Comments on: rant: the mistake in bailouts Blog, news, books Thu, 12 Oct 2017 08:56:00 +0000 hourly 1 By: حبيبي يا عراق Wed, 17 Apr 2013 18:11:33 +0000 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”:

By: Steve Mon, 22 Dec 2008 21:40:45 +0000 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.

By: Andrew S Mon, 15 Dec 2008 09:19:58 +0000 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.

By: Alexander Boström Mon, 15 Dec 2008 01:50:38 +0000 > “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?

By: Tsubasa Sun, 14 Dec 2008 18:45:17 +0000 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.

By: krishna Sat, 13 Dec 2008 04:33:16 +0000 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?

By: Mackenzie Fri, 12 Dec 2008 10:05:12 +0000 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.

By: Randy Fri, 12 Dec 2008 02:39:00 +0000 @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.


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.

By: Charlie Fri, 12 Dec 2008 01:35:12 +0000 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.

By: Liz Thu, 11 Dec 2008 23:10:46 +0000 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.

By: Gen Kanai Thu, 11 Dec 2008 14:21:41 +0000 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.

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.

By: Gen Kanai Thu, 11 Dec 2008 08:10:41 +0000 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)”

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

By: Chris Scoffield Thu, 11 Dec 2008 05:48:29 +0000 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 ***

By: w1L|)F1|2€ Thu, 11 Dec 2008 03:52:08 +0000 “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.

By: Andrew Nicholson Wed, 10 Dec 2008 22:48:38 +0000 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.

By: Evan Payne Wed, 10 Dec 2008 13:48:54 +0000 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.

By: Dave Burstein Wed, 10 Dec 2008 12:54:21 +0000 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

By: Suits Wed, 10 Dec 2008 12:37:57 +0000 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.

By: Fred Wed, 10 Dec 2008 12:14:03 +0000 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.

By: misterb Wed, 10 Dec 2008 09:52:45 +0000 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.

By: Rick Wed, 10 Dec 2008 08:48:41 +0000 @ 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.

By: Michael Wed, 10 Dec 2008 08:22:08 +0000 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.

By: Abernathy Wed, 10 Dec 2008 07:32:08 +0000 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.

By: MLO Wed, 10 Dec 2008 07:10:10 +0000 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.

By: Lee Wed, 10 Dec 2008 07:03:37 +0000 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?