The 3 American automakers are all in deep trouble, with General Motors leading the way. Last quarter GM and Ford burned through nearly $30 billion in cash and GM may not have enough to last through the end of this year. Over the most recent 4 years, GM and Ford (the two largest US auto companies) have lost more than $85 billion.
House Speaker Pelosi and Majority Leader Harry Reid are now both saying that they favor using some of the $700 billion in bailout money to assist the auto makers. The most recent figure is something in the range of an additional $25 billion in government loans. If you recall, this would be on top of the first $25 billion of taxpayer money that was recently promised to the Detroit 3 to help them build new fuel efficient vehicles.
Although I live and work in Michigan and the loss of any of the 3 auto companies would devastate this state, the idea of a government bailout is a horrible one. This bailout will not change the underlying fundamentals of the US auto market, and it will not correct the obvious competitive disadvantages under which the US companies operate. Unfortunately, the auto industry is heavily regulated and American companies have been hurt badly by this type of government intervention in the market. Nevertheless, the management at the Detroit 3 is now begging for more of the poison that helped to make them sick in the first place. It’s a disgusting spectacle to watch as the businessmen who run what were once the world’s most powerful industrial companies are now seen licking the boots of Pelosi and Reid, begging for a government handout. Ugggh.
The 3 American automakers are all in deep trouble, with General Motors leading the way. Last quarter GM and Ford burned through nearly $30 billion in cash and GM may not have enough to last through the end of this year. Over the most recent 4 years, GM and Ford (the two largest US auto companies) have lost more than $85 billion.
House Speaker Pelosi and Majority Leader Harry Reid are now both saying that they favor using some of the $700 billion in bailout money to assist the auto makers. The most recent figure is something in the range of an additional $25 billion in government loans. If you recall, this would be on top of the first $25 billion of taxpayer money that was recently promised to the Detroit 3 to help them build new fuel efficient vehicles.
Although I live and work in Michigan and the loss of any of the 3 auto companies would devastate this state, the idea of a government bailout is a horrible one. This bailout will not change the underlying fundamentals of the US auto market, and it will not correct the obvious competitive disadvantages under which the US companies operate. Unfortunately, the auto industry is heavily regulated and American companies have been hurt badly by this type of government intervention in the market. Nevertheless, the management at the Detroit 3 is now begging for more of the poison that helped to make them sick in the first place. It’s a disgusting spectacle to watch as the businessmen who run what were once the world’s most powerful industrial companies are now seen licking the boots of Pelosi and Reid, begging for a government handout. Ugggh.
Interesting…
Gags can you explain how exactly Michigan has been hurt by the government? How did the government hurt the auto industry and the businesses in Michigan? I do know that Michigan has one of the highest tax burdens in the country but I’m trying to understand this stuff and I don’t live in Michigan.
I had an interesting thought on this the other day. I forget the figure, but I know that the auto makers because of the unions have basically become quasi-welfare states, and the amount of money they pay for health insurance is so high that’s it’s the largest part of their account ledgers. Why not turn all that over to Obama’s universal healthcare? The auto makers will see a boom in revenue!
You joke Kevin, but this is one of the things that GM was hinting at a while ago. Their argument goes: “in other countries, the government pays for health care, so we’re at a competitive disadvantages paying for ours”.
Dadmonson: Typically, losses are a destruction of wealth. Losses mean one spent (say) $100 and produced something worth $99. When a loss-making entity is propped up with government money, it does not change the fact that there is a loss in real terms, which is simply “made up” by having the government take money from someone else (generally a profit-maker – aka wealth creator) and hand it to the wealth-destroyer. The subsidies simply encourage and allow ongoing wealth-destruction.
Gags can you explain how exactly Michigan has been hurt by the government? How did the government hurt the auto industry and the businesses in Michigan? I do know that Michigan has one of the highest tax burdens in the country but I’m trying to understand this stuff and I don’t live in Michigan.
The government regulates almost everything in a vehicle, from the door latches to the airbags to the exhaust systems. The government also regulates the gas mileage that vehicles must achieve. Perhaps most damaging though, the government forces businesses to collectively bargain with the unions. For years the American car companies have been paying wages and benefits to union workers that far exceed those paid for similar work in other countries and in non-union plants located in the US. Part of the blame for this certainly falls on the shoulders of management, which clearly needed to put its foot down and not agree to the unsustainable labor contracts that have been signed in previous years.
The fact is that US car companies have cost structures that make it impossible for them to be profitable by building and selling small, fuel efficient vehicles. When the public demanded large and expensive SUVs and trucks, the US companies usually made money. However, when the public demanded fuel economy, they began bleeding cash like crazy. Also, the lack of available capital (due to bad labor contracts with the UAW) has made it difficult to fund new product development. It is a hugely expensive undertaking to create a new vehicle and the lack of cash at the US companies made it so that they were far less successful in developing new car models than the foreign companies. In the final analysis, the companies that make the best vehicles at a given price point will end up being the most successful. Unfortunately, for years the US companies made poor quality cars and trucks. Even though their quality has improved considerably in recent years, the public still frequently perceives their vehicles as being poorly made.
As far as the State of Michigan is concerned, much of the damage here has been self-inflicted. We have high taxes, pro-union labor laws, and horrible political leadership. It’s sad because this state has a lot to offer in terms of natural resources and beauty, but the statists in Lansing have done very little to encourage businesses to come here.
You joke Kevin, but this is one of the things that GM was hinting at a while ago. Their argument goes: “in other countries, the government pays for health care, so we’re at a competitive disadvantages paying for ours”.
