December 9, 2008  ·  Lessig

These bailouts are an awful idea — the worst of K St. capitalism (== kapitalism) inviting an insanely bad future for the industries affected. If there’s one thing worse than Detroit managed by the managers who have been driving the American auto industry into the ground for the past three decades, it is Detroit managed by politicians.

I’m not against all bailouts. I think it was appropriate to save the airline industry after 9/11, for example: That was an unexpected shock that produced a failure not directly related to the bad management of the airlines.

But these bailouts are not that. Both the auto industry and the banking industry are insanely inefficient. They have been for decades. And rather than being saved from a shock, both need a significant shock to management to radically change how they do business.

Perhaps the shock to banking would be too great just now. I’m willing to be persuaded that intervention is necessary there. But the more I read about the auto industry, the less I am convinced.

People speak about this as if not bailing out Detroit means automobile production in America ends. That’s not what failing to bailout Detroit means. Not intervening now would mean these automakers would enter bankruptcy. And bankruptcy means the assets of these dinosaurs get reorganized: Someone else buys these companies, at a price the market sets, and runs them profitably, because of the price the market set.

Obviously, that change would not be painless. And I’m all for minimizing the pain where the pain is doing no good — with workers, or others depending upon these industries. But I’m against interventions designed to minimize the pain where the pain would do good — by radically changing how that industry is managed. The whole justification for insanely high executive compensation is, in part, so they can weather such storms. I don’t see why the government should be in the business of building safety nets for the (relatively) well off.

“But what if foreign car companies buy American car companies?”

So what. I just don’t get this fear. We live in a global economy. If you want to own Toyota, buy Toyota stock. In the vast majority of cases (meaning there are exceptions I’d be willing to consider), the place of incorporation of a company should mean squat little to these sorts of issues. Or better, the ability of the company to build and manage production should matter much more.

  • http://www.downes.ca Stephen Downes

    > We live in a global economy.

    When we can pack up and move and live in any location in the world – free to escape repressive governments, free to follow jobs and resources – *then* we live in a global economy.

    Until then, measures that protect location-based industries must be seen in the context of the inability of the local population to follow the marketplace and the earnings.

  • john

    Well some of the issue is the credit crunch, with banks not willing to lend.

    But handing more money to banks is just not going to do anything to the perceived risk of lending money, they would need to back loans to affect perceived risk. however backing loans just encourages more risky loans, unless there are regulations on who loans gets backed. Or we could just Nationalize the banks and fire the Top Management…

    The conditions for car industry bailout should be that the top management be voted out, and a new management voted in by the shareholders; but no extra regulation, just money incentives for greener cars.
    Then they will decide they don’t want the bailout they will just bankrupt and reorganize like regular companies.

  • Anonymous

    I think you need to adjust the time on your blog – it is saying it was posted at 2pm, today.

  • http://pa-2.blogspot.com William “Papa” Meloney

    Military.Industrial.Complex – I am relatively sure that from a General’s perspective we cannot ask multi-national corporations to re-tool for the war effort – God forbid that should come to pass. (I neither agree with this perspective or endorse it. Personally I feel that the US automotive industry should be allowed to ‘respond’ to the natural forces of capitalism on their own.)

  • Rick

    An interesting topic for you to take on given your usual field of expertise.
    But I’ll roll with it since you’re ABSOLUTELY F***ING RIGHT! :)

    “It’s the end of the world and we know it. And I feel fine.” (REM)

    If enough Americans can come to grips with that thought maybe we’ll all BE fine. Fact is, things are gonna get ugly. The ongoing efforts by the very wealthy to (for the last 8 years) steal whatever they could and now (seemingly) borrow what they need to carry on should be transparent to all. This government should freeze BIG 3′s books and assets right now and then let bankruptcy proceed to prevent more (ahem) “grand theft auto”.
    We’ll be far better off investing in transportation infrastructure, assisting individuals and auto aftermarket companies affected by the crisis, and underwriting truly innovative thinking. The only innovative thinking we’ve gotten out of Detroit in recent years has been GPS integrated into the the dash panel.
    Check out the doc film “Who Killed the Electric Car” for good insight into the BIG 3 / BIG OIL relationship.

  • http://geeklair.net/~dluke Daniel J. Luke

    It’s very likely that any auto company entering bankruptcy would not be able to emerge successfully.

    - In bankruptcy the pension obligations would probably be pawned off on the federal government.
    - Since the credit markets aren’t really working, the federal government would probably have to finance the bankruptcy reorganization.
    - Consumers will stop purchasing the cars of any company that goes into bankruptcy. If you look at when GM stopped producing Oldsmobiles, people stopped buying them even though all GM dealers could still service the cars and they shared significant components with other current GM cars.

    I don’t really like the idea of the bailout, but bankruptcy would be significantly worse for the workers (and probably for the taxpayers).

    If Toyota (or someone else) were actually interested in purchasing one (or more) of the companies, then perhaps a deal could be put together. I haven’t heard a reasonable alternative plan yet, though.

  • http://getoffmylawn.org Lance

    I cannot agree with you more here.

    The Big 3 need to file bankruptcy, renegotiate their contracts with the UAW, and rethink how they do business altogether. Washington having oversight will not solve any of the Big 3′s problems either – just look to Fannie Mae and Freddie Mac! We had an office dedicated to oversight of those 2 companies with a budget of roughly $65 million and over 200 personnel. They produced reports on a yearly basis for Congress that always delivered the news Congress wanted to hear, that everything was fine. The problem with Congressional oversight is that Congress has an interest, at least in the short term, to be lied to by the overseers so they can pass the good news on to constituents at home and get reelected.

    Even if the Big 3 do not survive bankruptcy it does not spell the end of the U.S. auto industry. If anything, it will open the door for next generation automakers who will learn from the mistakes of the past and will move forward with that knowledge. What we have now is a group of dinosaurs rooted in the middle of the 20th century wondering why they are struggling. If we bail them out they will never learn either.

