Bailout of the big 3, is it really such a bad thing?

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ig17
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Re: Bailout of the big 3, is it really such a bad thing?

Post by ig17 »

Yesterday I watched Peter Mansbridge One on One with Dennis DesRosiers (an auto analyst). They talked about the auto crisis, the future of the industry, etc. The interview is not online yet, so I can't link to it.

According to DesRosiers, GM has the weakest management among the big three. He is afraid they have not learned their lessons from the crisis. He said they were back to the bad habits that got them into trouble in the first place. Things like dumping large volumes into fleets or relying heavily on discounts.
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Re: Bailout of the big 3, is it really such a bad thing?

Post by Shakespeare »

And we may even wean ourselves off those SUVs that are still the most profitable product for North American car manufacturers.
Gas in the more remote parts of Hawaii was >$4/gal. That should do a lot to discourage big SUV drivers.
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Re: Bailout of the big 3, is it really such a bad thing?

Post by kcowan »

I would have liked to see how Ford would have made out without renewed competition from Government Motors and Renault.

By avoiding the tough medicine, the sickness just goes on and one.

($4/gal I can hardly wait until it gets to $6/gal. Let's get serious about conservation!)
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Re: Bailout of the big 3, is it really such a bad thing?

Post by chiaroscuro »

newguy wrote:
chiaroscuro wrote:The question isn't whether a government supported company can make a profit, it's whether the government should be deciding which companies to support.
It's clearly been demonstrated that the answer is not "no". When the world is in deep financial trouble the answer is yes. That is unless you believe in conspiracy theories. :wink:
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Re: Bailout of the big 3, is it really such a bad thing?

Post by newguy »

chiaroscuro wrote:
newguy wrote:
chiaroscuro wrote:The question isn't whether a government supported company can make a profit, it's whether the government should be deciding which companies to support.
It's clearly been demonstrated that the answer is not "no". When the world is in deep financial trouble the answer is yes. That is unless you believe in conspiracy theories. :wink:
Actually, you have to believe in parallel universes to say that. You have no way of knowing what would of happened if there weren't so many bailouts.

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Re: Bailout of the big 3, is it really such a bad thing?

Post by chiaroscuro »

newguy wrote:
chiaroscuro wrote:
newguy wrote:The question isn't whether a government supported company can make a profit, it's whether the government should be deciding which companies to support.
It's clearly been demonstrated that the answer is not "no". When the world is in deep financial trouble the answer is yes. That is unless you believe in conspiracy theories. :wink:
Actually, you have to believe in parallel universes to say that. You have no way of knowing what would of happened if there weren't so many bailouts.
Your parallel universe? :wink: We had the great depression and for the first year or so we had a libertarian wet dream going on. Andrew Melon had Herbert Hoover's ear and they did nothing...from that era comes the famous quote, "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.” It was a wonderful sentiment, a common sense sentiment but it blew up in their faces. People became afraid to spend money and it took the US government spending gobs of money in the second world war to finally pull the US out the depression over one decade later.
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Re: Bailout of the big 3, is it really such a bad thing?

Post by kcowan »

So Chia, we need a world war so we can let GM fail? But won't they get a windfall from Hummer sales?
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Re: Bailout of the big 3, is it really such a bad thing?

Post by mac1214 »

I wouldn't be surprised that 20-30 years in the future, GM is building nearly all it's cars in China and asia and importing those to North America. They're still paying North American workers about $70/hr, whereas the Chinese get about $5/hr and do as good a job. Either that or GM goes nearly all robot and fires nearly everyone. GM cars are made better than before their bailout, but BMW doesn't have much to worry about. GM's Camaro is fast, but with a 426 H.P. V8 it's overkill, BMW can do the same with a 3.5 litre 6 cylinder.
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Re: Bailout of the big 3, is it really such a bad thing?

Post by Brix »

There seems to be considerable enthusiasm for letting failed industries fail. Except, for some reason, the financial industry. It would be interesting to know many here who deplore the continued existence of "Government Motors" have cash deposited in its sometime subsidiary, Taxpayer Trust.
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Re: Bailout of the big 3, is it really such a bad thing?

