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Should we bail out Detroit?

Is a bailout just delaying an inevitable bankruptcy? And is bankruptcy – with its forced restructuring – the best chance the domestic car companies have?

Sure, they've mostly run themselves into the ground. I mean, you don't see Honda teetering into bankruptcy, do you? They've gorged themselves for years on high-fat SUVs, and now that they're having the inevitable heart attack, should we give them the money for a bypass? Will they even use the money to get healthy, or will they just use it to keep gorging?

On the other hand, the auto industry is the industrial backbone of America. And if it goes under, hundreds, if not thousands of other companies that supply parts and modules to the industry will go under, too. And with them, hundreds of thousands of jobs. Can we afford the kind of crushing transition that will be brought about if it happens all at once? And can we afford to let other countries produce our largest consumer goods for us?

If we DO offer help, what conditions should be placed on the money? Should it be only for products that will benefit the country -- like fuel efficient vehicles? Should it limit executive compensation until the loans are paid back? How can we be sure that it's an investment rather than a bailout...that we're teaching them to fish, rather than just buying them a boatload of Mrs. Paul's Fish Sticks?

We're interested in your thoughts.

Tom and Ray Magliozzi
Click and Clack, the Tappet Brothers

In my mind the function of the government and the purpose of taxation are not to provide bailouts to private companies who have been and continue to be poorly managed. We should not be entering the private sector in that manner.

The size of the market and the market segments will vary with the economy, but will be unaffected by a corporate bailout. The market is the best determiner of how large each competitor’s share of the market is. If GM is no longer a viable company, the same number of cars will be bought, they’ll just be from competitors that have better met the needs of the marketplace. And they’ll probably be more likely to have been manufactured in the U.S. than if they were GM products. Toyota and Honda seem to have done a far better job meeting the market’s need’s efficiently with U.S. facilities and labor than GM is currently doing.

In 1977 the Consumer Redevelopment Act was passed. That act, and subsequent legislation further loosening constraints on “creative financing” were passed to artificially stimulate a then-poor economy and “flat” housing market by promoting high risk loans for home ownership by demographics unable to purchase in the traditional way with conventional financing. Now high risk loans are crashing all around us. We’re now paying the price for such artificial support of the private sector. I contend that we should not now try to affect the situation by creating another artificial support vehicle using tax dollars.

Let the market decide. It’ll be painful either way, but at least letting the market decide will result in a correction of the core problems. Artificial intervention will not.

Bailing out the GMs of the world is not the purpose of taxation. Let us not allow the feds to distort this any more than they already have.

Kudos to Adam Smith.

Chrysler was given a government loan back in the early 1980’s and this helped Chrysler survive at the time. As Iacocca said, “We borrow money the old fashioned way. We pay it back”. In his first year, Iacocca fired 33 of the 36 vice presidents and streamlined the management. He also paid the workers less. Iacocca is an automotive engineer who knew how to develop a salable product line.

I think that if bailout money is made available to GM, the government must insist on good management. General Motors thrived in the days of Ed Cole and Bunkie Knudsen. These were automotive men. General Motors lost a big share of the market under Roger Smith’s management. Smith was an accountant. Chrysler got in trouble in the early 1960’s with a leader who was an accountant. It seems to me that GM and the other big three manufacturers need to submit a plan for research and development. The big three automakers got themselves in trouble by measuring success by Wall Street’s standards of next quarter’s profit as opposed to producing a quality product that in the long run will attract and keep customers and make the corporations healthy.

Excellent post. While I remain forever in awe of what Lee Iacocca accomplished, and he paid his loans back early, I still contend that it’s inappropriate use of tax money. Besides, I see no Iacocca at GM right now.

Iacocca was, as were Ed Cole and Bunkie Knudsen, first and foremost a “car guy”. Oddly, while Henry Ford was a a car guy Bill Ford seems to have majored in those accounting degrees that you so correctly point to as a major part of the problem.

I believe that in view of the dire economic situation in the US, some sort of bailout is in order.

As mentioned, firm conditions have to apply.

GM needs to restructure itself in line with a 25% market share. This means getting rid of several divisions, probably Pontiac, Saturn, GMC trucks, and Hummer. Executive staff should be cut in half, and their wages rolled back to those of Toyota managers.

Obama will expect to see a product development plan with green, economical vehicles. Union wages should reflect the level the company needs to be competitive. The US government should pick up some of the severance package costs.

A similar program is on order for Ford, although no cutback in product lines is necessary.

