I can see a lot of good arguments to let poorly-managed companies go under, no question there. And I agree with the sentiment expressed in a comment, I think, that the government should not be picking winners and losers. And if the car companies are in fact worth more alive than dead, then there is a mechanism to allow them to reorganize and continue operations -- Chapter 11.
But.
The potential downside of a potential bankruptcy of one or two of the Big Three, in this particular economy, is not negligible. And I'm not talking about the downside for the shareholders or employees, but for the greater economy.
- It is not clear that either could reorganize and emerge from chapter 11: a Pam-Am style liquidation would be a serious loss for the US manufacturing sector. I think there is macroeconomic value to preserving manufacturing as an industry in the US.
- The credit markets are still bad enough that a merger or acquisition would be unlikely. Chrysler, you may remember, had the good fortune to be acquired about a year ago, when this was still a viable option. Ford and GM may have hung on too long for a savior to emerge.
- If Ford or GM default on their obligations, it will depress the value of corporate bonds in general, and make it harder for companies to raise capital. This will depress growth and may deepen the recession.
- Bankruptcy is currently structured in a way which greatly disadvantages the employees and retirees of the company. My sense of social justice gets very aggravated seeing so many health plans and pensions liquidated to pay off preferred creditors (banks).
- Bankruptcy would also likely be used as a convenient pretext for a little union-busting. It's maybe inevitable, but a strong union force is a strong agent for good in my book, and I'd hate to see that lost.
No matter what Bush/Obama/Congress/Paulson wind up doing, I'm reasonably certain I'm going to be unhappy with it. That may just be because there are no good options here.
3 comments:
There's certainly a lot of wisdom in the idea that there are no good options. I also disclaim that I'm not sure of my opinion, but I only raise questions I am seriously interested in someone answering and no one yet has to my satisfaction:
The potential downside of a potential bankruptcy of one or two of the Big Three, in this particular economy, is not negligible.
I don't argue this. I just think it's time we take our lumps on it. It certainly would have been less painful to lose the failing auto industry in 1984 than it is today. The longer we prop it up, the more painful the fall.
I think there is macroeconomic value to preserving manufacturing as an industry in the US.
What are they? That's not a challenge, it's an honest question. I see that being able to fall back on it should we be unable to trade with industrial nations in the future would be nice, but under what circumstances can you see that happening?
If Ford or GM default on their obligations, it will depress the value of corporate bonds in general...
Really? I guess consumer confidence in corporate bonds would drop, but by that much? Having your GM bonds fail would make you question your GE bonds? I guess so, but how long and terrible would it be? I can't say I believe it would be lasting.
Bankruptcy is currently structured in a way which greatly disadvantages the employees and retirees of the company.
No question. My mother lost 20 years of 401(k) when Wang went under.
If the bottom-line is that the country winds up better off with an artificial preservation of the auto industry, I guess that would make it worthwhile.
But isn't that like saying, "If A is better, let's do that."? I am arguing that losing 3M jobs, depressing the bond market for a time and throwing Michigan even further into the lake of fire is better than propping her up for another 30 years until we are forced to do it with $30T instead of $30B.
I just see the logical conclusion of this, where Chris just pulls a paycheck right from the federal government... why would we think it would end up any other way? If we preserve the auto industry out of some unquestioning conventional wisdom that the auto industry is inherently more important that the soft drink industry, to what lengths won't we go? I just have never been convinced that it's more important to have them than not.
Is the failure of the industry inevitable? The concept behind the bailout is that it's sort of a bankruptcy-lite, right? That it prevents the bad stuff that comes with insolvency and provides a bridge to future prosperity. I wouldn't blame you if you were to argue that American car-makers can never be profitable -- but I do hope that is not the case.
As to manufacturing:
I'm no expert -- I think there is inherent value to the ability to make things, both for internal consumption as well as for export. Krugman won his Nobel for a theory of how local economies wind up dominating certain sectors, and we have been successful in this sector (historically, anyway). I think it would be a mistake to cede this ability to other nations. We can't export health care or even soda pop, but durable goods are different. Furthermore, manufacturing jobs are generally well-paying jobs that fuel the middle class, who in turn fuel the economy. A service economy alone would have trouble being a strong economy. And the economic moat for an intellectual-development economy is very narrow. So it's a good idea to be able to make things, I think.
I don't know how to factor in US-made Toyotas to this equation.
I get the idea that taking our lumps now will be better than later. I generally have that attitude about this crisis. Particularly consumer spending must contract as people start to save, and that's going to be painful for the economy.
But as for the big 3, I think whether to bail them out or not is small potatoes compared to the larger issues their troubles raise. If they aren't viable because, as so many free market fundamentalists argue, they pay pensions and health care (due to the union), then we better be worried about healt care and people's retirement in this country. But the same folks who are positive we should let companies live and die purely by competition, usually are opposed to things like Social Security and Government subsidizing of health care costs. Take away jobs like at the auto makers, bankrupt social security and decline to intervene in the heal care crisis, and you are going to have lots of old people living in poverty and lots of people in the "wealthiest nation in the world" who die or have shitty quality of life because they can't pay for treatment. That's what we should be talking about.
Post a Comment