As a matter of economic policy, the decision of whether or not to bail out Detroit must by now have become a no-brainer. Or at least it should be for anyone who watched congressional demagogues, particularly California Rep. Nancy Pelosi and Nevada Sen. Harry Reid, lay down their conditions for parting with US$25-billion. “Until they show us the plan, we cannot show them the money.”
The future of the U. S. auto industry now appears to be in the hands of politicians who constantly play roles in a Hollywood tragicomedy cum disaster movie. In Jerry McGuire, Tom Cruise gets into rap-like exchanges with one of his sports clients, screaming the lines “show me the money.” It worked as fiction, but it’s not what we need from politicians who are, in the real world, about to nationalize the U. S. auto industry, pretending to be bankers buying into the economy, and pressing for green agendas out of another disaster film, An Inconvenient Truth.
This isn’t business or economics. Congress is playing out radical movie politics as a live TV reality show.
As for Sen. Reid, he also played to the home video audience, mocking the CEOs of General Motors, Ford and Chrysler for flying to Washington in private jets. This is the future of the U. S. and Canadian auto industries under a bailout — begging for cash from crass populists who think GM would be better off if CEO Rick Wagoner wandered about U. S. airports in search of his luggage.
If all Congress and the Bush or Obama administrations wanted from auto companies were fewer executive perks and a ban on corporate jets, it would be a small price to pay.
But what these political actors want in exchange for a bailout is the beginning of a U. S. government takeover of the North American auto industry.
It means car firms whose future will be determined by grandstanding politicians and bureaucrats monitoring the operations and overseeing the strategies of the auto business. It means the further suppression of market forces from an industry already burdened by regulations that have driven it into the ground. It means the continued existence of union protections, and the maintenance of scores of state and national rules that prevent any rational reorganization. It means – as The Wall Street Journal put it the other day–turning the auto firms into agents of the Sierra Club.
So: If we assume that at least two if not all three of the Detroit firms, unable to get fresh credit, are now on the brink of failure, then the options — bankruptcy or bailout — should be beyond debate. Let them go.
A bankruptcy, perhaps under Chapter 11 or some other legal U. S. insolvency procedure, would put a judicial trustee in place to manage a reorganization of the auto firms and remove the existing causes of distress. A government bailout, with none of the existing causes of failure removed, would force the companies to continue to operate under a whole new set of regulations and controls on top of their existing ones.
Under insolvency, the old managements would likely be removed, boards replaced, debt repayments delayed, reworked and even defaulted. Notorious union contracts would have to be renegotiated. Billions of dollars in legislated obligations to thousands of auto dealers would have to be rescinded and adjusted.
All this would take place within the context of an existing regulatory environment and the existing market for automobiles. Many of the risks in bankruptcy are real, including the industry’s claim that their products would be impossible to sell without the promise of warranties. But such risks can surely be overcome and managed.
If the companies are indeed on the brink of running out of cash, no bailout money will be enough to carry the firms through to long-term health, described by Congress as “viability.” The road to viability, moreover, would become impossible if the government bailout — as planned — burdens the companies with scores of new environmental directives.
Green policies and mandates are the greatest threat to the U. S. auto companies, and to the U. S. economy. Fuel efficiency standards are already responsible for draining billions of cash and chunks of market share away from Detroit. Now Detroit is being forced into putting all its research eggs into one product category. General Motors has halted all research and capital spending, except for its multi-billion dollar push to get its plug-in Volt electric car on the market by 2010. “Around 2015 we’re going to sell a ton of hybrids whether people want them or not,” said GM vice-chairman Bob Lutz.
That kind of talk, and that kind of strategic decision-making, smacks of desperation. No matter how appealing the Chevy Volt eventually turns out to be, it cannot possibly provide the auto company with financial momentum to drive it out of bankruptcy. Despite Mr. Lutz’s tough talk, the Volt is still a concept car, and real mass-marketable electric battery technology remains undeveloped.
Of course, with a government takeover via bailout, governments could attempt to regulate Detroit to prosperity by attempting to force the entire U. S. economy to make way for electric cars. The ideas are already built into the Obama economic plan, including massive efforts to increase “clean energy” from wind, solar, nuclear and other power sources.
Even if that were theoretically possible, there is no way massive U. S. policy directives could possibly help Detroit make it through its financial crisis. It will burn through the first $25-billion in loan guarantees, already approved to fund green vehicles, and it would easily burn through another $25-billion over the next few years covering union legacy costs and other obligations.
A bailout would only buy time, allowing Detroit to make it to the next bailout, with government running the show in an increasingly distorted and regulated market. A bankruptcy process should install a permanent reorganization, with the companies (or whatever combination emerges) still part of a viable auto industry operating in a genuine market.