Auto-Bailout for Big Three?

In response to Kevin’s post, I have to take sides with the bankruptcy opinion.  The bailout, explained by Richard Shelby (thanks Oliver), seems to be providing a short-term solution.  The American auto industry is not even confident they will be able to pay the federal loans back.  The need for a major reconstruction of these companies, however, is certain.  The amount of reconstruction necessary is simply not attainable by a mere bailout.  These companies need to file for bankruptcy in order to really change how the American industry functions.

Steven Levitt (author of Freakonomics) puts the problem clearly, arguing that American car manufacturers are not profitable because of their high cost of labor.  Levitt contends that allowing the “Big Three” car companies to file for bankruptcy will allow bankruptcy judges to breakup auto unions, and finally allow these companies to compete with foreign manufacturers.

Obvious objections to these contentions can be raised: (more…)

Published in: on December 2, 2008 at 4:20 pm Comments Off on Auto-Bailout for Big Three?

What to Do with Detroit?

Automakers this week went before Congress to try to convince them that they needed a $25 billion bailout to avoid a massive disaster that would result in the loss of millions of American jobs.  Congress remained unmoved.  Congress gave the executives of these companies a little under two weeks to come up with a plan for the proposed bailout that would inspire confidence that the money they’d receive would be used properly.  We’ll see if the executives are up to the task.

There are a lot of different viewpoints about how best to handle this situation.  There’s the approach advocated by free-marketers that say that letting Detroit automakers fail is the best thing for the economy.  Jim Lindgren at The Volokh Conspiracy takes this approach, as does David Yermack at the Wall Street Journal.   Their basic contention is that the economic resources tied up in the American auto industry are being inefficiently used and have been since the 1970s.  They contend that letting these companies fail, while initially painful, would free up those resources to be used by more efficient firms in profitable industries.  This would create more jobs long term.  These arguments make intuitive sense.  However, there is a major problem with them.  We as a nation are already faced with the worst economic conditions since the Great Depression.  Allowing the Big 3 to fail would result in the loss of MILLIONS of jobs.  Those millions of jobless people aren’t all going to be able to jump into new careers.  Many will need to be re-trained and most companies aren’t hiring right now because of the current economic conditions.  This solution doesn’t seem tenable given today’s economic realities.

Then there’s the solution offered by Robert Reich, an economic adviser to President-elect Obama.  He suggests allowing the Big 3 to reorganize with a bailout, but as a condition of the bailout, the Big 3’s executives, creditors, and shareholders take losses equivalent to what they would suffer under Chapter 11 and that the United Auto Workers take wage and benefit cuts.  The bailout and savings from the aforementioned conditions, he argues, would allow them to retool their production process towards the more fuel efficient cars that are in high demand and are produced cheaper and better by their competitors from Japan (Honda and Toyota).  Todd Zywicki at The Volokh Conspiracy advocates a similar approach, although he argues for an actual Chapter 11 filing and reorganization, and would only allow government funds to be made available after a good-faith effort was made to try to secure private debtor in possession (DIP) financing.


Published in: on November 21, 2008 at 3:01 pm Comments Off on What to Do with Detroit?

Is the Federal Bailout Plan Enough

This past week has not been kind to Wall Street.

Just shortly after the government takeover of mortgage buyer giants Fannie Mae and Freddie Mac, Wall Street entered into a major downward spiral. The investment bank Lehman Bros. declared Chapter 11 bankruptcy, American International Group faced a downgrade, Merrill Lynch was bought by Bank of America, and the Dow Jones plummeted. The financial troubles continued throughout the week, with an $85 billion bailout of AIG and the SEC temporarily banning “short selling” of 799 financial companies. Towards the end of the week, the Federal Reserve Bank has offered to let investment institutions borrow money for collateral since it has become harder for Wall Street investment banks and other financial institutions to obtain credit, as well as lower the interest rate for those special loans.

On Saturday, President Bush, along with the U.S. Treasury Department, announced a proposed $700 billion bailout for Wall Street. This bailout gives the Treasury Dept unprecedented power to buy troubled mortgage-related assets from faltering private financial institutions. This means that the burden to pay for the troubles of the falls on federal taxpayers, at least for now. After buying the mortgages and other bad assets at a below market rate discount from these private banks, the government will retain them until the stock market recovers and hopefully sell to investors for a profit. Along with the bailout plan, the Bush administration has agreed to incorporate mortgage assistance and congressional oversight to appease Congress into signing a bill as quickly as possible. Although the bailout plan seems drastic, administration officials as well as members of Congress seem to think that not taking action could hurt Americans worse in the long run- investments and retirement savings could be at stake.

While it does seem like the federal government needs to step in and help in some way, it’s hard to ignore the large price tag that will cost American taxpayers. Why is it that the government can afford to help out these private financial institutions now, but didn’t set more regulations and protections for homeowners when the mortgage crisis started? There needs to be more protections for the average U.S. homeowner, and less for the executives of big business. Especially if it’s the average U.S. citizen that’s supposed to bail out these corporations. Hopefully the bailout bill that comes to fruition will incorporate more protections for homeowners, and that new regulations will prevent a financial catastrophe like this from happening again in the near future.


Published in: on September 26, 2008 at 10:37 am Comments Off on Is the Federal Bailout Plan Enough