  • http://www.altiva.fr NM

    Lawrence,
    Your argument would be valid … if it was about protectionism, and not about the bail-out. This has nothing to do with competition. Well, at least a little bit in that it provides cheap credit to US auto companies that foreign competitors won’t get; but it’s a (mostly) one shot thing(*), and it will not directly translate into a long term advantage. In other words, they will have to compete in the future, unlike if the debate was about raising import duties or something.
    The Big Three are indeed responsible for part of their predicament. If they hadn’t relied so much on D.C. to tailor standards to suit their ill-conceived gas-guzzling plans, they might not be in such deep doo-doo. But what they are not responsible for is the collapse of the financial markets. If the markets had been sane, they would have been able to restructurate; even go chapter 11. As it stands, as many economists such as Krugman have pointed out, they could not go chapter 11 because there’s nobody around to lend them money to restart their biz on sane grounds.
    And as Michael Moore pointed out, while those CEOs are a*holes, at least their companies produce tangible goods. What about those in charge of Wall-Street? They did incommensurably more damage, and there’s nothing to show for it, nothing at all! And nobody asked them how they got to D.C. They sure as hell didn’t share an airplanes with the plebs’. And on top of that they asked for $700 billions, not a mere 35.
    Letting the big three fail now would push millions of people into unemployment immediately. It would give the coup de grâce to an economy that’s already knocked out. You don’t change things for the better by dumping everything and everyone to the garbage dump. Unless the change you want involves martial law and massive famine.

    (*) Obviously if they keep doing it every year it won’t be, but for the moment what is being discussed is a one shot loan, so let’s talk about it and not about some hypothetical future slippery slope.

  • Ed Heil

    I’m just afraid that bankruptcy would be used as an excuse to crap all over union workers. Again.

  • Daniel Stern

    I have to agree with NM. It sounds like your objections are more about protectionism and less about the bailout.

    But if you are interested in learning more about the tradeoffs involved in bailing out Detroit, you may enjoy watching this video http://www.youtube.com/watch?v=U7YBjjLKLd0, of Michigan representative McCotter talking about the auto-industry.

    To distill a couple of his points:

    1. The auto industry has been attempting to restructure… the most current efforts were undermined by the credit crisis and the faults of Wall Street.

    2. The net difference in cost between bankruptcy vs. bailout is diminutive. The cost of supporting the resulting unemployed’s healthcare, unemployment, retraining, etc, is about what it would cost to bailout Detroit.

    You may also enjoy the blog post that led me to McCotter’s video, written by Ford’s social media guru Scott Monty: http://www.scottmonty.com/2008/11/how-you-can-use-social-media-to-help-us.html.

  • Jardinero1

    I have a great deal of sympathy for the automakers. The problem with the auto companies is not poor products or even the current management. They produce the cars that people want to buy. The problems the automakers face are not even of the current generation’s own doing. The problem is that they are straddled with legacy wage, benefit and pension obligations that make it impossible to operate, profitably, in North America. In bad times when sales are down the problem is magnified. A loan or cash infusion will not change this essential fact. The only way out is via bankruptcy reorganization. That’s why we have bankruptcy courts in the first place.

    I work in insurance and investments and I am less sympathetic to the big banks and brokerage houses which are failing now. They brought this on themselves by taking on too much risk. The government’s flagrant cronyism towards these firms and their management is the worst possible policy response. The wrong doers are being rewarded when they should be hauled out on the town square and shot. There is a widespread belief that you can’t let the big banks and the brokerages fail. This is completely untrue and historically unfounded.

    Unlike the auto industry which exists in real concrete terms the financial sector is a legal fiction. It does not exist in any real sense. The financial industry is not a bridge, or a dam or a tall building. If it falls, there won’t be death and destruction. There is not going to be a pile of rubble. The financial industry is a bunch of lawyers, accountants and mba’s who meet in rooms with other lawyers, accountants and mba’s and they shuffle paper around. It is a meeting of minds and a bunch of paper contracts. It is the easiest thing to start anew. History is replete with financial systems that have collapsed utterly, yet were up and running again within weeks or months. The worse thing one can do is continue to provide aid and comfort to the individuals who brought on the crisis in the first place. Let the sick companies go bankrupt. Let them fail. Don’t throw good money after bad. It’ll be alright. The bank deposits are insured and state guaranty funds protect the annuities.

  • http://www.gmfactsandfiction.com Christopher Barger

    Hi Prof. Lessig — I’m Christopher Barger, Director of Social Media at GM. I used to be with IBM and knew of you back in my old job, and still read your blog every now and then. I know you focus mostly on intellectual property issues, so I appreciate you spending some time on the automotive industry.

    I do want to present our side on a few of the issues you present here. First, in many ways, the crisis that has hit the auto industry is related to the banking crisis. The reason people aren’t buying our cars is because they cannot get credit, not because the automobile is outdated technology. And every manufacturer, domestic or foreign-based, that sells vehicles in the U.S. has seen its US sales plummet, in virtually every case by 30% or more, in the last few months. Were this a case only of lousy Detroit management, one would expect that Toyota, Honda, Nissan, BMW or others would still be doing fine while we slumped; this is not what’s happening, and underscores the systemic nature of the problems we’re currently facing.

    Second, according to the Center for Automotive Research (www.cargroup.org/), a failure of even one of the domestic automakers essentially means the end of automaking in America for at least a few years. That means the failure of entire communities which rely on the auto industry – not only in Michigan but in places like Alabama and Tennessee where transplants like Toyota operate.