Post by chiaroscuro »

kcowan wrote:So Chia, we need a world war so we can let GM fail? But won't they get a windfall from Hummer sales?
No, the point is you nuture in times of extreme stress because the world is dependent on the financial well being of the US. At any other time you can let GM fail. The example of the depression was to demonstrate that free markets become very distorted in times of extreme stress. When you liquidate all that can be liquidated at such a time the economy becomes disabled. It took over a decade for the economy and the mindset of the people at that time to change.
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Re: Bailout of the big 3, is it really such a bad thing?

Post by Bylo Selhi »

Honda tops Consumer Reports rankings
Honda had the best overall score of 74 out of 100 points in the Consumer Reports' ranking. Honda was followed by Subaru with 73 points and Toyota with 71 points. Volvo was fourth with 68 points, followed closely by Ford and Hyundai.

Chrysler had the worst ranking among the car makers with 43 points. Mercedes-Benz, BMW and General Motors were also near the bottom.
Chrysler and GM I can understand. Bu...bu...but Mercedes and BMW? Ach, du Scheiße! :shock:
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Re: Bailout of the big 3, is it really such a bad thing?

Post by scomac »

Bylo Selhi wrote:Chrysler and GM I can understand. Bu...bu...but Mercedes and BMW? Ach, du Scheiße! :shock:
That's what happens when you let Bubba and Boo build 'em. :roll:
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Re: Bailout of the big 3, is it really such a bad thing?

Post by Bylo Selhi »

scomac wrote:That's what happens when you let Bubba and Boo build 'em. :roll:
Yabbut don't they also build cars for Honda, Toyota and Nissan?
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Re: Bailout of the big 3, is it really such a bad thing?

Post by ghariton »

Brix wrote:There seems to be considerable enthusiasm for letting failed industries fail. Except, for some reason, the financial industry.
You must get your news from different sources than I do. As I recall, there was precious little enthusiasm for bailing out financial institutions, and the bailouts that happened are still extremeply controversial. Just ask Brian Cowen.

My personal opinion is that the government had to step in to provide liquidity and stop the the system from seizing up -- sorta ike ensuring that there's oil in your car. Think of it as an externality. But I fail to see why the government had to protect creditors from their folly longer term, when there were no liquidity externalities any more.
It would be interesting to know many here who deplore the continued existence of "Government Motors" have cash deposited in its sometime subsidiary, Taxpayer Trust.
Not me. I bank with Canadian Tire -- been using their currency for many years now. :wink:

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Re: Bailout of the big 3, is it really such a bad thing?

Post by Shurville »

scomac wrote:
That's what happens when you let Bubba and Boo build 'em. :roll:
From 2007

Among the least reliable used cars ranked by CR: The MB SL, SLK, CLK, CLS, E Class sedan, R-Class, M Class.

I think you will find that Bubba and Boo made the M Class and the rest were made by Fritz and Heinz!
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Brix
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Re: Bailout of the big 3, is it really such a bad thing?

Post by Brix »

ghariton wrote:
Brix wrote:There seems to be considerable enthusiasm for letting failed industries fail. Except, for some reason, the financial industry.
You must get your news from different sources than I do. As I recall, there was precious little enthusiasm for bailing out financial institutions
I was commenting on the climate of opinion in this forum. And in any event a lack of enthusiasm for rescue -- a sentiment easy enough to share -- is not quite the same as a positive enthusiasm for 'creative destruction'.

I suspect that few of us at this forum can imagine being seriously inconvenienced in the process of catastrophic restructuring of the auto industry, whereas we are perhaps somewhat more catastrophe-shy in relation to the financial industry.
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Re: Bailout of the big 3, is it really such a bad thing?

Post by ghariton »

Brix wrote:
ghariton wrote:
Brix wrote:There seems to be considerable enthusiasm for letting failed industries fail. Except, for some reason, the financial industry.
You must get your news from different sources than I do. As I recall, there was precious little enthusiasm for bailing out financial institutions
I was commenting on the climate of opinion in this forum.
You may be conflating concerns over a liquidity crunch and (non)-support of bailout of bankers and their creditors in the long run. I haven't done an in-depth review of the posts here, but frankly I can't remember any supporting bailouts (as opposed to provision of liquidity).

