Car Wars, Episode IV: A New Hope
I have been challenged in the comments by more than one reader to justify why a ‘bailout’ loan is better than a bankruptcy for the Big 3 (or Chrysler and GM). I have tried to answer that challenge, but apparently not successfully, so I’ll drill down on it once more in a moment, but first, some good news, for a change.
Just when I had completely given up, Bloomberg pulls me back from the brink of despair – if this story is true (and the story emphasizes that the plan is not final, and is subject to change), the Bush administration stands poised to lend GM and Chrysler funds that will tide them through until March, AND they plan to do it through GMAC and Chrysler Financial, which would seem to forestall bankruptcy for those two distressed companies, as well:
General Motors Corp. and Chrysler LLC would get U.S. loans to stay afloat until March under a Bush administration rescue plan that may be unveiled as soon as today, people familiar with the talks said.
The government could take back the money should the automakers not comply with federal restrictions as a condition of receiving the funds, said the people, who asked not to be identified because the discussions are private. The plan isn’t final and may change, the people said.
…The Treasury Department may lend to the automakers through their credit arms, GMAC LLC and Chrysler Financial, to avoid having other industrial companies line up for access to the $700 billion Troubled Asset Relief Program, the people said.
…While the option of placing Chrysler and GM into a prearranged bankruptcy has been considered, the administration decided that such a move would put Ford at a competitive disadvantage, the person said.
If that last paragraph is true, thank God Ford is in good enough shape not to need funds at the moment!
Now, let’s play the what-if game and weigh the job losses likely between bailout and bankruptcy. If – and I grant you it’s a big if – IF the automakers can use a bridge loan from the federal government to pay the bills and buy time to reorganize outside of bankruptcy, massive job losses will still accrue. This is because supply and demand are woefully mismatched in the current environment. Let’s say that GM follows through on its plan submitted to Congress.
Even under the official GM plan, 21,000 to 31,000 GM employees would be laid off, and 1,750 dealerships shut down (dealerships employ 53 people on average). That’s over 100,000 GM-related job losses already. Suffice to say, 250,000 total job losses from the Big 3 and related companies are probably coming under the best of circumstances.
But job losses from a bankruptcy are estimated at 10 times that number (the following paragraphs are from the previously linked Bloomberg story):
Auto production now accounts for about 3 percent of GDP, Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut, estimated last week. About 239,000 people work in the U.S. for GM, Chrysler and Ford, according to the Center for Automotive Research in Ann Arbor, Michigan.
Job losses from a failure of GM would reach 2.5 million, and total 3.5 million should all three automakers go out of business next year, according to the center, which conducts studies for government agencies and companies. That includes 1.4 million people in industries such as retailing that aren’t directly tied to manufacturing.
Okay, the Center for Automative Research – more scare tactics from the auto industry and its supporters, right? Well, I haven’t read the study, and neither have you, I’m willing to wager – so I can’t speak for it…I’m a blogger and not a full-time one at that.
But I have been asked to put a number to bailout vs bankruptcy, and this is the best I have to go by. 10 bankruptcy-related job losses for every 1 bailout-related loss. That’s my answer…and I stress again, I freely admit, that’s IF the bailout works.
I’ll repeat, though – in this environment, and particularly with the brutal employment situation, I’m willing to wager $14 billion on the chance that it might work, since we’ve already given away a trillion dollars, literally, to a financial industry intent, apparently, on using the funds to further tighten the screws on consumers…
UPDATE 12/19/08 7:30 a.m.: The President will make an announcement at 8 a.m. regarding the bailout…
This whole situation is a cluster-fffff. If a company is “too big to fail” someone fell asleep at the regulation wheel. That should be the whole point of think tanks and economic experts. To fight fires before they happen!
If engineering worked like this there would be a lot more appliances catching fire in people’s homes…and there are plenty of those to raise an eyebrow.
That’s what frustrates me the most. You say protectionism is bad when democrats talk about it, but that is exactly what giving companies a loan is. The bailout is the definition of socialism. The government is selectively choosing where to pump public funds into industry. It doesn’t matter what the intended end is, whether it be preventing employment (which, to me, is basically delaying the inevitable).
It also occurred to me that this whole thing was a storm intended to unleash itself during the next president’s term that came to fruition a little bit too soon.
The only reason I am upset about this more than the trillion dollars we have already spent is because I have no idea how the financial industry works. I do, however, understand manufacturing of real goods. The financial industry is just a bunch of paper-pushing to me, that adds no value to my life whatsoever. If I could not acquire a loan to purchase a home, I don’t think I would have been any worse-off. I could have saved so much money renting. I honestly kick myself in the butt from time to time for buying a home. The pressure to be all domesticated was just far too great. Oh well. I just need to make sure that when I have kids I will explain to them the value of renting while saving up to just buy a home with cash money. Even if you CAN borrow within your means, it doesn’t mean you SHOULD.
“Center for Automotive Research”…CAR. How quaint.