Just Take It from the TARP
December 12th, 2008 . by economistmomWith the Big Three assistance bill failing in the Senate last night, it seems the only hope for federal aid to the automakers before the end of the year is for the Administration to take some of the Treasury “TARP” money for it. Apparently the Bush Administration is more seriously considering this option this morning:
Dec. 12 (Bloomberg) — The Bush administration would consider using money from a fund intended to rescue U.S. financial markets to prevent the collapse of the nation’s auto companies, White House spokeswoman Dana Perino said.
“Under normal economic conditions we would prefer that markets determine the ultimate fate of private firms,” Perino told reporters aboard Air Force One. “However given the current weakened state of the U.S. economy we will consider other options if necessary, including use of the TARP program to prevent a collapse of troubled automakers.”
(An updated Washington Post story with this latest development is here.)
The TARP option is what the Democratic leadership wanted in the first place, and it also seems to make sense and to be the “fair” thing to do. If rescuing the financial firms with federal money was justified as really saving Main Street, not just Wall Street, then surely a just-as-strong (or even stronger?) case can be made for rescuing the automakers. You’d think that out of the $700 billion worth of economic life support already committed, carving out just $14-$15 billion for the Big Three is reasonable and in the end more likely to pass the cost-benefit test than some of the other chunks of tens of billions of dollars already spent from the fund.
‘Fair’?
Detroit is losing because its competitors produce cars for less money. The only way out is to reorganize under Chapter 11; to get out from under archaic (and stupid) labor contracts. A political bailout will only delay the inevitable.
“If rescuing the financial firms with federal money was justified as really saving Main Street, not just Wall Street, then surely a just-as-strong (or even stronger?) case can be made for rescuing the automakers.”
Sure — and on the same terms.
AIG got an $85 bilion loan at 11% interst (in a 3% interest world) to be paid off in two years by carving it up and selling off its parts.
Is this the kind of rescue the Detroit auto firms want?
” carving out just $14-$15 billion for the Big Three is reasonable and in the end more likely to pass the cost-benefit test than some of the other chunks of tens of billions of dollars already spent from the fund.”
But $14-$15 billion is nowhere near enough to turn around the auto firrms (which is why their last request went up to $34 billion in such a short time from$25 billion).
GM by itself lost $15.5 billion, more than the entire bailout amount, during its last quarter.
The Fed and Treasury have followed the standard policy for financial bailouts:
[] If a financial firm is solvent it gets a secured loan, and either pays off the loan or gets sold off in parts to do so. (AIG)
[] If not #1 but it has value to another, it is sold off (Bear Stearns).
[] If it is insolvent and can’t get a buyer, it gets deep-sixed. (Washington Mutual)
This is as it should be. ( The Japanese tried having the government support insolvent “zombie banks” and “zombie corporations”, and the Japanese economy paid the price for a decade.)
The Detroit auto companies deserve terms no better than these, what the financial industry has gotten.
GM and Chrysler are bust. Like Washington Mutual. Should they get a “rescue” of a loan at 11% secured by their assets, as AIG did? They don’t have the assets!
GM has a technical problem with getting TARP money that reflects this larger problem, it lacks the capital to qualify for TARP money:
Yes, let’s treat GM on the same terms as insolvent financual firsms: functionally, that means prepackaged bankruptcy. If the UAW continues to insist on not cooperating, hardball bankruptcy.
Ooops, link left out for the last blockquote:
http://www.bloomberg.com/apps/news?pid=20601110&sid=abLGhi7QEIt8
If GM and Chrysler are that bust on the merits, there is no cost-benefit plus from adding billlions more to the national debt for them.
Reorganization to profitability is what bankruptcy is for, governement subsidies to money-losers are just a way of delaying same at high cost. And bankrutpcy isn’t so bad, the Big Steel industry went through what Detroit is facing today, and steel came out a lot better for it.
As a final but non-trivial distinction between interventions for financial and industrial firms, interventions for financial firms are meant to protect not the firms themsleves, nor their employees, but their depositors and insureds and to prevent or offset collapse of the money multiplier (which see). GM does not have depositors or insureds or drive the money multiplier.
That is, the bankruptcy of GM would not collapse the economies of Iceland, Russia, etc.
In 20-20 hindsight retrospect, the real cost-benefit payoff would have come from bailing out Lehman Bros.
EconomistMom -
You clearly want economists to be listened to when it’s.. economic issues that are considered. Why, pray tell, do you not listen to industrial engineers when it’s.. industrial engineering that is the reason the Big 3 are failing?
The culture of the Big 3 is not conducive to implementing lean manufacturing, which is NOT the exclusive domain of Toyota. It has been within the halls of industrial engineering for 3,4 decades at this point.
The reason Detroit has failed to do even the slightest bit of lean engineering is simple. Their labor contracts do not allow it to be implemented. The residual bitterness from “failed” managers is quite literally a failure of the labor negotiation. Precisely WHAT can a manager do if the labor contract stipulates that he cannot change anything about the worker’s role? Process improvement DEMANDS that ability - yet, Detroit has none of it.
The reason Honda and Toyota don’t have unions is NOT because they are somehow anti-labor. The reason Honda and Toyota don’t have unions is because they do not need them - the CULTURE of those organizations is so supportive of the line worker, the line foreman that the workers continually reject union organizers.
Lean engineering is fundamentally about reducing wasted motion, wasted steel, waste in any form. But the ideas are from WORKERS - not management. Workers are incentivized to make their job more efficient, and given 4-figure cash bonuses when they think of something. They’re encouraged to try new ideas. And unfortunately for gratuitous Democratic morons who think “BIG LABOR” is somehow a necessity, lean manufacturing works.
Detroit should only be bailed out if Lean is requirement #1 on the agenda.
Sadly, Lean was invented by the US state department to win world war 2. How do you think the US had tanks/trucks/planes that were reliable with all the factory workers doing the fighting?