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Detroit’s Big Three Automakers Go for the Bailout

September 9th, 2008 by Max Gladwell · 10 Comments

General Motors, Ford, and Chrysler are seeking $50 billion in low-interest federal loans. But don’t call it a bailout.

First there was the subprime crisis and Bear Sterns. The U.S. government bailed out the investment bank to the tune of $29 billion because it was too big to fail. Investors lost a ton of dough, but that doesn’t change how much it cost taxpayers. Ya gotta love it: private profits, socialized losses. More recently, the feds took control of Fannie Mae and Freddie Mac. The full cost is anyone’s guess. The stocks have already lost as much as 90% of their value, so investors aren’t getting much relief. But the housing crisis is far from over, as successive waves of defaults and foreclosures continue through 2010. There’s much more pain ahead for housing and the global economy. Next in line: America’s auto industry.

It’s no secret that $4 gasoline has wreaked havoc on American automakers. But it’s not as if they didn’t see it coming. It’s not as if it hasn’t happened before. It’s not as if Congress, the residents of Michigan, and the United Auto Workers (UAW) weren’t pressing for higher fuel efficiency standards as far back as the ’70s and as recently as 2002. How did the auto industry respond to these calls? By lobbying their way around the CAFE standards. How’d they do it? By intimidating the Regan administration with mass layoffs.

Today, the same companies claim they need $50 billion in low-interest, government loans to retool their factories. Congress passed legislation in December requiring automakers to achieve average fuel efficiency of 35 mpg by 2020. This included $25 billion of loans, which have yet to be funded. Detroit is lobbying hard to fast-track the funding and double it. How so? By intimidating the presidential candidates with mass layoffs. Some tactics never get old.

“This is not a bailout,” says to Ziad S. Ojakli of Ford Motor Company, “We’re looking to lower the cost of capital so we can meet the [fuel efficiency] mandate put on us and transform our industry faster,” he says.

The fuel efficiency standards may have been legislated by Congress with a 12-year horizon, plenty of time to comply and do so profitably, but it was “put on” them by the free market in the here and now. GM, Ford, and Chrysler bet big on trucks and SUVs. They went for the easy profits based on cheap oil and lost, fair and square. Who’s responsibility is it to rescue them? The government? What about the invisible hand? There is plenty of competition in the global auto industry, and with the challenges we face in terms of energy and efficiency, it can benefit from more collaboration. In other words, consolidation could be a good thing. Let the market shake out.

As with housing and mortgages, government support and intervention only prolong the inevitable. House prices are going to bottom one way or another. They may over correct. But the government will just prolong the pain. The same goes for automakers, and it’s at taxpayers’ expense.

As the more liberal of the two presidential candidates, Obama is more at home in backing the full bailout, which he does, while McCain is tempering his position by supporting a fast-track for the original $25 billion. Both are pandering to swing voters in the battleground states of Ohio and Michigan. That’s the way it goes.

The general irony and hypocrisy of successive government bailouts under a self-described conservative administration should not be lost on anyone. At least the liberals are consistent: tax, regulate, and bail out or nationalize if you have to. It’s bad policy but it’s consistent. These conservatives have it both ways: lax regulations and laissez faire economics when profits are flowing; when it overheats and blows up in their faces, it’s best to socialize the downside. Instead of redistribution of the wealth, it’s redistribution of the losses.

The only question is which tab the American people will pick up next?

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Tags: Automotive · Policy