Yes, in fact the pseudo-capitalists at the US car companies have been lobbying for national healthcare for years. If I remember correctly, GM was in favor of Hillary Clinton’s plan when it came out. They wanted the taxpayers to cover them for the poor labor contracts they made with the unions. Nauseating.
Nauseating it is indeed. What upsets me most about this situation is the immediate condemnation of laissez-faire capitalism by the ignorant masses and the power hungry politicians. It gives more fuel to the collectivists to take over corporations and nationalize them to “save” the poor workers who through their irrational demands contributed to the collapse of their own cow.
The biggest shame is that business leaders today all sleep in the same bed with bureaucrats and policy makers. What a quagmire, but oh so predictable.
Analysts are now openly saying that GM is headed for bankruptcy. This seems to be the best option, as it would allow them to get out of their ridiculous labor contract, downsize and become more economically viable. A government loan is going to just prolong the agony.
GM’s third-quarter results made it clear that, without government intervention, GM is headed for bankruptcy,” wrote Shelly Lombard in a report issued after the earnings release. “And we aren’t referring to the $25 billion of federal loans designed to incentivize production of fuel-efficient vehicles. At this point, that’s like bringing a Band-Aid to a train wreck.”
GM said it is already close to the minimum amount of cash it needs just to run its business day to day, “leaving nothing to cover the huge operating losses its North American business continues to incur,” added Ms. Lombard.
Analysts are now openly saying that GM is headed for bankruptcy.
Nationalization, maybe?
It seems almost certain that the government will give them money. Allowing them to go bankrupt would produce opportunities for rejuvenation in the industry and would be a great blow to unions. I think it’s too much to hope for.
If GM were to go bankrupt it would seem totally appropriate, if only it weren’t so tragic for a once great company. The unions have sucked the auto industry dry for all they can get away with and it seems like just desserts to me for their posh livelihood to wither with the host.
This morning Senator Sessions, who is against the auto bailout, was joking that somebody should tell Paulson that Bush made him Treasury Secretary a while back; he seems to working under the delusion that he’s still an investment banker. Sessions continued, saying this: “We need to ask these questions: what is the nature of government? where are we going to stop”. [CNBC 11/11/2008]
If the government really wants to spur the auto industry, it should give these $50 billion to Toyota, Honda and so on, who run a vibrant part of the U.S. auto-industry, with plants all over the Southern states (mostly GOP?) and employ over 100,000 people. Of course, that is not what the government should do, but it would be far better than giving it to people who will destroy part of it.
You could give the American companies $100 billion and it won’t solve their problems. They are uncompetitive because their management has agreed to labor contracts that make them uncompetitive and create legacy costs that make it impossible for them to be profitable selling small, cheap, fuel efficient vehicles. Small, cheap and fuel efficient happens to be what America wants right now. Management has known about this situation for at least the last 30 or 40 years, but now they want the taxpayers to bail them out. That may give the union boys a few more years to collect their bloated pay and benefits, but it isn’t going to change any of the fundamental underlying economics that make these companies uncompetitive.
Snerd, I assume you saw yesterday’s WSJ opinion page. There was some generally good advice there.
At this point it has reached the point where unions can be informed that the contract they are insisting on will *bankrupt* the employer. And the unions do not care. Delta Airlines, and now the auto companies. And the businesses have *no* recourse once they are unionized.
Union goons are rapidly rising to the top of my shit list, though they will have work to do getting above environmentalists.
According to Pelosi: “It is essential for the domestic automobile manufacturing industry to re-emerge as a global, competitive leader in fuel efficiency and in new, path-breaking energy-efficient technologies that protect our environment,” Pelosi said in a statement. “For the automobile industry to be truly viable, it must continue to move in this direction. I am confident Congress can consider emergency assistance legislation next week during a lame-duck session, and I hope the Bush administration would support it.”
In 6 months or a year, when Washington decides that Detroit isn’t building the kinds of cars that they think should be built, I wonder if the clowns at GM will rue the day they asked for government help.
The UAW has about 500,000 members. So, $50 billion is like giving each member a loan of about $100,000 so that they can keep doing what they’re doing. This, in order to keep some of the best paying of low-skilled jobs. When the economy is tanking one of the most important adjustments that needs to happens is lowering of employment, and of wage rates. The only way the UAW will forced to cut pay substantially is if the car companies go bankrupt and can “walk away” from their union contracts.
A sane government would, at the very least, insist that the union cut pay and benefits. Even an honest mixed-economy bureaucrat would insist that the UAW bring pay and benefits to about 70% of what the Jap companies are paying in the south.
Unfortunately, I have no doubt that the government will bail these guys out. Once again, the GOP are playing lead socialists. Paulson is urging Congress to help the auto companies.
Of course the Republicans will do it. Short sighted political pragmatism is their strong suit and it has gotten them where they are today. Out of power and having to take the blame for our economic problems.
What I find most disturbing about this auto bailout is not so much that it has been proposed–we live in a mixed economy so that is expected–it’s that the car companies want it so bad and seem to think it’s a good business plan. It just weird to see the descendants of great men like Henry Ford now begging from money from the government. Don’t these men have any pride?
Someone on the radio program earlier made a good comment. It’s possible for the union to take a vote and lower their pay to aid their company, but they will do no such thing. It’s very telling that these people would sooner force everyone else (and future taxpayers) to pay for their subsidization than to even lower their own standard of living.
Paulson is pushing for it, saying he wants Congress to do it. I assume he would not do this unless he had Bush’s backing. The debate between Bush/Paulson on one hand and congressional Democrats on the other hand appears to be whether the $25-50 billion should come out of the “TARP” ($700 billion), or whether Congress makes a separate move.