    Third, I’d argue that the radical changes you’re looking for in the auto industry are and were already in progress before the banking crisis hit — and in fact had been recognized by the market, because our stock went up and was trading at about $43 a share as recently as 14 months ago. The 2007 agreement with the UAW, set to take effect in 2010, all but erases the labor cost gap between the Big 3 and the transplants. Production adjustments have put Detroit on the same level as Toyota and Honda in terms of quality. (I could easily give a list of GM vehicles that have won quality awards from JD Power and others in the past few years, but I don’t want to turn this comment into too much of a commercial.) And GM, for its part, has the most advanced alternative-fuel program of any major automaker and our electric Chevy Volt is the best and closest-to-market of its competitors.

    Anyway, thanks for your thoughts and for letting me present some of our side of the story.

  • http://www.eurotrib.com NM

    To expand about what’s been said about the responsibility of Wall-Street vs the real economy in this crisis, I recommend the essay written by my friend Jérôme, who happens to be a banker (albeit an industrial banker), title “The Anglo Disease”, in reference to the “Dutch Disease”: http://www.eurotrib.com/story/2008/2/3/10253/66655

  • http://zaneselvans.org Zane Selvans

    I think the automakers are in essence yet another case of “too big to fail” being, quite simply, too big. There are economies of scale for big companies, but if the cost of those economies is catastrophic systemic failure and socialized losses when things go bad (and they do occasionally go bad, for every industry), then either we should be taxing the oligopolies heavily so they can in effect pay for their own bailouts when the time comes, or we should be facilitating the creation of a more competitive and dynamic market, with many smaller players, that can re-organize themselves as needed.

  • http://thefordstory.com Scott Monty

    I’d like to echo what my GM counterpart has written above. The financial, oil, and commodity crisis that hit the auto industry simultaneously was unexpected. Luckily, Ford was in the midst of restructuring and aligning its global resources under the plan that Alan Mulally put in place when he came to Ford just two years ago.

    And Ford was well on its way to returning to profitability in 2009, which is what Alan planned. In fact, we earned our first profit in a long time in Q1 2008. Were it not for this perfect storm of outside events, Ford would have been doing much better.

    And it’s not just the domestic auto industries that are suffering – sales have dropped around the world at all of our competitors. Toyota’s sales tumbled 34 percent, while Nissan’s dropped 42 percent and Honda’s fell 32 percent. So this is clearly not something endemic to the U.S. auto industry at the moment.

    At Ford we’re lucky to have a plan in place to be dealing with things. If you go to http://thefordstory.com, you can see what we’ve been doing and what we’re planning.

    Scott Monty
    Global Digital Communications
    Ford Motor Company

  • Jardinero1

    “The reason people aren’t buying our cars is because they cannot get credit”

    That’s a lie.

    There is plenty of credit available for persons with average to good credit and the ability to put some money down. Yes, the well has dried up for persons with bad credit and/or no money down. The question I ask the industry reps who have appeared here today is, should the auto industry build its sales model around this type of buyer? Is it even ethical to depend upon this type of buyer?

  • http://brightinstrument.blogspot.com Nick Novitski

    A friend of mine recently claimed that if the bailout does not happen, he will have to immediately leave school, return home to Detroit and start working. Emotions run high on the subject: he won’t listen to any arguments for moderation or restructuring or anything else, because images of his parents sitting on the street holding up cardboard signs saying “PLEASE HELP GOD BLESS” keep flashing before his eyes.

    I’m pretty sure that if anyone articulated a goal for this bailout that was, at root, anything besides protecting the working-class employees (do they still have middle-class ones?) and the families that depend on them, they would be rightfully pilloried. I’ve heard some protectionist rhetoric too, but it’s always been presented as being about the workers (though I suspect it remains misguided or dishonest). So, since anyone willing to speak will be willing to agree on that as a goal, isn’t there some more direct way to help workers than giving loans to their employers?

    For example, couldn’t a fund be created to pay for autoworker pensions and health care? That would assist the existing companies by taking significant debts off their hands, but I’m pretty sure they’ve already learned their lesson about demand shrinking and life-spans lengthening; they won’t negotiate contracts that generous for a long, long time.

  • http://mylumineux.wordpress.com Lumineux

    I agree completely and wrote something similar earlier today.

    It’s interesting that the reps here from GM and Ford are both singing the same PR tune we’re hearing elsewhere. “It’s the banking industry’s fault” and “We were on our way to being green.” Tantamount to “The dog ate my homework.” As Mr. Lessig notes, the industry has been in decline for years. And for years has continued to operate the same way, only appearing to change when it is convenient. (If you haven’t watch “Who Killed the Electric Car” you should. It’s an excellent primer on how this industry has worked with the oil industry to squash innovation in automobiles.)

    I don’t want to see people lose their jobs, but I also don’t want our country to fall into a habit of corporate welfare. The American auto industry needs to restructure iteslf based on what the free market is asking for and if that can’t figure out how to do that without falling into bankruptcy, so be it.

    The only thing the automakers have going for them is fear. Most Americans don’t spend enough time understanding the issues to recognize that they should not be afraid. That works in the Big 3′s favor, and they know it.

  • Greg

    Do you honestly believe that there is a government that wants to be seen as letting GM die? This has nothing to do with economics, so it can’t be understood in such a light. This is about political optics. A PR move to show voters that politicians care about America.

    But my question is, what about the auto companies that have been doing a good job. Toyota has a number of plants in the US that hire US workers. Why should Americans be punishing the growing industries by supporting ones that fail. Call your congressman and ask him why he wants to punish successful companies creating jobs in America.

    This is about re-framing the question.

    “If they can get you asking the wrong questions, they don’t have to worry about the answers.” Thomas Pychon

  • http://www.gmfactsandfiction.com Christopher Barger

    Jardiner01 — I’d dispute that the credit situation is as rosy as you think. But as car ownership is almost universal in the United States, it’s a fact of life that some people with poor credit will buy cars. They don’t make up the bulk of our business, but they’re there.