Chrysler should either (allowed to go under)be put out of its misery or sold to Tata of India or the Chinese. It does not deserve a bailout, only a line of credit until its sold. On its own it is not a viable entity!

Any bailout for any industry is just temporary.

Until ethics return to upper management(fat chance) we are stuck in a loop

Look at Lehmen and Bear Stearns, those top executives were getting job offers as they walked down the street carrying the boxes they used to clean out their old offices.

There is no stigma attached to acting like “one of the boys”

But we can’t let the Auto industry fail.

It’s like “if we fail it will hurt us,but it will hurt you more” they have us over a barrel.

While it might go against our nature and our instincts to bail out the auto industry, we have to look at the totality of the situation. GM, Ford, and Chrysler are not just a few factories bearing the names of those profligate, poorly managed corporations. In addition to that structure, they employ tens of thousands of rank and file employees, all of whom have to pay rent or a mortgage, purchase food, and provide for dependents.

In addition to the employees of “The Big Three”, there are also their suppliers, all of whom also employ tens of thousands of employees who also have to provide for their basic needs, as well as the needs of their dependents. If the car companies have to declare bankruptcy, their suppliers will either not be paid or might receive a paltry sum–like .30 on the dollar–many months or years in the future. The result is that many of the suppliers would likely go out of business.

There are also dealerships, who also employ countless people. Just by walking into a shopping mall or a restaurant nowadays, most of us can see how drastically the retail environment has already been impacted by the current financial turmoil. A statistic that I think is very relevant is that new car sales represent at least 20%* of the retail sales figures in this country. Thus, the closure of scores of dealerships will devastate retail sales figures even more than we have already observed.

Thus, a failure of the US auto industry would devastate the industrial sector, the retail sector, and countless other parts of the economy that depend on the spending of auto workers, employees of suppliers, and employees of dealerships.

And, while none of us like taxes, the reality is that taxation is the fuel that provides government services for all of us. A further collapse of the retail sector will result in even fewer sales taxes being collected. Unemployed people do not pay income taxes, and this will further weaken the ability of government to provide everything from defense to education, to…virtually every service that we have come to depend on.

According to virtually all of the “experts” whose opinions I read and listen to, the economy is not likely to see substantial improvement until sometime in 2010. At the rate that the car companies are burning up their cash reserves just to keep the lights on, they cannot last until 2010, and in fact, it appears that GM is not likely to survive more than a few months without declaring bankruptcy.

We, as a nation, cannot afford to let the US car industry fail. The cost of bailing them out will be huge, but the ultimate cost of not aiding them is even larger. Loans (NOT grants or gifts!), coupled with government regulation of excesses such as executive compensation packages and “golden parachutes”, are necessary in order to preserve this vital part of our economy. The economic survival of our nation literally depends on this action.

*Updated to correct my earlier (too low) figure on the percentage of retail sales represented by new car sales.

VDC, while I understand your perspective and respect the intelligence of the argument, I still contend that the secondary and tertiary effects of the shrinking total market will be the same whether the product is produced by GM, Ford, Toyota, or Honda. I maintain that it’s in our best economic interest to let that market share be taken by the more efficient of the competitors, whoever that ends up being.

It’s entirely possible that artificially supporting the less efficient competitors will result in having the market sliced into more shares but end up having overall less efficient providers in the market. In short, the entire market would be more productive without the less efficient producers.

I’d argue that the economic survival of our nation depends on more efficiency in the manufacturing segment and that can only happen by allowing the market to correct itself without artificial support of the less efficient producers.

mountainbike–I also understand your position and I respect (as usual) the intelligence of your argument. But, what would tens of thousands of unemployed (and largely unskilled) workers in the rust belt do for employment if their jobs in the auto factories and in the factories of their suppliers were eliminated?

What could have worked better was if we had stopped the Federal Reserve every time they jerked the interest rate up and down for the last fifteen years. That story is way too long. It isn’t even the fault of car makers that the auto situation is so bad. They did what I recommended when they got rid of that old Oldsmobile. They didn’t really change it to Saturn. We, as a people, do not want to drive the golf carts that would save so much fuel. The cars that are offered today are strange looking. The PT Cruiser gets the front so wrong. The new Camaro looks dreadful. The Charger is the biggest joke. Only the Mustang is perfect to look at. The Challenger may have a chance. Who thinks that Lucerne is a good name for a car? We made up a name for a car, The Dodge Elmo. It’s better than that BMW 750il. It looks like the 75 Oil. We can do better by pulling letters and numbers out of a hat. The only honest car was the Daihatsu Charade. Most of the excitement is gone; it has been replaced with air bags and antilock brakes. Maybe we should mandate style and get an AMX instead of Pacers all over the landscape. I know that I am asking for the impossible, but we used to have cars that would get 42 MPG on the freeway with headlights that cost $3.50 that didn’t turn yellow. Nobody wants todays cars.

