Internal combustion boogaloo

Some folks I normally respect have taken on a specious argument equating the financial system bailout with the proposed bailout of the big 3 US automakers. The argument is along the lines of: why do wealthy bankers deserve a break but not everyday autoworkers?

This is specious because no one believes the financial bailout was intended to help all those poor rich kids in the banking industry. Instead, the argument was that a credit wipeout following the failure of the big financial firms would hurt every other business in the country, from hotels to computer firms.

I say this not because I supported that bailout -- I was skeptical to say the least and it's clearly becoming a Soviet-style secret clusterf*ck, pardon my French.

So the comparison is not apples-to-apples, regardless of the merits.

Now, should we bail out the big 3 in order to "save jobs"? No.

Here's the first thing to understand: those jobs are already gone. GM and others have made it clear that they can't continue to pay their workers. The American public has spoken by not buying GM's cars. That's their right, no?

The bailout, therefore, is the economic equivalent of Weekend at Bernie's. But it's not even that original. Let's call it Weekend at Bernie's 2 (Internal Combustion Boogaloo).

Such a bailout is forcing you to buy a GM car that you already said you don't want. Except that you won't actually get a car, of course.

Comments

[Ian Random]

It's simple because the grandson of a banker is the president elect. :->

[POWinCA]

Your instincts are dead on.

In a fractional reserve banking system, banks "create" money by retaining only a small portion of deposits and lending out the rest. In today's banking system, lending capacity is based more on capital than excess reserves.

If banks are deficient in capital, lending grinds to a halt. Of course that means fewer auto and home loans, but it also means fewer small-business loans, commercial real estate loans, loans for agricultural hedging, loans to pay Workers Comp and health insurance premiums, etc.

Furthermore, if banks fail, the money creation process reverses; money is DESTROYED. And THAT is what caused the Great Depression - a 25% decrease in the money supply with sticky prices and wages causing massive unemployment.

So saving the banking industry IS saving everyone else.

In contrast, the bailout of GM helps ONLY GM, their employees, and suppliers - a very small part of our economy.

In some respects the financial sector deserves to fail, but in other respects they were victims of moral hazard, adverse selection, incomplete information, and government intervention in the market with "affordable housing" programs which provided them incentives to take inordinate risks.

GM and their workers have NO ONE TO BLAME BUT THEMSELVES for failure. They were greedy and failed to innovate.

[(an) andrew in california]

a bailout is one thing. a interest-laden loan is something else.

if the feds offer a LOAN to the automakers, that would be a different story altogether.

plus, unions have to get reigned in.

[Hucbald]

Humph.

Personally, I'd like to see a chapter 11 deal, because I want a 2010 Dodge RAM 1500 4x4 with the new light duty, 30+ MPG Cummins V8 turbodiesel... but perhaps I'm the only one. LOL!

[Ronnie Schreiber]

The American public has spoken by not buying GM's cars...
Such a bailout is forcing you to buy a GM car that you already said you don't want.

Disinformation. It's sad to see otherwise bright people say so many things that are factually wrong.

Apple has about 10% of the personal computer market. By your standards, nobody wants an Apple computer.

The American car companies still have a 55% market share in North America. That's right, a majority of cars sold here are sold by GM, Ford & Chrysler. GM sold more cars than Toyota last month and Ford and Chrysler both sold more cars than Honda.

For October 2008:
GM 170,585
Toyota 152,101
Ford 132,838
Chrysler 94,530
Honda 85,864
Nissan 56,945
Hyundai 20,820
Mazda 16,442
Kia 15,483
Mercedes-Benz 14,996

It's one thing to acknowledge past management mistakes and costly union contracts (which have been drastically restructured and will put costs pretty much even with the imports as the savings kick in next year and in 2010) but you don't have to spread misinformation.

Since you're a conservative, how about discussing the fact that the federal gov't has transferred almost a trillion dollars of wealth from the industrial midwest to the southern states and the DC area? What about the 300,000 GS-13s and above who make at least $77,500 a year? Did you know the average salary for the 1.6 million non postal civilian federal workers is more than $66,000 a year? The feds raped Michigan of $200 billion over the past 25 years to pay for highways and off ramps for Mercedes and Hyundai plants in Alabama.

[Ronnie Schreiber]

In contrast, the bailout of GM helps ONLY GM, their employees, and suppliers - a very small part of our economy.

Farmers make up a much smaller part of our economy than the automakers and their supply chain but do you think we can get by without any farms?

The fact is that at least 1 in 13 Americans is employed directly or indirectly by the domestic auto industry. The same supply chain that is dependent on the business of the Detroit 3 supplies our defense industries. You can't make F-22s without machine tools and without a domestic auto industry, we won't have machine tools. Weapons programs have already been stalled because suppliers have gone out of business or been bought by Chinese companies. GM has the largest installed base of computers of any company in America. So it's not just going to be folks who make auto parts who will take a hit, it will be people in the Silicon Valley too. With auto sales down over 30%, those businesses in California that sell to the auto industry are cutting back, hence California's 8.3% unemployment rate.

In some respects the financial sector deserves to fail, but in other respects they were victims of moral hazard, adverse selection, incomplete information, and government intervention in the market with "affordable housing" programs which provided them incentives to take inordinate risks.

Moral hazard? Adverse selection? Doesn't that mean greed and bad decisions? Just like in Detroit. And if you're going to talk about government intervention in markets, let's discuss EPA, CAFE, DOT and how the government has intervened in the automotive market. We can also talk about a lack of coherent industrial policy. A lack of a coherent energy policy also provided incentives to sell profitable but fuel inefficient SUVs and pickups at the risk of not developing higher mileage vehicles.

And now, after getting $25 billion (does that number sound familiar) from the TARP to add to the $75 billion they have in cash on hand, Citigroup is facing bankruptcy. Of course Paulson will send his Wall Street buddies some more money. After all, according to you, Wall Street creates money out of thin air, unlike Detroit, which only turns raw materials into finished products. Somehow I think that has more to do with creating real wealth than paper games by bankers.

[Ken Nelson]

I have a two Fords, a Chevy truck and a Jeep. I think I've done enough for the Big 3.

This really isn't about them, though. They will scale back their production, their dealerships, their employees, and their wage structures. Wasting my money might delay that.

Ultimately, this is a geography and union play. Geography... they will lose. Unions... maybe not. The Democrats owe them a lot. But that allegiance is regional, so I think this is going down.

At least I hope so.

With the credit bailout, I could get a loan. But here my money goes to UAW folks and I don't get a car. No thanks.

The right course is for GM and the rest to go bankrupt and their creditors to operate the company. A loss for the shareholders, and since the largest creditors will be the unions they will end up running the Big 3. A good opportunity for them if they are willing to do what is needed.

Given their past history though... I don't have high hopes for their performance.

[Ronnie Schreiber]

The right course is for GM and the rest to go bankrupt and their creditors to operate the company.

Just one question, would you buy a car from an auto company in Chapter 11 bankruptcy?

[cenzo]

The better question is not whether one would buy a car from a company in Chapter 11 reorganization, but whether one would buy a car from a company operated by the UAW knuckleheads!