    Losing those customers is a hit to our business, as well as the business of every automaker. On a much larger level, I’d argue that the across-the-board sales declines I mentioned in my first comment are evidence of a much deeper issue — sales don’t drop 30%+ for every manufacturer just because the biggest credit risks can no longer get credit.

    But more generally, a credit contraction means that there is less money overall to spend on big-ticket items like cars; the effects aren’t solely limited to auto loans.

    One last thing: I hope that as we continue this conversation, even if we continue to disagree, we could do so without calling each other liars. Civility still has a place, don’t you think?

  • Mr.JM

    Professor Lessig’s post is based on a faulty premise, i.e. that the automotive bailout is about automobile manufacturing.

    It isn’t.

    It is about the future of the United Auto Workers. If government loans are extended to the Big Three auto manufacturers, the the pro-Democratic auto worker’s union will survive. If those loans are denied, a longstanding conservative goal will be achieved: the UAW — the first major union willing to organize African-American workers — will be destroyed.

    If you look at the auto industry “bailout” story from this perspective, it makes much more sense than if you view it in terms of the so-called “free market”.

    Mr.JM

  • Jardinero1

    Yes civility has a place, my apologies, but so does truth. The inability of GM to post a profit has little to do with the credit markets. Take 2007 for example. 2007 was a banner year for GM. GM sold over nine million vehicles. Only one year in its history had higher sales. Yet GM posted a loss of thirty eight billion in 2007. Were the credit markets to blame in 2007?

  • http://www.mloknitting.com/ MLO

    Because the representatives of Ford and GM are too polite to say so, Mr. Lessig, you are full of shit. You are obviously neither an historian or economist because you fail to understand this is NOT a bailout that the Big 3 are asking for.

    Here is the reality of what has happened. (I worked in both banking and automotive, so I know whereof I speak from seeing this nonsense first hand.)

    The banking industry decided to create horse betting on mortgage defaults somewhere in the 1990s when derivatives were suddenly made legal in the USA again. (They had been illegal since the 1930s. Ring any bells?) Anyway, they then created paper money and sold it to folks world wide who knew that these same instruments were illegal in their own markets. When the cows came home they went to their crony Bush and asked him to actually bail them out. The banks did not get a loan, no, they got a bailout. I know some of you are saying, “but we bought their stock!” Nope, the idiots in Congress bought their derivatives – which are completely and utterly worthless. The cpu time used to generate reports on these things are more valuable.

    Now, what were the banks supposed to do with that money? Inject it into the economy through commercial loans. They aren’t doing that. It isn’t just the Big 3 that are not getting their loans. There are farmers reporting that they are being denied loans capriciously as well. (These are farmers with good credit, by the way.) I know of small businesses who rely on loans for payroll who are also finding it difficult to get loans and are turning to private lending arrangements – sans the banks.

    Now, you all are under some false idea that the Japanese and German automakers play on an even playing field. They do not. Their governments blatantly underwrite their research, pensions, insurance, etc. Thus, making Ford, GM, and Chrysler carry a burden that none of their international competitors needs to carry. Our government, instead, puts onerous requirements – often scientifically infeasible – on our industry and fines them when they can’t meet the goals. Oh, that is such a grand and great help. I won’t get into how all of the ‘so-called’ Greens in California drive pick-ups and other 4-wheel drives while ignoring smaller, fuel-efficient, and safer (for those around them) vehicles. Or that those on the Mid-North East Coast don’t even have to rely on cars because most of them don’t own any.

    Now, what do the Big 3 actually want? A bridge loan to fulfill their obligations to the workers that they promised health care and a pension to. But, what does nasty old America seem to want? To punish any company that dares do the right thing by workers. Instead of demanding the same treatment for themselves, they choose to demonize the union members who fought blood and guts – oftentimes literally – to get what they have. So, all I see are a bunch of nasty, gutless, cowardly whiners who want to blame their own inability to stand up for themselves and demand to be treated fairly when I hear how the Big 3 don’t deserve a “bailout” when what they are asking for is a commercial loan that the banking REAL bailout should be providing for.

    But, honestly, most of the men and women who fought and gave their lives for this country would be ashamed of the majority of naysayers and whiners around here.

    I apologize a wee bit for my screed, but I am sick to death of hearing how Detroit deserves this when our government has had a policy of screwing Detroit for the past 30 years.

  • Jakub

    If we are going to have a discussion about these issues, the tax breaks for SUVs that were initiated in 2003 must be mentioned.

    http://www.bankrate.com/brm/itax/biz_tips/20030403a1.asp

    Government intervention had the adverse impact of distorting the market, whether the dog (government) was wagging the tail (car companies) or the tail was wagging the dog is a question of certain import. Nonetheless, it moved American car companies toward greater investment in SUV production and marketing which made them ill-prepared for rising gasoline prices. That doesn’t relieve them of a significant amount of blame which is due, but it does present an additional factor in this current scenario. In these terms we might be making up for the governments intervention at that point.

    I would suggest that bankruptcy and layoffs might force the regional economy (if not the entire American economy) past a tipping point that we are rapidly edging towards.

    In all honesty the corporate leaders in the big three are not threatened personally. Independent of whether this bailout occurrs, they will stay terribly wealthy, sit on their laurels, and likely manage some other companies into the ground. The UAW workers, according to Mark J Perry (UMich) apparently make 91% more than similarly skilled manufacturing workers in this country. This is a great achievement for collective bargaining but a drag on US automotive manufacturers. Sometimes you need to take an option even it you don’t agree with it. But I hope that the terms of this agreement are significantly more demanding on all parties involved than what has occured with the TARP. I feel ill every time I access bailoutsleuth.

  • Joe Buck

    If the Detroit automobile manufacturers are forced to enter bankruptcy, that will be it. They’ll die. They won’t be reorganized under chapter 11, because there will be nothing left. They won’t be bought intact by foreign manufacturers, though certainly some valuable pieces will be. Millions of jobs will disappear.

