Can We Find The Right Way To Bailout The Auto Companies

It's an exercise in futility to argue against a government bailout of one or more of the auto companies. Politically, nothing else can happen. Let's instead argue for the form of the salvation of Detroit.

Let's note from the outset that the political claims that the rationale for investing government money in any one or all of the Detroit auto makers is to save the U.S. auto industry is simply a blatant lie. The U.S. has a vibrant auto industry that doesn't stop at the borders of Michigan. Throughout much of the Southeastern part of the country auto plants are churning out quality cars and paying their workers wages comparable to those paid to the Big Three. Similarly benefits are as good or better as found in most other private industries in America.

Another reality that must be accepted is that the global auto industry suffers from over capacity. There are simply too many manufacturers for existing and probably future demand. Lost in the tornado surrounding the mortgage catastrophe is the fact that the auto industry was living in a bubble created by the same lax credit standards. Unit sales that approached 17 million vehicles a year were creatures of faulty lease assumptions and non-existent underwriting standards. Those artificial stimuli have disappeared, probably for some time, and the reality is that the natural market is probably closer to 12 million units per year.

If you are willing to accept these propositions then it is difficult in the extreme to argue that a government bailout makes any sense whatsoever. But we've already stipulated that something is inevitable so what is it to be?

First, any attempt to "save" the industry has to be one that extracts sacrifice from all of the stakeholders. As currently proposed, any bailout seems to leave the unions untouched. The legacy costs are a major part of the problem and as difficult as it might be they need to be erased. The unions have to accept the fact that the preservation of their workers' jobs is the most they can expect from the government. While this may be difficult, their option is disastrous and that reality has to be made impeccably clear.

Second, whatever remedy eventually ensues must succeed in downsizing the industry. The problem of too much capacity is not going to vanish. A government financed merger of perhaps two of the players with assistance given to the third to transition to a more logical product line might be one way. Other options will probably be advanced as well. So long as they address the problem of too many new cars it makes little difference what the temporary solution might be.

It's unreasonable to expect the political process to make these decisions. An alternative process needs to be found to work out the problem. Paul Ingrassia argues in the Wall Street Journal today in favor of a government receiver. Others suggest that Chapter 11 is the best method. The bugaboo has always been that these solutions are tantamount to liquidation as consumers won't purchase the product if they suspect the warranty won't be honored. There are ways around that via government guarantees, the government acting as the debtor-in-possession financier or similar ad hoc arrangements. In the end if this is to be anything more than an exercise in spending taxpayer money to preserve jobs that arguably should be lost, a arbiter with no axe to grind has to be found.

Regardless of the steps taken to address the problems of the Big Three, and rest assured that will be steps taken, this is best a decision left until after the new administration takes office. The stakes are high and whatever is done needs to be done by the Democrats not by a lame duck congress and administration. Any rescue efforts are going to have negative repercussions for other constituencies. Other car companies and their workers are going to be disadvantaged by government assistance. Those people deserve representation and a say in the debate. To slide any aid through at this time would deny them the fair hearing they deserve and relieve elected officials of the responsibility they need to shoulder for a decision of this magnitude.

I would personally prefer not to see this occurring. My preference is to let the market punish inefficient participants. I know that won't happen. So failing that resolution can we just try and do this one somewhat right. We shouldn't set ourselves on another AIG type road of serial bailouts.

Tom Lindmark