m out of bankruptcy, or at least to keep them functional during a bankruptcy. For some firms, like United Airlines, it is possible to enter into bankruptcy proceedings and resume flights a short time later. However, unlike with commercial aviation, car consumers are looking at shelling out anywhere from $20-70K for a vehicle with the expectation that the firm will be there five, ten years down the road to provide ongoing support. The worry is that, should GM, Chrysler or Ford enter into Chapter 11 bankruptcy proceedings, consumer confidence will plummet and they will never recover. Kaput.Unlike the airline edition of this series, I have nothing personally riding on the outcome of this bailout debate. Nevertheless, the principle is the same. If a firm with as many assets as an enormous automotive company cannot receive financing, there's got to be a good reason. In fact, there are two good reasons. The first is that, due to the credit crunch, financial institutions are currently de-leveraging their liabilities and are thus unwilling to take on a large-scale financing project of this nature.
The second, more relevant, reason is that these firms have been operating under a failing business strategy for at least a decade. These companies are simply uncompetitive: they have over-priced, lower-quality vehicles (pickups excepted), silly-expensive labour union deals and are failing to adjust to environmental concerns.
Moreover, this bailout plan smacks of thinly-disguised politicking. It is a well established fact that the Big Three have considerable traction in Washington, and a Democrat-dominated legislature tends to lean towards protectionism on these issues. In any event, we'll find out on Monday how this one is going to play out. In the meantime, some questions to ponder and some readables to read.
Question first: Do the Big Three pose systemic risk for the economy in the same way that Bear Stearns or AIG do? If not, why are they being considered under TARP?
Question second: Should the government finance GM's bankruptcy, do they have any prospect of getting their money back?
Yet more questions: For a considerable chunk of the electorate (and thus a considerable chunk of politicians), defending the Big Three is equivalent to defending American industry. But what is an American car anyway? If it's a Ford minivan made in Windsor, Ontario with Japanese parts, does it count? What if it's a Honda made in Ohio? Or that Mercedes engine plant in Alabama?
Links
- FT Alphaville thinks we've moved past moral hazard into a barely-concealed sense of entitlement. Nobody "deserves" a bailout.
- GM wants a bailout? Clusterstock lays out their conditions.
- Clusterstock responds with a counter to its own argument.
Opening material sourced from Planet Money.
Links
- FT Alphaville thinks we've moved past moral hazard into a barely-concealed sense of entitlement. Nobody "deserves" a bailout.
- GM wants a bailout? Clusterstock lays out their conditions.
- Clusterstock responds with a counter to its own argument.
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