    And are you sure that the collapse will be limited to Detroit? Toyota and Honda sales are also down 30%+. We could get a world-wide cycle, feeding on itself, as everyone becomes to fearful to spend money. Almost everyone can drive their current car another year.

  • http://Http://soylentcola.com Lee

    Regarding the comment about this not being a bailout so much as a loan… It becomes a bailout when the auto makers can’t pay back the loan, no? And if they’ve all been losing so much money lately, how are they supposed to repay it? Is this magic sum of money suddenly going to make everyone buy more cars? No.

    What gives?

  • http://www.mloknitting.com/ MLO

    Actually, the Big 3 has paid back all the loans they have ever taken out. They are one of the few industries that have.

    Banking is what has destroyed this country and the middle class. Until people get it through their heads that the bankers are thieves and liars nothing will be accomplished.

  • Abernathy

    This isn’t about the auto industry, this is about collateral damage. I talked with someone who works for one of the Japanese transplant auto companies. They’re concerned because, if even just GM goes down, it will take down their suppliers who in turn will prevent most of the U.S. auto industry from producing cars for up to a full year.

    The 3 million job loss estimate doesn’t even begin to take into account that scenario.

  • Michael

    No offense Professor Lessig, but this rant of yours didn’t seem very well thought out. If you want to argue that we should let the big 3 die, fine. But you haven’t really considered the social implications of all the lost jobs, or the indirect effects of the collapse on the manufacturing industry… Today there are too many wanna-be experts trying to boil down this big hairy problem into a simple box so they can apply their ridiculously broad principles.

  • Rick

    @ Mr. Barger & Mr. Monty

    Let’s not be superficial, guys. You are suggesting that companies with combined top management takeouts of over $1billion a year were somehow blind-sided, surprized, and taken aback by the economic events of late. Really? You can get much more capable people for far less money (palm reading not required). The handwriting was on the wall in late 2007 when the mortgage crisis began.
    More believable is that the Bush administration propped up this economy at taxpayer expense with a war for some five years instead of addressing sound economic issues. In this election year big-corporate had to grin and bear it in hopes that the Republicans might somehow prevail and keep the gravy train rolling. The money markets toughed it out as long as they could but, with all the international involvement, could not prop up their house of cards until after the election. The BIG 3 grinned and bore it way too long.

    Mr. Barger: “On a much larger level, I’d argue that the across-the-board sales declines I mentioned in my first comment are evidence of a much deeper issue…”
    No kidding! You’re making the case for the prosecution, my friend! There is no optimistic outlook for this auto industry as-is so why dump tons of money into it? Further, your management has offered no plan of substance for changing it (publicly that is; and why should there be a plan that’s not public?). The entire case has been thrown into the political arena in the strategic expectation that Congress can’t stomach the labor issues.

    As for the UAW: No disrespect intended but for the many many millions of us not in the auto business a UAW/Big 3 battle is basically “asshole vs. asshole”, the result of which, whoever wins on any given day, is more expensive cars for all of us.
    In marketing terms the US market has “plateaued”; flattened out and in decline. In reality it did that years ago but easy credit, high-risk mortgages, and strange accounting have kept it floating. It’s over.

    So the conundrum here is “pick your poison.” Bailout or bankruptcy? “Bridge loan” (as MLO calls it) is at best a “bridge to nowhere” loan. My beef against bailout is that we give BIG 3 management the opportunity to channel assets anywhere they choose without effective accountability. They know it’s over; they’re just looking to finance their exit.

    To use (at my peril) a Lessig’esque analogy: Why transplant a perfectly good heart into a brain-dead patient?

    @MLO: You make some good points about our bankers. Perhaps if Woodrow Wilson had the chance to rethink it we’d live in a better world. He didn’t and we don’t.
    But it’s just hard for me to segregate bankers from the guys who run GM, or 3M, or Haliburdon, or Exxon, or Pfizer. They all went to the same schools, feed at the same trough, and espouse trickle-down economics with a sly smirk.

  • misterb

    This post illustrates the problem with blogging – on any issue that’s important enough to care about – we don’t need paragraphs, we need books. This current crisis is caused by millions if not billions of interactions, and in order to solve it, we will need to take millions if not billions of individual actions to dig ourselves out. Trying to capture all that needs to be done in a paragraph or two is an empty exercise.

    But since we’re all having fun, my two cents is that if companies are too big to fail, then we should make them smaller. If we had 30 car companies rather than 3, the bad ones could fail and the industry would survive. And in another 30 years when we only have 3 again, we could break ‘em up again.

  • Fred

    Perhaps it would be more productive to consider what exactly would happen in a Chapter 11 scenario. In the abstract, I really don’t see an insurmountable problem with this as a solution, and in fact it would create real opportunities to change the structure of these businesses in ways which are (a) necessary but (b) will never happen under current management and labor structures and in the current political environment.

    I don’t think it would be impossible to finance the reorganisations by any means. Cash, of course, is a serious problem, but if we’re going to give them $15bn, then as I think someone has already suggested, “we, the Taxpayers” are already committed to giving them that money. Further, it’s not inconceivable to me that the big 3 might find lenders willing to fund reorganization (assuming money is actually available to those lenders at any price). These are businesses with a demonstrated track record of huge potential profitability, if only they can be streamlined and reorganised. Perhaps only in a bankruptcy scenario will this streamlining be possible.

    Yes, this inevitably involves dumping retiree health and pension obligations on the taxpayer, but it seems pretty obvious to me that this will happen once they burn through our $15bn anyway, and it’s questionable whether the wages and benefits they are locked into by the UAW are sustainable in any scenario. This doesn’t mean the unions get locked out in the future, but it does mean that labor costs can be brought down to a sustainable level.

