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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?
10 responses so far ↓
1 Tundra Headquarters // Sep 13, 2008 at 1:22 pm
I like what you have to say, but I have to point out two important omissions:
One – The CAFE restrictions are phased in slowly, with a slightly higher standard being applicable every years starting in 2011 (or so – I’m going from memory). It’s a misnomer to say that automakers have 12 years to get it done. They need to start making changes now if they want to get their from here.
Two – The reason that U.S. automakers are struggling with CAFE regulations isn’t just the fuel economy issue – it’s also about emissions. Ford has a version of the new Fiesta that gets 65 mpg and it would cost less than $20k in the USA. Unfortunately, it will never be sold here because U.S. emissions regulations are ridiculous.
The easiest was to “fix” the U.S. auto industry would be to relax emissions regs every so slightly (specifically in the area of NOx). That would make it easy for GM, Ford, and Chrysler to sell their international products here.
2 Max Gladwell // Sep 13, 2008 at 1:54 pm
TH: Precisely the type of comments we’re looking for. Thanks very much for your input.
We agree that regulators should look more seriously at diesel and, by extension, biodiesel for passenger cars. Giving them a short-term exemption to get a foothold and spur the market could be all the automakers need. There are also technologies that comply with the strict emissions standards, which are in place for a reason. NOx causes smog and bunch of respiratory ailments, and many urban areas are well above safe levels.
But the Big Three had every opportunity to comply with CAFE in the ’70s, ’80s and ’90s. They chose to lobby against it. They counted on oil remaining cheap, despite seeing the writing on the wall. It’s not the taxpayer’s role to bail them out and give them free money for their own mistakes. After all, the government did everything it could to keep oil cheap while encouraging automakers to innovate. Just because the market is more powerful than the U.S. government doesn’t mean the automakers should count on taxpayers to come to their rescue.
Let the market do what it does. The government needs to stop, once and for all, and let all of these markets shake out. They will one way or another; the government will only prolong the pain while burdening taxpayers in the process.
3 Max Gladwell // Sep 17, 2008 at 2:48 pm
To the question at the end of this post, the answer is AIG to the tune of $85 billion taxpayer dollars.
But the question still remains.
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5 Will Austin // Sep 19, 2008 at 3:32 am
By letting the market do what it does, you’re risking the acquisition of the Big Three by oversea’s automakers. Isuzu is in the works of buying part of GM (truck interest) which will only outsource even more job s. As to why Congress has yet to release the 25 billion promised in last years energy bill is baffling. NYC is in line to lose 40,000 jobs over the financial market collapse, How many jobs have been lost in the auto industry?
As of resident of Michigan, I see first hand what the layoffs are doing. I fully understand that Michigans future cannot bank on the auto industry. What I don’t understand is how congress can see an entire State going down the toilet and do nothing about it. AIG can get 85 billion, Fannie/Freddie 200 billion…. I guess it’ll take Michigan getting hit by a hurricane or wildfire to receive any assistance.
I guess by your standard, Michigan should tell Georgia to invest in desalination plants, don’t look to us for help.
6 Max Gladwell // Sep 19, 2008 at 8:17 am
Will: Toyota is building factories here in the U.S. If GM is acquired by the Chinese or Japanese, it will make sense for them to keep manufacturing here. It just may not be as unionized if we want to keep it here, and something will have to be done about healthcare. GM is a healthcare company that happens to make cars. The Fed has to do something there to keep companies competitive in global markets.
We sympathize with the people of Michigan, but the government did all it could to encourage GM to make more efficient cars and stay competitive. It’s almost absurd to say that the gov’t made better decisions that GM’s leadership, but that’s the case. It’s not the Fed’s responsibility to bail out these companies when they had every opportunity not to find themselves in this position. The banks are a different story; it’s more of a systemic problem. Automakers that did the right thing are doing fine.
That said, the Fed will bail out the Big 3 b/c it’s become a huge election issue.
7 Will Austin // Oct 1, 2008 at 3:57 am
Max, I’m anxious to hear your take on the bailout plan. Looks like Bush has been able to sneak the 25 billion to the automakers under our nose because of the financial crisis…
I see you posted an article on the Chevy Volt. Do you not agree this concept beats relaxing emission standards, or do you stand by your above statement on diesel/biodiesil “Giving them a short-term exemption to get a foothold and spur the market”? Consider the Money an investment, not a bailout.
Since this is a green website, you of all people should realize Michigan will be the leader of this movement. Any money invested into this State, be it through large companies or small business grants, should be supported. I do agree the funds should be strictly monitored and promoted to be used for research and development of Green technology.
8 Max Gladwell // Oct 1, 2008 at 8:26 am
Will: The people of Michigan deserve the help, but the Big Three leaders should be held accountable in some way, even if it’s just exposing them for their mistakes that lead them to need a bailout. Meanwhile, GM just launched a new Hummer model.
We’d rather see the money go into startups that are actually innovating. The Volt is too little too late for GM. They had their chance with the EV1 and blew it. Should the workers and people of Michigan suffer for the executives’ mistakes? No. Should the taxpayers? No.
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10 justine // Nov 25, 2008 at 2:38 pm
Don’t forget that the Partnership for a New Generation Vehicle in the 1990s, was where the federal government gave the Big 3 automakers $1.5 billion over several years to develop 80 mpg vehicles. They each developed a prototype that got 72-80 mpg and then begged to scrap the program. The hybrid technology has been proven and could be replicated with off-the-shelf equipment. The U.S. car manufacturer bailout should go through ONLY IF we extract some promises to seriously overhaul the fuel efficiency of their vehicles ahead of CAFE standards schedule.
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