On the other hand, I do remember posts (including some by me) expressing concern over the moral hazard that was exacerbated by the bailouts. Many of them went so far as to condemn the bailouts in rather harsh terms.
And in any event a lack of enthusiasm for rescue -- a sentiment easy enough to share -- is not quite the same as a positive enthusiasm for 'creative destruction'.
True enough. I for one am in favour of letting market forces operate -- with or without enthusiasm -- as long as there are no significant negative externalities. Financial crises are marked by systemic risk, where the misfortunes of one financial institution can cause great damage to other financial institutions, and indeed the whole financial system. In turn, lack of liquidity affects all sectors of the economy, including consumers. So there are huge externalities at play.

That said, I'm all in favour of letting individual financial institutions go under if that is what the market dictates, provided an adequate resolution regime is in place.

By contrast, the automobile sector has few externalities, and the bankruptcy regime already in place seems adequate to handle the eventual failure of a GM or a Chrysler. Here, there seemed no good economic reason for intervention (political reasons are another matter -- special interests always speak louder and stronger at any given point in time than the voice of the general public).
I suspect that few of us at this forum can imagine being seriously inconvenienced in the process of catastrophic restructuring of the auto industry, whereas we are perhaps somewhat more catastrophe-shy in relation to the financial industry.
A common misconception of the left, that the right is more motivated politically by self-interest than is the left. There have been several studies now -- the links elude me at the moment -- that show that this is not so. If anything, the right is even more idealistic than the left in its voting patterns.

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Re: Bailout of the big 3, is it really such a bad thing?

Post by brucecohen »

ghariton wrote: By contrast, the automobile sector has few externalities, and the bankruptcy regime already in place seems adequate to handle the eventual failure of a GM or a Chrysler. Here, there seemed no good economic reason for intervention
A few weeks ago I heard -- don't remember where -- that the big driver behind the GM-Chrysler bailout was the frozen state of the credit markets. Apparently there are normally lenders that will make available the working capital companies going through Chapter 11 restructuring need to keep operating. IIRC these loans are called "debtor in possession" financing. Because the credit markets were frozen, this pipeline was cut off and GM-Chrysler faced the real prospect of running out of cash and having to shut down for good. This would have affected not only their employees but also all of their suppliers, many of whom would have then gone under. IIRC sudden death for GM-Chrysler would have wiped out something like 3 million jobs, mainly in the Midwest. While some/many of those people would have been hired by new owners after liquidation, this was occurring at a time when hardly anyone was buying anything because there was no credit and there was increasing talk of possible depression.
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Re: Bailout of the big 3, is it really such a bad thing?

Post by adrian2 »

brucecohen wrote:the big driver behind the GM-Chrysler bailout was the frozen state of the credit markets. Apparently there are normally lenders that will make available the working capital companies going through Chapter 11 restructuring need to keep operating.
The quip in those times was that GM is a finance company with a small division that produces cars. Worth remembering for forum members who keep pouring vitriol towards U.S. banking institutions while praising the Big Three for their turnaround.
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Re: Bailout of the big 3, is it really such a bad thing?

Post by newguy »

brucecohen wrote:A few weeks ago I heard -- don't remember where -- that the big driver behind the GM-Chrysler bailout was the frozen state of the credit markets.
That doesn't explain why the new company gets to use the old company's 40 billion in losses as a tax writeoff.

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Re: Bailout of the big 3, is it really such a bad thing?

Post by chiaroscuro »

ghariton wrote:On the other hand, I do remember posts (including some by me) expressing concern over the moral hazard that was exacerbated by the bailouts. Many of them went so far as to condemn the bailouts in rather harsh terms.
It's rich to be talking about moral hazard. The idea of moral hazard is that if we do a bailout no one learns a lesson. How about when we have fraud and collusion on a massive scale and no one from wall street goes to jail. Oh and they get to keep their obscene bonuses and make further massive bonuses because the bailouts was basically an idiot proof way for the banks to make money. How anyone can divorce these moral hazards from each other is beyond me.
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Re: Bailout of the big 3, is it really such a bad thing?

Post by ghariton »

brucecohen wrote:A few weeks ago I heard -- don't remember where -- that the big driver behind the GM-Chrysler bailout was the frozen state of the credit markets. Apparently there are normally lenders that will make available the working capital companies going through Chapter 11 restructuring need to keep operating.
Yes. This was happening throughout the economy. It is one of the main reasons why liquidity is so important and the government should intervene to ensure it.

It sounds as if General Motors and Chrysler were "too big to fail". And perhaps they were. But there are certainly consequences.