    It seems to me from the comments above that perhaps the most worrying issue would be whether the entire manufacturing supply chain from tier 1 suppliers down to the smallest businesses would fall over if the big 3 filed bankruptcy petitions. I’m not clear that it would. Again, assuming that they are solvent post-petition, we’re only talking about unpaid pre-petition trade debt, at least in the near term. Most likely, again assuming cash is available from a potential purchaser or purchasers, a syndicate of commercial lenders, or the lender of last resort (see above – guess who!), a large number of those suppliers will be critical vendors, so that pre-petition debt would be paid after some initial delay. There may well be some suppliers for whom this would be the proverbial final straw, but it’s not clear to me that the worst would actually happen.

  • http://www.astorandblack.com/ Suits

    However these companies have hold many american jobs. When they go many jobs are lost and many people will lose their homes. It will be allot worse with them gone. Yes i do agree that we have to place some oversight on these companies however if they collapse then they destroy what is known of american jobs.

  • http://www.fastnetnews.com Dave Burstein

    Larry

    There may be arguments about loans to Detroit, but there’s a far worse ripoff happening as part of the “infrastructure” proposal in the works and it’s being ignored. Billions for broadband, spent well, might have good use. But the details I’m getting are that most of the money will go to a couple of big carriers in a form that will not substantially improve broadband to the majority of U.S. homes.

    In particular, much of the money is currently being given as direct subsidies (tax credits) even if the company is going ahead with the build previously planned, was going to spend the money already, and is covered by the depreciation on the old equipment. AT&T, expecting to be the largest recipient, in the last week just reduced their capital budget by $2B despite being told they would be getting a big subsidy.

    I’m starting to scream as hard as I can to change the terms so the money actually does build more or faster broadband. It’s enough money, being distributed by friends of ours who should look harder, to take a look yourself. Ask for details.
    Dave Burstein

  • Evan Payne

    Well, amongst all the chatter here, I’ll attempt to raise a rather key issue here, one which I hope Mr. Barger and Mr. Monty can address… Even if a bailout is received and bankruptcy is avoided, there is still a problem in one small regard:

    The era of the combustible engine is nearing its end, and any number of factors may bring it to a close within the next 2 years. Not just the big 3, but all auto makers will need to radically change their factories and their business models, and fast.

    It would seem to me sheer folly for the US populace to invest their money into an industry that does not seem to wish to change. I’ve heard arguments along the lines of, “we’ve had that technology ready for years now, but the public just wasn’t ready”. Remind me again, Who Killed the Electric Car?

    If the Big 3 want to remain relevant, then there should be a direct promise made to use whatever money they are given for conversion of ALL of their products to non-gasoline models. Hybrids aren’t enough, hydrogen isn’t close to ready. Go for batteries, or face the cliff.

  • Andrew Nicholson

    Why should the big-3 go hat in and to the taxpayer? Why not get a loan from the fat cats in the oil business that made more than $10 billion each (Exxon, Shell etc) last quarter in profits. Surely they would like to help out support their own market.

    Why not spend the $30 billion from the government on helping the “unemployed workers” while the auto business restructures through bankruptcy, or provide loans to small electric car companies (like Tesla) and create a whole new set of new USA auto companies who will compete profitably and provide jobs.

  • w1L|)F1|2€

    “Even if the Big 3 do not survive bankruptcy it does not spell the end of the U.S. auto industry. If anything, it will open the door for next generation automakers who will learn from the mistakes of the past and will move forward with that knowledge.”

    Absolutely. That is how a capatilist structure is supposed to work. Any guesses how a socialist structure works???

    Everyone keeps talking about the poor UAW while the execs are flying cross country in private jets eating caviar and champagne – so they can ask for more money. Just like the banks continued to pay dividends to their billionaire CEO’s from the bailout money, there is poor oversight on the ultimate resting place of tax-payers’ money. They do not need more money, they need to use that which they already have more wisely. If it’s too late; then it’s too late and it’s not our fault, nor our responsibility to bail them out.

  • Chris Scoffield

    Auto Bailout – My Thoughts …..

    The recent debate over wether the big 3 auto companies should receive financial assistance has drawn quite a debate. I have an idea that I think could solve many of the objectives seen as mandatory for a deal to be completed. The government shouldn’t loan any money to these companies to do with as they see fit. It is obvious that the corporate leadership of these companies is very incompetent. Their foolish love affair with gas guzzling vehicles is proof of that.

    Instead, I would like to propose that the government purchase from each of the three big automobile companies, 160,000 all electric vehicles, to be constructed and ready for customer pick up within 7 months of the initial 75% down payment. The vehicles must have these parameters:

    They will not cost a penny more than $50,000 per vehicle.
    They will be attractive, more like a Lexus, and nothing like an AMC Gremlan
    They will be 4 – door vehicles, with ample trunk space.
    They will be capable of comfortably seating 4 average sized adults.
    They will be able to carry this payload at least 125 miles round trip, at an
    average speed of 65 miles per hour, per charge.
    They will be completely, all electric vehicles. They will have 1-year warranties.

    160,000 vehicles, at $50,000 per vehicle, will cost 8 billion dollars. This contract will be given to each of the big 3 auto makers.

    The last billion dollars, of this 25 billion dollar investment, will be given to Tesla motors of the Bay Area, to make 20,000 vehicles of the same, exact criteria as the big three. The balance due will be paid only when the very last car is delivered to the federal government, from each of these four companies.

    All these government purchased all electric vehicles, will then be given away, for free, to US taxpayers that will have won a completely random drawing. Each US citizen who filed a federal tax return the previous year, will have their name and contact information put into the pot. The first 500,000 names drawn will win one of these all electric vehicles.

    - Chris Scoffield, San Jose, California

    *** If you agree with this idea, than please pass it along ***

  • http://kanai.net/weblog/ Gen Kanai

    I fully agree with Prof. Lessig.

    Larry’s comment reminds me of Nouriel Roubini’s blog post of Sept. 9th, 2008.