“The only honest car was the Daihatsu Charade.”


My contention is that since the car’s purchaser would still have to purchase a car, he/she would purchase it from one of the other producers, who would have to increase capacity to fill the additional market share. That would men new facilities, more shifts, work for those laid off.

The surviving producer would I’ll grant you be likely to hire fewer workers, since the survivor is more efficient, however the option has our tax dollars being used almost as a modified welfare system, ensuring some modicum of income for the employees of the inefficient producer. In reality, that support would have to continue to grow because the market for the product has shrunk.

Overall, there will be a shrinkage of the market size. A specific number of jobs total will be necessary to supply that market. The question in my mind is should that market be supplied by as efficient an aggregate of producers as the natural Adam Smithian theory would dictate, or should be artificially support the inefficient producers?

I have compassion for those that would become unemployed. I’ve been unemployed and I know the trauma firsthand. But in the long term I think we’re better off allowing the market to correct itself without tax-funded intervention. I also tend to be somewhat of a constitutionalist and have to point out that that isn’t the function of our system of government or our tax system.

I have great respect for you and for your argument, but on this one I’ll stay my ground.

The taxpayers should NOT bail out the Big 3. Let them fail and declare bankcruptcy. The unions have stong armed the Big 3 for all these years. Why should I pay for their retirement. If only they made good cars then this would not have happened. I bought a Chevy before and all I got was problems, same thing with my FORD Expedition.I have a Toyota a Honda and a Mercedes and I am very happy with my cars. I bought American cars and I was so disappointed. Sorry NO BAILOUTS for the Big 3. Clean up your acts yourself. There is no one to blame but the Big 3 and the unions.

Iacocca was first and foremost a marketing guy. He hardly ever, if ever, worked for Ford as an engineer. He did have an engineering degree, though.

Like it or not, you will pay for the retirements of any people formerly employed by GM, Chrysler, or Ford if they go out of business. There is nothing in the workd more sure than that.

I am in favor of loans that would be used to update the product line. I would not put too many strings on them. Possibly that the borrower must update existing plants rather than build new ones where they don’t have any now. That is, if a plant in Delaware is shut down, it must be modernized before a new one in Nevada can be built.

Remember that they owned the truck and large car market. The only way that the Asian car makers would get into the market was to sell small, low profit cars. GM, Ford, and Chrysler gave us what we wanted. How long ago was it that everyone had to have a bigger SUV? Not very. Yes, they do have problems. Now the growth is in smaller cars and trucks. The traditional US manufacturers are trying to do a better job there; GM and Ford are succeeding in providing smaller, competitive cars. I’d rather loan them money to keep a lot of good people employed than see Michigan go under. Maybe Illinois, Indiana, and Ohio, too.

I’m a free-market guy, but there are times when laisse faire is too harsh a cure. This is one of those times.

If this is going to be a rational discussion, please stop using the term ?bailout.? Since when is a loan a bailout? Is your mortgage a bailout? When you bought your car, did you ask for a car loan or did you ask for a bailout? Is your child?s student loan a bailout?

Since I?m about to lay it all out, first I?ll answer ?Yes? to the financial aid package, which really needs to be closer to $50 billion over the next 6 months. The money does not need to go directly into the pockets of automakers. It needs to be made available to dealers, for floor plan purchases they cannot otherwise make, and to customers, who otherwise cannot get car loans. $50 billion directly to the automakers would likely buy only 45 days cash flow. The money needs to go to stabilizing guarantees of loans to consumers and dealers, whether they?re buying and selling Ford, GM, Chrysler, Toyota, Honda, or whatever.

From Bloomberg News, October US automotive sales were down 32 percent to 838,156 from 1.23 million, for the lowest monthly total since January 1991, according to Autodata.

