Loans to the Big 3?
What does bankruptcy for the Big 3 Automakers mean? Partially it means they can tear up or substantially change the contracts that cause them to legally owe money to hundreds of thousands of people in the form of other businesses (parts suppliers, etc.), employees, retirees, and so on. How is that a good thing? I call that passing the buck -- with subsequently many more megabucks of social costs.
I think that the 70-80’s era labor contracts with the Unions were foolish and short-sighted but they were ultimately agreed to by the executives of that time. The goal now is to figure out how to make it work in the present. It’s not like the current management did nothing but fiddle while Rome burned. Already the UAW and Auto Manufacturers have worked together to change their contracts such that current workers are *already* (apparently) price competitive with their foreign competitors. I would suggest that this was no easy task and represents exactly the type of movement that Mr. Romney says the Big 3 are incapable of making without a healthy dose of Bankruptcy.
Now it is possible that he’s right and that if *loaned* the money, Ford, Chrysler and GM will fritter it away and end up destroying themselves anyway. I would suggest, however, that change is already underway. Even though none of these companies made the Prius, GM still had a net profit in the 3rd quarter of 2004 of $1.3B. Yes, they were lured by the high profit margins of the gas guzzlers and trucks prior to the spike in oil prices – but if you think they aren’t already in development (or production) of a full line of vehicles more palatable to the customers of today’s economic and social zeitgeist, I’d be amazed and I’m sure the Boards of Directors would be….apoplectic.
In perhaps an unfortunately metaphor, I see the proposed industry loan guarantees as giving the Titanic the much needed bigger rudder – one that gives the majestic ship a chance of steering around its icy nemesis, and allowing it’s steersmen to learn to keep their eyes on the horizon (and ignore the young lovers on the…well you know).
All that being said…I buy Japanese.
I think that the 70-80’s era labor contracts with the Unions were foolish and short-sighted but they were ultimately agreed to by the executives of that time. The goal now is to figure out how to make it work in the present. It’s not like the current management did nothing but fiddle while Rome burned. Already the UAW and Auto Manufacturers have worked together to change their contracts such that current workers are *already* (apparently) price competitive with their foreign competitors. I would suggest that this was no easy task and represents exactly the type of movement that Mr. Romney says the Big 3 are incapable of making without a healthy dose of Bankruptcy.
Now it is possible that he’s right and that if *loaned* the money, Ford, Chrysler and GM will fritter it away and end up destroying themselves anyway. I would suggest, however, that change is already underway. Even though none of these companies made the Prius, GM still had a net profit in the 3rd quarter of 2004 of $1.3B. Yes, they were lured by the high profit margins of the gas guzzlers and trucks prior to the spike in oil prices – but if you think they aren’t already in development (or production) of a full line of vehicles more palatable to the customers of today’s economic and social zeitgeist, I’d be amazed and I’m sure the Boards of Directors would be….apoplectic.
In perhaps an unfortunately metaphor, I see the proposed industry loan guarantees as giving the Titanic the much needed bigger rudder – one that gives the majestic ship a chance of steering around its icy nemesis, and allowing it’s steersmen to learn to keep their eyes on the horizon (and ignore the young lovers on the…well you know).
All that being said…I buy Japanese.
posted by Dyrk | 4:26 PM
3 Comments:
This bailout simply looks political to me. The UAW is in need of the bailout and a Democratic congress will give it to them. What better power grab then to run the auto industry from BOTH sides now?
The "Big 3" are no different than big airlines or national retailers of the past. Failed businesses go under, after which an industry is reshaped and rebuilt (see Jet Blue, Southwest, Walmart). Where do we stop once the auto industry is socialized? What about the workers and suppliers at Mervyn's, Ward's, Circuit City, Pan Am, Eastern? Unfortunately, these corporations were not so politically connected.
A big dose of cash will cause change in the short term, followed quickly by more of the same. Knowing the Government has your back, and is willing to print money for you whenever you need it, there is no real incentive to change. For proof of this we have Fannie, Freddy, and the New Deal.
You really need to post more... I love it.
I think the most significant disagreement I have with your take is that the Big 3 *are* different than the other industries you listed. Why? Because it’s actual manufacturing – the largest (?) bit of manufacturing left in the United States. And making things is how you create wealth. That’s a huge difference. Secondly, right now I think the single most important thing is stop the bleeding of jobs in this country. The auto-workers themselves are the tip of the industry-employment iceberg (to continue the metaphor). Even the loan guarantees won’t stop all the job losses, nor should they if there are truly in excess for the new business plan.
Manufactures should definitely not be socialized (though some degree of “protection” is warranted for the national interests). I’ve heard it said that the Govt. could outright purchase the big 3 for $3B. Don’t want that. Right off the bat, the government would then still need to provide for the lines of credit. Don’t want the government designing, manufacturing, and advertising vehicles. Not its purpose. Not its expertise. Placing some conditions on the terms of the loans? Definitely.
For the duration until the loans are repaid: no Dividends; no executive salaries more than say…the President’s (some bonuses allowed as an incentive if performance actually warrants it); and the balance of manufacturing jobs must stay in the US, at least proportionally.
As for industries that should be socialized… That’s an entirely new /cough insurance /cough topic.
We agree that we *need* an auto industry and that manufacturing jobs are key. I think that's the reasoning behind bankruptcy over a bail out. I see a bail out as a short term political maneuver and bankruptcy a way to radical restructuring. Cars will still be made here, Toyota and Honda are doing a swell job. Maybe Toyota will buy one of the "Big 3". Maybe the "Big 2" will become much more productive. Whatever the case, how could such a fowled up industry make this remarkable turnaround with a "loan" that only gets them through March? -- They get by because once this precedent is set, they know the government trough is with them now.
Congress today is showing that you can't have it both ways. Once you call for "protection" and "conditions" you start down a path that is already shaping up as nationalization. We'll have a Car Czar overseeing another government agency designed to nationalize the auto industry... We'll have an EPA that will now be able to push their "green" agenda on a government run auto industry and an auto workers union with government backed pensions. All the while, guys like us still buy from Toyota and Nissan because who in their right mind would buy a car designed by congress?
If our current problems with the credit markets are followed, they lead back to the government pushing banks to give housing loans to people with no money. All for political gain, all built on a stack of cards. These same politicians are now putting themselves in charge of the resulting economy by again, handing our money out to people who don't deserve it and then telling them how they should run their business.
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