    “Comrades Bush, Paulson and Bernanke Welcome You to the USSRA (United Socialist State Republic of America)”

    http://www.rgemonitor.com/roubini-monitor/253529/comrades_bush_paulson_and_bernanke_welcome_you_to_the_ussra_united_socialist_state_republic_of_america

    This is long before the discussion of the bailout of Detroit was even on the table.

  • http://kanai.net/weblog/ Gen Kanai

    To pile insult on injury, take a close look at how Chrysler is asking for billions in bailout funding while it is not willing to use any of the capital that it’s owners, Cerberus Capital, has access to.

    http://www.forbes.com/opinions/2008/12/09/chrysler-cerberus-bailout-oped-cx_dg_1210gerstein.html

    The only way that Cerberus Capital would pay for a Chrysler bailout is if we were able to capture by the 3-headed guardian of Hell unscathed, which only Hercules could do.

  • Liz

    If these companies do not get a bailout the US will collapse. There’s no way around that. The “auto industry” is the heart of North America and the blue collar middle class. That is a fact not a threat. Creatives may be the new blue collar middle class but they rely on the stability of their middle class peers. Yes, the auto companies cannot be trusted with the positive usage of the money, and yes, nobody trusts the politicians. Is the issue here really Capitalism vs. Communism? Is your argument promoting Capitalism vs. Cynicism.

    If these companies go into bankruptcy they will be bought by corporations and politicians… but from outside North America. This brings up the issue of human rights. Toyota (or [insert buyer here]) is not a friendly company when it comes to worker rights and it has no interest that is any different than the North American companies currently in trouble. This is Capitalism vs. Capitalism.

    So, not providing a bailout means that North America collapses both financially and humainly. The world needs change and globalization is fact. Collapsing an industry because it is failing is just as pointless as bailing it out. It keeps the global economy on the same track, any company that would buy or replace these companies would contribute to the current global crisis of business run by people who only care about themselves. Is that the global economy your talking about? Is that the global economy you support?

    These companies are failing because they tried to “be competitive” with the companies that are now in the position to buy them out. These companies are run in countries that are below Standard, never mind Example in human rights. Our companies are better companies as long as they are run on the principles that encourage a higher standard. They need to be run above the competition. People don’t need cynicism. People need the incentive to live beyond competition.

  • Charlie

    Cars are not selling because everyone has a car and its running. If the automotive industry wants to sell cars, they will need to innovate beyond putting a DVD player in a mini van. Example: Chevy Volt, this could completely revolutionize the industry. Imagine being able to plug your car in at a mall and paying for the charge when you leave. Image charging your car with the sun and not having to touch gas much while doing in city driving. This is real change. However, I don’t believe this technology is going to move into production because of status quo thinking.

  • http://www.blahblahblahg.com/ Randy

    @Jardinero1:

    I’m not sure where you find this easy credit, but I know my own family members are having trouble getting credit. My youngest brother is trying to get $15,000 from the bank he has used for over 15 years and which has $43,000 of his in savings and another $5,000 in checking. He has never defaulted on a loan. He paid off student loans 6.5 years early (to the same bank he is trying to borrow from), bought a car and paid off the loan (from the same bank he is now trying to get credit from) in 17 months, and as a single man earns well above average family income for where he lives in Florida. With never a bad mark on his record for missed or late payments or any defaults, a long damn history of paying off loans ahead of schedule, a 15+ year history with the bank, and significantly more cash available than he needs, he is unable to get a small (to him) loan to help improve his credit score for when he tries to buy a house in the near future. If someone with an excellent record of fiscal responsibility cannot get a loan from his own bank, how, exactly, is the rest of the country getting this easy credit you seem to be claiming is out there?

    @auto-industry posters:

    Thank you for the posts you have made here. I have been very wishy-washy on the auto-industry bailout, but really feel I still lack much information I need to properly evaluate the proposal. I will be doing my homework on learning more about what is happening, and this will help me form a wiser opinion.

    @lessig:

    Thanks for the post. The conversation in the comments alone makes it worth having, but I also like seeing the thoughts of someone who I respect intellectually. As noted in my auto-industry bit above, I will be doing more homework to get a better understanding and form a wiser opinion.

  • http://ubuntulinuxtipstricks.blogspot.com Mackenzie

    Christopher:
    Credit isn’t why I never intend to buy a car. Public transportation and the fact that I, like most other people, was born with a pair of legs are why I will never buy a car. What use is owning a car? Use a ZipCar if you need to transport a new chair once every 5 years from IKEA. Take the bus or the train (so much leg room on the train, it’s fantastic!) if you need to go to another city. Paying for maintenance, insurance, and all the rest for no added value makes having a personal car…well…stupid.

  • krishna

    Under normal circumstances, this argument against a bailout would make sense. However these are not normal
    circumstances, since a lack of such a bailout would mean a *very* large increase in the number of unemployed, which the economy cannot afford at this stage. Secondly, unlike the car industry, the financial industry is essentially parasitical, which under normal circumstances makes money by acting as a middleman for economic transactions. The financial industry has grown disproportionately large, and disproportionately important and powerful, and the bailouts it has received dwarf anything that the carmakers are asking for. It has also received these moneys with *no* oversight, and *no* strings attached. Given that it seems to be run by a bunch of crooks, both inside and outside government, this is essentially a criminal giveway of taxpayer money.

    What you (and many others) are suggesting is, in this context, somewhat ignorant of the costs. The american carmakers may have run their industry not very efficiently, and not very well, but these are entirely remediable matters which can be begun to be resolved by the appropriate structuring of the terms of any loans that the government makes to them. However, at the same time, they offer workers better working and wage conditions, and a very large auxiliary industry depends on them. They also have a tremendous amount of invaluable institutional and technological knowledge built up which would be lost irrecoverably if they go under. It is a real mistake to allow such an industrial base to vanish for incompletely considered “free market” arguments. Especially when such arguments are applied selectively to automakers while the government turns surprisingly and generously socialist towards a bunch of bankers who created this crisis.