Several negatives converged in the U.S. automotive market all at once, with that ugly spike in gas prices being one of them. And the spike in gas prices had, as we now easily see, less to do with automobiles than with a credit-over-fueled worldwide industrial boom. Now the boom is over. Demand is down. Hurricane season is ending and refineries are back online. There?s a glut of gas again. The whipping boy can go home?. The BIG AMERICAN CAR has taken yet another beating and kept on rolling. It wasn?t his fault after all. :slight_smile:

Anyway, other negative forces included a US dollar hitting record lows against other currencies, making raw materials prohibitively expensive and profit margins on small, low-margin cars essentially nil.

Also, the glut of free money last year pushed US auto sales to a record 17 million cars. This year, sales are expected to be near 10 million car sales for the year, which I think is about a 25-year low.

Customers who want to buy cars are having trouble getting financing. Other customers bought their car last year and don?t need one this year. Others are too afraid to buy right now. Car dealers, which are not owned by the manufacturers, are having trouble in many parts of the country getting floor plan financing to buy cars from manufacturers to resell. Capital One announced a few weeks ago it was pulling out of the floor plan financing business in New York and New Jersey. Hey, that?s 10 percent of the car market. What?s in your wallet?

American buyers bought big cars because they wanted big cars. If Honda was the only mass market manufacturer to stay out of the SUV business, it doesn’t make them right. Honda’s US market share has just now, finally, after 40 years, gotten out of the single digits thanks to what Greenspan called a We’re in a “once-in-a-century credit tsunami”.* I don’t think I would necessarily call that a winning strategy. I’m not slighting Honda, really, really not. I’m just saying don’t read too much into their US performance based on this environment.

GM, Ford, and Chrysler have much higher exposure to the U.S. market than any foreign manufacturer. US car sales account for a much higher percentage of GM, Ford, and Chrysler sales than they do for Honda, Toyota, VW, Daimler, BMW, and other foreign carmakers. Therefore, when U.S. sales decline, they feel it more.

Outside the U.S., where consumers really want small, fuel efficient cars, American car makers have long sold small, fuel efficient cars by the millions. They?ve even tried bringing those cars home. Forget about it. Not wanted.

On the other hand, most foreign market small cars do not meet U.S. or California emissions standards as-built and cannot be sold here without significant additional unit cost for emission control systems and certification. Additionally, U.S. market car new car warranties are typically 2 or more times longer than warranties in most other markets.

The upshot is that carmakers with less U.S. market exposure are faring the best right now. That will be true until the turnaround begins. Pundits think that will happen in the U.S. first. At that time, U.S. profits will mean that the carmakers with the greatest U.S. exposure will fare the best. And then perhaps everything will level out again.

*Sorry - originally I misquoted as “the financial storm of the millennium.”

What has the airlines been doing for decades???BANKRUPTCY!!!
The planes are still flying and the big names are, on the most part, still on the planes.
But the Union strength has deminished. See the pattern???

Maybe they should be bailed out. They certainly should not be put back into the kind of financial condition that they were in a few years ago, but we need a strong domestic automobile industry. Over time, the U.S. carmakers have gone from making transportation machinery to making living room motorized furniture, because they catered to the lowest of consumers’ taste. I had a 1983 Chevy Cavalier that got better gas mileage (34.5) than nearly all cars get ow, and it was mechanically superior. If we bailout the carmakers, then they will have to be required to mke transportation machinery.

I think that it might also be a good idea to break GM and Ford into a few pieces. That would create companies that might be small enough to be able to move quickly in the market, and it would reduce the size of the headquarters staff. GM alredy has several operating divisions that have separate design and manufacturing units, so breaking it apart would be easy, and they have already split Delco-Remy and at least one other division into a separate company. Ford also has separate design divisions, so it would also be easy to break into pieces. Chrysler isn’t large enough to need breaking up.

When Detroit can again build a car that is as good, reliable, and inexpensive as the 1983 Chevy Cavalier for $9000 (plus inflationadjustment), we will have an automobile industry that will be able to take on the world.

I think a tax credit for fuel efficient vehicles is the way to go. We encourage energy independence, allow the industry to determine how best to achieve the goal, encourage people who still can afford to purchase a vehicle to do so now, and provide an economic stimulus to keep people working and in their homes.

If they don’t have anything to sell except gas guzzlers, then … ohh well…
They should have learned their lesson back in the 70’s and not fought improved fuel efficiency standards that were in their own best interests.

I agree with mountainbike, that the total available market will remain unchanged (except for the stimulus effect of the tax credits) if one or more of the auto manufacturers goes out of business or is taken over by someone else, and that the ripple effect is only a scare tactic.