One more thing...

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SEPTEMBER 19, 2008 9:20AM

The Next Bailout

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I shall refrain from making yet another snide remark about the irony of bailouts. But it seems the bailouts may not be over nor confined to the financial sector. I guess, when the feds start handing out cash to any business that gets itself into trouble and which operates in that ephemeral American industry called “Too Big to Fail”,  you're likely to get a wolf-pack of mega-corporations making a grab for the government till. And now it's the car companies.

The Detroit 3, Chrysler, GM and Ford are largely themselves responsible for their predicament. Unlike the role played by federal regulations when it comes to the financial services industry. The car companies focused on building large SUVs in the 1990s because they were what the market demanded and were incredibly profitable. What they neglected to do was invest in new technologies and building efficient, reliable, but more importantly desirable, passenger cars. They left the Japanese and other Asian car makers to do that because margins are slimmer on smaller vehicles and so they simply ceded those segments of the market to their competitors. Now, the market has shifted back to passenger cars and they are stumped as to how to deliver products that consumers trust and want.

Some auto industry observers have said that tighter CAFE regulations (the ones that stipulate mileage standards) would have made Detroit more competitive and benefited their long-term prospects. There is some validity to that claim. But they always opposed tougher standards because it would have interferred with their SUV windfall. Ultimately, if you fail in the marketplace, meaning consumers don't want to buy what you are selling (in fact, the opposite of the sub-prime crisis), while your rivals thrive, it's a simple matter of competition and nothing else. 

From the NY Times story:

Both presidential candidates, Senator John McCain of Arizona and Senator Barack Obama of Illinois, have voiced support for the loan guarantees — an unsurprising stance given the critical importance of the main auto-producing states, Michigan and Ohio, to the electoral map this fall.

The chief executives of the three big American automakers — General Motors, Ford and Chrysler — met on Wednesday afternoon with House Speaker Nancy Pelosi.

When they emerged, they expressed optimism that the loan guarantees would be included as part of a budget resolution that is needed to finance government operations through the end of the year.


The Senate majority leader, Harry Reid of Nevada, expressed his own support for aid to the automakers at a news conference on Wednesday morning. Mr. Reid said the loan guarantees, which would cost taxpayers $7.5 billion, were needed.

The good news is that this bailout comes almost as a relief to the Treasury. ”You mean only 7.5 billion? Wow, we finally caught a break.”

And the best line from the story:

Still, some fiscal conservatives reacted angrily to the prospect of more taxpayer money being used to prop up private companies.

 Oh, really? Which Republican guy locked screaming in a closet for 30 years are you talking about?

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What became of the trumpeting and banner-waving of the "Free Marketeers"? Build crap cars and no one will buy them. Therefore GM, Chrysler, Ford deserve to fail and fail miserably. Handing them a few billion dollars is absurd. They'll just continue to produce low-quality junk that no one will buy. Cars are expensive. Buy a Japanese car that won't just fall apart in a few years. That's common sense at this point, is it not?
Hi Stellaa, good question.

Much of what I write may be half-baked but this is a topic I actually do know something about since, in my non-TV detective guise, I work as a business journalist and I cover the automotive industry.

The way you phrase the question "American capitalism" is perfectly apt. So much of the American economy is based on selling/marketing and consumer borrowing. To keep this short, much of the economy is companies that offer mediocre (or poor) services and products but stellar marketing campaigns. And consumers spend much more than they can afford. A few years back, in a non-recession economy, Americans actually had a negative savings rate, something not seen since the Depression.

If you mean that style of capitalism coming to a complete end, well, perhaps not, because so much of it is cultural. But the regulatory shenanigans that have led to the current financial crisis will create a correction that may put the US's economic philosophy more in line with the rest of the world.

But a correction is not going to be solely due to the current crisis, which is limited to the financial infrastructure. With a global economy US businesses are going to have to be more competitive on an international scale and marketing pizazz is not going to cut it. They have to, literally, deliver the goods.

As for the stupidity of the market. Every other country in the Western world has put away the notion of pure, unfettered markets. They've come to understand that market forces need to be shaped and harnessed in order to serve the greater good and benefit the majority of the people. Only in the US do you have this ideological stubbornness. Until things fall apart in which case the Bush administration has instantly turned the country into an emergency socialist economy.

And one should hope that right wing radical economic theorists will be marginalized in American political life. Lest Americans lack the foresight to avoid becoming an oligarchy in the way that many Latin American countries used to be -- where a super-wealthy elite run the whole show with a small upper class who serve them, and the masses languishing in poverty with absolutely no middle-class left.
I completely oppose any bailout to the American automobile industry. You are correct that their problems are of their own making. They are the biggest morons on the planet. Toyota has been showing the world how to make money on cars for several years, while at the same time increasing fuel efficiency and introducing a fleet of hybrids. I never write my congresspeople, but I just about will over this.
Hi Rich,

Well, with the announcement today of an additional, incredible 700 billion dollar bailout where the US taxpayer will be buying up most of those errant mortgages, 7.5 billion for the car makers is going to be seen as a pretty paltry sum.

It it obvious they are slipping this one under the radar. Who's going to notice what amounts to 1 percent of that 700 billion dollar check your tax dollars have just put out?

I'm sure the Detroit CEOs, as described in that story, are elated at this. With the election (and both candidates supporting the loan guarantees to the auto industry) and the financial meltdown dominating the news, they couldn't have asked for better circumstances. One is surprised they didn't ask for a larger sum. I'm sure they would have gotten it.

I am afraid, though, that your local congressperson will have no fear of voter anger on this topic. He/she will be taking plenty of heat for the other bailouts and this issue will fall by the way side.

Under other circumstances, it would have been huge news - US government bails out Detroit.

And you're right about Toyota. They definitely don't need to run to the Japanese government for a loan. Last time I checked, they had about 50 billion in the bank.