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No to Detroit

It's time to turn off the federal bailout spigots

Rocky Mountain News

Published November 2, 2008 at 9:31 p.m.

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A modest sigh of relief is in order with the announcement Friday that the U.S. Treasury Department will not hand over billions of dollars in federal aid to facilitate a merger between General Motors and Chrysler.

At least, the money won't change hands before Tuesday's election.

Treasury officials told the Detroit Free Press they were too busy managing their new stake in banks and other financial institutions resulting from the $700 billion rescue package to get in the car business. And a lame-duck Bush administration is not eager to inject billions of taxpayer dollars in a merger that could lead to 40,000 layoffs. That's 40,000 jobs lost even if Uncle Sam pays up and the merger goes through.

Of course, the next Treasury secretary may not share those reservations. Sen. Barack Obama said he'd like to double the $25 billion in loan guarantees already promised to help Detroit retool its assembly lines to build more "clean" cars. And Congress already faces huge pressures to save any of the Big Three from bankruptcy.

However, any further federal assistance would be a huge mistake. The current $25 billion loan package comes with no guarantee that U.S. consumers will buy clean cars from Detroit instead of vehicles produced by its Asian and European competitors. Upping Washington's ante would throw good money after bad.

The financial rescue package was hardly perfect, as we said at the time, but it may have been necessary to keep credit flowing, restore confidence in financial markets and prevent a total seizure in the global, national and local economies.

It was never intended to prop up a wide variety of industries. If Detroit gets its wish, we can easily see other businesses (airlines, for starters) lining up for help. There'll be no end to the list of corporate charity cases.

GM and Chrysler are indeed in terrible shape. They will hemorrhage money for the foreseeable future and may be terminal cases. (Ford isn't making profits, either, but it may have enough cash on hand to survive.) New car sales are about one-third below 2004 levels, and aren't expected to bounce back any time soon.

Then there are the "legacy" costs: GM and Chrysler face $90 billion in pension and medical expenses for retirees over the next decade.

But once GM, Chrysler or even Ford starts getting subsidies, the payments will never stop. No matter how high their losses mount, the companies will become too important to fail.

Bankruptcy may be the only way GM or Chrysler can survive without taxpayer support. As Washington Post financial writer Steven Pearlstein noted, a bankruptcy court could relieve some retirement costs and let the companies work out new salary and benefit packages that are more in line with the still-generous compensation that foreign-based carmakers offer their U.S. employees.

The court could also examine whether automakers deserve exemption from the state franchise laws giving dealerships what amounts to local monopolies. Would automakers be more likely to flourish if they could emulate Michael Dell, letting consumers custom-order cars directly from the factory and delivering them to their homes?

The bankruptcy of a single automaker would ripple through the supply chain. But it would hardly spell the end to auto manufacturing in the U.S., by both domestic and foreign-based firms. The alternative to a possible bankruptcy would be to make a few automakers perpetually dependent on taxpayer support, with politicians and bureaucrats in the driver's seat.

Comments

  • November 3, 2008

    7:09 a.m.

    Suggest removal

    VVVV writes:

    Bankruptcy is the only way to revitalize the auto market in America. Only when competition from start up companies is allowed will good cars actually start being produced in this country. Man can not live by trucks alone.

  • November 3, 2008

    9:31 a.m.

    Suggest removal

    bxwatso writes:

    GM is essentially a health and retirement plan that makes cars. If GM, and to a lesser extent Chrysler, go Ch. 11, the PBCG would pick up the tab for tens of billions of dollars in underfunded pensions and health plans.

    Unlike the $1trln bank bailout, the PBGC liability is real cash out of the treasury (the bank bailout may or may not end up costing taxpayers actual money).

  • November 4, 2008

    11:51 a.m.

    Suggest removal

    CDee writes:

    You are exactly right bx,
    Then Ford will have to declare bankruptcy as well in order to stay competitive. May end up costing more jobs than the "bail out"

  • November 4, 2008

    5:47 p.m.

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    Spencer writes:

    b,b,b,b,b,b,but what about the bonuses?