More Money More Problems: The Auto Industry Bailout

Though I talked about the $700 billion bailout in a previous post, I thought it would be prudent to discuss the second proposed bailout in as many months. This time, instead of bailing out financial institutions, Congress is debating bailing out the auto industry. More specifically, they are talking about saving the “Big Three”: GM (see below, right), Ford, and Chrysler, from potential bankruptcy. The numbers are staggering. The United States government has already passed a $25 billion relief program set to come into effect in early 2009. However, leaders at GM came out to declare that the company may run out of cash by the end of 2008, and that they would be forced to declare bankruptcy before they would be able to receive any federal aid. Thus, they came to the government asking for more money with fewer strings attached. Under the current program, the money, coming in the form of loans, would only be used to help the companies develop more fuel efficient cars. Leaders in the federal government are torn. Generally, Republicans believe that the problems American car manufacturers are experiencing are a result of their financial mismanagement and faulty business plan (see below, left). They do not believe we should bail them out, for it would be another instance of taxpayers paying for poor management of companies. Democrats claim that failure in the domestic auto manufacturing industry would be detrimental to the health of our economy and would cost Americans up to 3 million jobs. Because of how divided our government is on the issue and despite the fact that I have come to my own conclusions about the $700 billion Troubled Assets Relief Program (TARP), I decided to explore the blogosphere to get a feel for what the public and experts believe about this bailout and to leave my feedback on them. The result was overwhelming. I expected to find equal parts positive and negative feedback on the issue, but I found it hard to find any supporting commentary by economists or financial experts. Of those sites, I found two that were especially interesting. The first, “Demand More for Your Auto Bailout Dollar; Oil Patch Should Bounce Back Long Term” by Michael Fitzsimmons of Seeking Alpha, Fitzsimmons discusses what conditions the government should put on any money they give to the auto industry in order to maximize its benefit to the country as a whole. Peter Cohan, of BloggingStocks, writes about how taxpayer dollars can be best utilized to help the auto industry, and GM in particular, in a post entitled “Six Steps to Restructure GM”. Overall, I agree that the current bailout is not justified. There need to be more restrictions and covenants on the money that is being given to the auto industry. Whether that is to make the companies greener or to save taxpayers more money, it does not matter. In addition to posting my comments on the blogs, I have copied them below.

“Demand More for Your Auto Bailout Dollar; Oil Patch Should Bounce Back Long Term”
Comment:
Thank you for your thoughtful and insightful commentary on the proposed bailout of the American automobile industry. I liked how you approached the issue not as a simple yes or no to the bailout, but more of constructive commentary as to how the terms of any loans to the automobile companies can be amended to create a sustainable industry dynamic and to best benefit the country as a whole. I agree that U.S. automakers are to blame for much of the problems our economy is experiencing by producing sub-par products that increased our dependence on foreign oil and pushed consumers to foreign products. In the end, I do not believe the question is if the automobile industry will receive more money from the government. Based on its track record, the question is more when and under what terms.

I agree with your ideas that they must make a natural gas powered car and that they should strive to make cars that get over 40 MPG. That is the most sustainable approach and it also benefits every person in the country by reducing our emissions However, I do not agree that every vehicle must get over 40 MPG or that “every vehicle they make must be natural gas, hybrid, or electric”. Engines and batteries have not reached the level of technology that they are capable of being reliably installed in every vehicle. Did you forget about commercial vehicles that must be used to tow heavy loads? How can you expect vehicles like that to use a less powerful hybrid or electric engine or to achieve such a high gas mileage? Additionally, until there are better ways of getting natural gas to every consumer, it does not make sense for a large percentage of vehicles to be powered exclusively by natural gas.

Once again, thank you for taking a different approach to this issue than many other people do. It is so easy to say no without giving any sort of alternative. Hopefully, the federal government will pay attention to people like you and realize that there are better ways to approach this problem and use this money to actually improve our automobile industry rather than temporarily slow its failure.

“Six Steps to Restructure GM”
Comment:
Thank you for an interesting piece on your approach to the problems the U.S. automobile industry. I liked the fact that you took a stance that so many people have overlooked or deemed impossible, despite the fact that it is one that makes the most sense. Bankruptcy was created for companies in GM’s exact situation and it does not make sense that people cannot see that. Admittedly, we are living in a time of potentially extenuating circumstances, for the economy is in such bad shape and the stock markets so volatile that news of GM declaring for Chapter 11 protection might trigger a chain reaction that would end up destroying our economy.

The government eventually will have to put some money into the automobile industry, but not in the way it is currently planning. I think your ideas make the most sense. If people really do want to see change in companies like General Motors, then force it to declare bankruptcy and then provide the financing to restructure once it has done so. Your talking points, of merging with Chrysler, getting rid of unprofitable brands, closing related dealerships, merging Chrysler and GM brands, and cutting pay all make sense and should have been done if not for one problem that you also provide a remedy for. The management must be replaced. Your fact that GM’s CEO has “presided over a 95% decline in the company stock over his tenure” is shocking, and I agree that we cannot expect any changes if the person who started this decline remains in a position of authority.