First, consider the number of jobs at risk if the government had not intervened. White House announcements on the success of the bailout refer to testimony by Mark Zandi in front of the Senate Banking Committee in December 2008, available here. I suspect that this is the source of many of the claims. I believe the key passage in Zandi's testimony is the following:
The Big Three employ fewer than 250,000 people in the U.S., but given their broad links into the rest of the economy, closer to 2.5 million jobs would be immediately at risk. For every one lost job in auto assembly, another nine jobs are lost at auto suppliers, auto dealers, steel and metal suppliers, plastic and rubber companies, healthcare providers, trucking and freight operators, and others. Hundreds of thousands of people would be laid off at a time when the economy is already set to lose several million jobs.
A few things are worth noting.

-- The number includes Ford, which didn't need or get a bailout

-- 2.5 million jobs were at risk, but there would have been "hundreds of thousands of layoffs"; that's a big difference

-- Mr. Zandi uses a multiplier of 9. Multipliers are notoriously suspect. This one seems particularly high.

-- The 2.5 million number does not take into account jobs created at other automobile manufacturers. It is reasonable to assume that Ford, Toyota et al would have expanded and hired workers. And they would have purchased auto parts, tires, health care, etc. True, they would not have hired all the laid off workers or purchased as many parts. But then the industry has over capacity.


Still, there would have been significant job losses and distress. One thing the government could have done would have been to use that $50 billion to help laid off workers adjust. By July 2010 the government had provided $50 million in such aid and had set aside another $75 million. Those programs could have been greatly expanded.

But supposing that the government decided that surplus capacity in the automobile was a good thing to maintain after all. As you identify, the immediate problem was frozen credit. As it turns out the government launched a program, Term Asset Backed Securities Loan Facility (TALF) in February 2009, that was specifically intended to make credit available to various sectors of the economy and, among other things, unfreeze the automobile market. It could have made the necessary debtor-in-possession loans, on the usual commercial terms, once GM and Chrysler had entered Chapter 11.

The only reason the usual insolvency process could not be applied was the "too big to fail" syndrome. But that gives a terrible message to industry, and not only the automotive sector. If you are big enough, you don't have to worry about bankruptcy: the government taxpayers will bail you out.

In my opinion, it was the wrong thing to do for the banks, and it was the wrong thing to do for the automobile manufacturers. For the banking sector, there was an excuse, albeit a weak one -- a proper resolution regime was not in place. That excuse was much, much weaker for the automobile sector.

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Re: Bailout of the big 3, is it really such a bad thing?

Post by Brix »

ghariton wrote:A common misconception of the left [is] that the right is more motivated politically by self-interest than is the left. There have been several studies now -- the links elude me at the moment -- that show that this is not so.
I wouldn't be surprised. E.g., even the most cursory glance at the pattern of political donation in the US reveals that labour unions seem collectively determined to help fund union-supporting Democrats almost exclusively, while large corporations tend to be more impartially civic-minded, with individual corporations commonly donating to both major parties at the same time, giving most encouragement to whichever party is most likely to bear the burden of governance. :wink:
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Re: Bailout of the big 3, is it really such a bad thing?

Post by mac1214 »

With Ontario's $22 billion deficit, the bailout of the big 3, also includes the bailout of the teachers, doctors, administration, lawyers, everyone else the government pays, who's in the union. It's safe to say that we can't afford them, but the unions don't mind because it's all on borrowed money that's not going to be their responsibility to repay. One day we'll have to figure it out, when the end of borrowing arrives. Mass firings, reductions in salary, union busting is probably the solution, but it's been put off until the future.
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Re: Bailout of the big 3, is it really such a bad thing?

Post by chiaroscuro »

Brix wrote:
ghariton wrote:A common misconception of the left [is] that the right is more motivated politically by self-interest than is the left. There have been several studies now -- the links elude me at the moment -- that show that this is not so.
I wouldn't be surprised. E.g., even the most cursory glance at the pattern of political donation in the US reveals that labour unions seem collectively determined to help fund union-supporting Democrats almost exclusively, while large corporations tend to be more impartially civic-minded, with individual corporations commonly donating to both major parties at the same time, giving most encouragement to whichever party is most likely to bear the burden of governance. :wink:
That is called hedging your bet, playing both sides.... phooey to the notion that right is being altruistic here. If anything it demonstrates a more conniving mindset.
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