    Finally, turning to the intellectual argument against bailing out the automakers. There are three parts to this argument: 1. Both the financial and auto industries are insanely inefficient, 2. Banks are too big to fail, so they need a bailout, while the same conditions don’t apply to carmakers, and 3. If the carmakers need a bailout, it is because they are not competitive with foreign automakers, and the free market should be allowed to dictate what happens.

    There is an obvious contradiction between 2. & 3., since clearly the argument in case 2. implies that the “free market” does not work in the context of the financial sector. Secondly, this argument assumes that banks are “too big to fail” while the carmakers are not. It is not at all clear why this assumption is valid. I would think any industry which employs > 3 million people would be “too big to fail”. Also, giving a free pass to the bailout of the financial sector assumes that it was done in good faith, which in this case is patently false. The govt has, upto now, committed ~ $ 350 Billions of taxpayer money to the financial sector *without* getting anything in return, i.e the same incompetents and crooks who caused this mess are now spending the bailout money. On the other hand the $ 14 Billion baillout package for the automakers imposes relatively significant terms and conditions on them. I would expect that restructuring of the industries under such conditions would be better and less painless than allowing them to be completely bankrupt and broken up. Finally, there is a significant factor which affects domestic car industry and not the foreign one (which is why I think the “free market” argument is flawed). This is the fact that the domestic industry is unionized, while the foreign one is not. Unionization significantly affects relative costs, but also ensures better wages and working conditions. What you are suggesting, in part, amounts ensuring that these unions are destroyed, and that workers who get reemployed if at all, remain relatively impoverished. Of course, the same free market argument extends to make the case that unions inherently should not exist, since this reduces market efficiency. But why should one believe such arguments which are so selectively applied and which have been shown, especially by the recent crisis to be flawed and a intellectually dishonest means of maintaining concentrations of power and wealth?

  • Tsubasa

    Mackenzie,

    As soon as it’s viable for me, I intend to buy a car. Why? Because I don’t like spending three hours every day in commute to work just to get to the other side of town. If I had a car, the same drive would be 15 minutes. That’s not including the times that the bus is running 15 minutes ahead of schedule and I get to the stop just to see its tail lights.

    Then there’s grocery shopping and laundry. Ever try to purchase more than a few days of groceries and get on a packed bus full of crazies and weirdos?

    Next up is career. I’m woefully underpaid right now. (And don’t give me that “lucky to have a job” crap—my employer is lucky to have me and McDonald’s will gladly take me for a buck or two less per hour if the drama gets to me.) If I had a car, I could be looking for jobs an hour away by car. However, since I don’t have a car, I’m stuck in a dead-end job that doesn’t pay me enough to have a car.

    This comes back on topic: if auto makers could produce an affordable all-weather vehicle, I would buy it. I don’t need something that can do 0-60 in 3 seconds. I don’t need something that can even seat 4 people. I don’t need to watch DVDs in traffic, and I don’t need a bass-pounding stereo system. All I need is something that can transport me and a few bags 10 miles per day in a blizzard. A 3-wheeled moped would do for crying out loud.

  • http://www.alexander.bostrom.net/ Alexander Boström

    > “But what if foreign car companies buy American car companies?”

    Instead foreign investors will be buying US bonds, financing the bailout. What’s the difference?

  • http://flickr.com/photos/shandrew/ Andrew S

    Here are some interesting facts I dug up while looking at the state of the US car makers:

    1. GM and Ford are the largest American companies aside from big oil and Walmart. Regardless of what you think of their cars, they still sell a lot of them.

    2. Less than a decade ago, GM was earning record profits, earning up to $7 billion a year. That is about as much as Google earns today.

    The question as I see it is not whether they are bailed out or not. If the automakers file for bankruptcy, we’ll still be bailing them out. When it comes to a company as far in debt and as large as GM, bankruptcy is an institutionalized form of bailout–taxpayers end up paying for massive unemployment, massive loss of tax revenue, and . The largest difference I see is that actually calling the company “bankrupt” may hit sales 10-20%, causing GM’s quarterly losses to double. Otherwise, is there a big difference between a legislature-driven restructuring versus a bankruptcy court-driven restructuring? I do not know enough about bankruptcy or this bailout to say. Neither appears to be much of a market-driven effort. The question we should be asking isn’t whether we should bail them out; it’s how can we drive the best outcome.

  • http://www.visual-meme.com Steve

    Bailing out the car companies makes sense because of the timing. The simple reality is we can’t afford to have a couple million more people thrown into unemployment right now. If the economy was otherwise doing okay, it would make sense to take a harder line with them, but right now, no.

    Have the car companies done a good job of running their affairs? Broadly speaking, no. Ford has done better than GM and Chrysler, but overall it hasn’t been stellar. But it’s worth recognizing that the drop in sales experience by the big three has been seen for foreign manufacturers as well. The big difference is that the big three do most of their sales in the US where as the foreign makers are more diversified.

    I agree with the basic premise that we can’t reward failure and that we need to avoid creating moral hazard but it strikes me as strange that everybody’s in a huge uproar over GM but we were cutting checks to banks without a second thought. We’ve put billions and billions on the line to try to get credit markets flowing with only modest success because those banks we gave money to aren’t loaning it out. In the end that’s more money, less effectively managed, and yet few complaints about it.

  • http://www.ok-iraq.com/ حبيبي يا عراق

    To expand about what’s been said about the responsibility of Wall-Street vs the real economy in this crisis, I recommend the essay written by my friend Jérôme, who happens to be a banker (albeit an industrial banker), title “The Anglo Disease”, in reference to the “Dutch Disease”: http://www.eurotrib.com/story/2008/2/3/10253/66655