One thing I would have liked to have seen is more talk about how to address the issue of renewable energy and increased vehicle efficiency. I agree that it may not make sense to set an immediate requirement for achieving a certain level of emissions, but does it not make sense to set some sort of timetable for requiring them to get on the right track in terms of research and development and future models?

The Red Flag: An Examination of the Social and Economic Implications of the Recent Government Bailouts

Bailout. This one word has inspired more commentary than any other in the past few weeks. However, with every news outlet in the world talking about the bailouts of Fannie Mae, Freddie Mac, and AIG, I find it interesting how the ideological implications of these actions are only now starting to receive some attention. Most media has been focused on the direct, economic impact of Congress's decisions on the stock market now and in the near future, as well as the simple dollar figures for what the bailouts are going to cost taxpayers (see below, left). While this aspect is obviously important, there are deeper, more long-term consequences to the government’s actions. With the most recent buyouts, federal insurance for risky mortgages, economic stimulus packages, and ban on short selling of financial stocks, the government has been taking actions contrary in nature to the free market economy it was founded upon and more in line with the communist, government backed system it has been fighting against for the better part of a century. Is this the end of capitalism as we know it? Did the government take a step in the wrong direction by bailing out this country’s financial system? No, probably not. While the recent government buyouts of Fannie Mae, Freddie Mac, and AIG go against the capitalistic ideals of this country, they were necessary in order to help keep the country out of the depression it was headed towards and will eventually be seen as the right decision by the federal government. Assuming the government does not continue to take over companies or impose its will too much on the companies it already controls, these actions will be seen as temporary socialist interventions like those during the Great Depression and not the beginning of the decline of capitalism in America.

Despite the fact that most of the actions the government has taken in the recent past have be socialist in nature, the United States is not moving down a path away from capitalism; rather, it has simply been following a history of free market capitalism supported by moderately socialist government policy. Capitalism is an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decisions and by prices, production, and the distribution of goods that are determined mainly by competition in a free market. Socialism is the opposite. It is composed of a government controlled economy in which the means of production are federally controlled. Today, the American economy cannot be accurately described by either word in itself, but more of a combination of the two. Originally, the it represented the epitome of a capitalist society. People spoke of the “American Dream,” of common men coming to the United States and working their way into fame and fortune. However, the American economy has gradually shifted away from a true free market economy towards a mix between capitalism and socialism. True, the most recent wave of attempts to revitalize the economy by the United States government have been some of the most extreme ever, but regulation of our financial markets has been a critical part of our economy since the Great Depression. In fact, one of the reasons these problems arose was the deregulation of the financial markets that allowed instruments like mortgage-backed securities to exist and subprime loans to be issued. Like it or not, the government has a history of stepping in during times of financial crisis and taking extreme measures to protect the economy (see the New Deal). For the most part, it has always been justified and ended up having a positive influence on the economy. If the United States government had not stepped in and taken the actions it did, the economic fallout would cost taxpayers much more than what it has cost to effectively bail out the housing market. According to Jeanne Sahadi, a senior writer for CNNMoney.com, “If Fannie and Freddie went under…the housing industry could seize up, causing the loss of millions of jobs.” Or, in terms of actual dollars and cents, an article by James Pethokoukis, the money and politics blogger for U.S. News & World Report, claims that the dollar cost of not bailing out Wall Street could range anywhere from $15 trillion over four years to upwards of $30 trillion. The financial markets would crash and credit markets would completely freeze, making it impossible for students to get loans and families to get mortgages. If these estimates are anywhere close to the truth, the government intervention in this financial crisis will prove to be a brilliant move that effectively saved the American economy.

There are those who argue that these bailouts set a poor example for financial institutions, especially how it guarantees money for the larger financial institutions at the expense of everyone else (see below, right). As Andrew Horowitz, founder of Horowitz & Company, says, “In a capitalistic society that relies on a free market system, we should only look to the government to guide and regulate against fraud and the manipulation of the system... it is not to be a business partner and a sugar daddy there to provide a backstop to the bad business practices of the banking system.” True, there is the potential for companies to take these bailouts as a figurative safety net for them, guaranteeing their continued existence despite any risky practices they might engage in. However, given the necessity for a dramatic move by the federal government to turn the economy around, there were not many other options. Ideally the government would not have to come in and financially back the banking system, but in times like today, people have to look past their ideals to what is the most prudent and effective solution for our financial crisis. Like the co-host of CNBC’s “Squawk on the Street” Mark Haines observed on “Morning Joe”, “Nobody really likes this on a philosophical basis, but we live in a real world and we can’t, can’t dither with philosophy when such serious matters are at stake.” Only time will tell whether or not the government made the right decision, but given the situation at the time, it made the best possible move by intervening in our failing economy. Either way, this bailout is only a temporary fix. Unless we do something about the unchecked greed that is at the root of all these problems, we will not be able to fully recover from this recession.