WEEKEND READ: Bailout blues

Allowing the automotive industry to collapse in the middle of a downturn sounds like terrible policy. But does this stricken sector really deserve a bailout?


A bipartisan group of senators has come up with a compromise deal to keep beleaguered US car makers afloat, although it is unclear whether the full Senate will pass it.

The plan is to take money aimed at giving the Big Three a fighting chance to compete in a world where climate change and declining fossil fuel resources are immense challenges, and use it just to keep General Motors, Ford and Chrysler from declaring imminent bankruptcy. If ever the phrase "bail out" was appropriate, in the sense of futilely bailing water out of a doomed sinking ship, this would be the case.

When the news first filtered out on the wires, the Wall Street Journal reported an immediate stock rally, but by early afternoon sentiment had already turned sour again on a day marked by immense volatility.

And no wonder. New jobless claims spiked to their highest point in 16 years, the Labor Department announced on Wednesday. Signs of serious stress are now emerging in the market for commercial real estate mortgage-backed securities. There is absolutely no doubt, as economist Brad Setser conceded this week, that "this is the biggest financial crisis since the depression."

So, in this climate, the possibility of a General Motors declaring bankruptcy is obviously terrifying to financial markets, but the news that Congress may only go so far as to subsidize ongoing expenses for another month or two does very little to build confidence.

The short and sweet argument for an immediate rescue plan for the Big Three goes like this: economists agree that we need a big, fat, honking economic stimulus plan to juice the economy right now. Not two months from now, not six months from now. Right now. Classic Keynesian economics are the order of the day. Goldman Sachs is suggesting something on the order of $US300 billion to $US500 billion – anything less would have little effect.

Letting a GM collapse would, effectively, be the polar opposite of a stimulus – it would accelerate job losses and pummel the economies of Michigan and Ohio, two states that are already in big trouble. So if you support a stimulus plan, as do most economists, Democrats, and President-elect Barack Obama, one would think that you would also probably support trying to avert, in the short term, a US auto implosion.

However, I don't think it makes any sense to support a solution that doesn't include a comprehensive restructuring of how the Big Three do business. Sell the corporate jets. Axe the current management. Force corporate mergers. There are numerous smart proposals for some kind of government-administered bankruptcy that keeps Ford, Chrysler and GM going in some form but as markedly different entities than as currently exist.

Perhaps some form of consolidation, along with liquidation of various assets, and sacrifices made by all the stakeholders – labor, shareholders, management, bondholders, etc. And of course, there's my hope, as bashed today by Sen. James Inhofe, that any new regime would be structured to make sense in terms of limiting greenhouse gas emissions and conserving on fuel consumption.

But so far as I can tell, there's nothing like that included in the current compromise besides a desperate attempt to pay car maker bills in a desperate economy. No wonder stock traders appear unimpressed.

My prediction? Chances are good that we will find out exactly what will happen when a major US industry collapses in the middle of a fierce recession. And then we can argue about something else.

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