The Auto Bailout Clings to Life

It’s not over yet folks, although your voice is being heard.  The big sticking point seems to be whether the bailout money should be taken out of our left pocket ($700 billion TARP bailout package) or our right pocket ($25 billion fund to provide re-tooling for green production).  The only people talking about going Chapter 11 are people on the right such as Mitt Romney, who actually knows something about it having watched his father, George Romney, try to save American Motors, as CEO.

Politics Trumps Problem Solving

Barney Frank has weighed in to make sure the class warfare card is played.  He compared the bailout of AIG with the bailout of the auto companies as White Collar (AIG) vs. Blue Collar (GM). A blog by dbeale points this out very well.  This begs the question:  where does it all end?  Where do you draw the line?  If you bail out AIG, you have to bail out GM because they have blue collar workers.  If you bail out GM you have to bail out (fill in the company name) because they have (fill in special interest group).

But if you read the post carefully you can see the true political objectives of the Democrats and their supporters:

1. Give the auto companies a bailout
2. Fire most of senior management for mismanagement
3. Threaten bankruptcy but don’t do it
4. If the auto companies don’t reinvent themselves (which they can’t do without bankruptcy), nationalize them.  Don’t call it nationalization, call it a “quasi government takeover”
5. Make sure the focus is on building high mileage cars, and whatever else the green program demands.  Anyone who gets in the way of that goal should be fired. To quote dbeale, “every one involved in undermining gas efficiency standards must go.”
6. Appoint a automobile czar (don’t call it nationalization) to oversee the companies to make sure that the management isn’t paid too much, that union contracts are reinforced, the “right” kind of cars are built.
7. Bailout with more government money every 3 years, because the root cause the problem is never addressed.

A Workable Solution

The root of the problem is that the auto companies as they are today, are not competitive.  Here is my proposal

1. Eliminate the CAFE standards.  The CAFE standards were introduced 1975 in response to the energy crisis.  At least that was the stated objective.  The real objective was to curtail the importation of foreign cars, particularly Japanese cars, which could already meet the standards.  If you wanted to buy a car that got good gas mileage, you could.  This was a attempt by government to force U.S. car companies to make cars of similar economy.  However, their cost structure would not allow them to compete with the imports at the low end of the market.  G.M., Ford, and Chrysler don’t seem to have a problem making a profit on the luxury end of the market, on SUVs, and light trucks.  But if, for example the standard is 27 MPG, and your Cadillac only got 20 MPG.  You would have to sell eight compact cars that get 28 MPG for each Cadillac to comply with the standard.  However, it is estimated that GM is at a cost disadvantage of $2000 per vehicle.  At the luxury end there is enough margin to cover that.  At the low end there isn’t.  So, GM as a direct result of government policy has to sell eight cars at a loss to allow them to sell one car at a profit.  Why not let them sell as many cars at a profit as they can, sell no cars at a loss and let the market decide?  If need a high mileage car to save on gas for your long commute, buy a foreign car.
2. File bankruptcy.  Reorganize and get rid of those things that are killing you.  That’s what the bankruptcy laws are for.  Yes, shareholders may get wiped out, union contracts will have to be renegotiated, commitments to continue paying revenue bonds for plants that are no longer needed can be renegotiated or voided, pension commitments revisited, etc.
3. Slim down, come out of bankruptcy, and get competitive again.  The Big three made about 17 million vehicles in 2007.  Does any rational person believe that if the Big Three go into bankruptcy that the people and companies that bought that many vehicles will no longer need cars?  If they still need cars, someone has to build them.  That can either be the foreign makes, the slimmed down Lean Three, or new companies that are formed to take advantage of this huge demand for 17 million vehicles that no one, or not enough are stepping up to the plate to meet it.  People will be re-hired, sub-contractors will have new subcontracts, and the auto industry can actually thrive and not just limp along from bailout to bailout.

The key to this working is to get government out of the mix.  We are facing a plethora of problems and most of them can be traced to government intervention in the market place.  The financial crisis is a direct result of government programs such as Fannie Mae, Freddie Mac, the Community Reinvestment Act, the strong arm tactics of the Clinton Justice Department and HUD to demand more sub-prime lending, and the resistance of Barney Frank and Chris Dodd for more oversight.

The tragedy is that we have problems created by the government and we think that more government is going to fix them.  Keep up the fight.  Let your representatives and senators know, NO BAILOUT

Tagged as: 110th United States Congress, American International Group, American Motors Corp, Bailout, Bankruptcy, Barney Frank, BFM FHLMC Mortgsecurities Fund, Big Three, Business/Finance, CAFE Standards, CEO, Chris Dodd, Chrysler, Department of Justice, Economic history, economics, Economy of the United States, Emergency Economic Stabilization Act, Fannie Mae, Finance, Ford, George Romney, George W. Romney, GM, GMAC, HUD, Mitt Romney, Politics, the United States, Troubled Asset Relief Program, Troubled Assets Relief Program, United States, USD