Saturday, November 15, 2008

Motown aid needs some Big Mo

Nancy Pelosi has put together a bailout bill for Detroit's Big Three, but a bailout by the lame duck Congress seems unlikely, as Republicans and conservatives assail the very idea as an offense to free market capitalism and "creative destruction," and many non-Republicans wonder whether the "rescues" will end before we're all broke. Something is going to have to happen to build new momentum behind any sizable aid package, if one is going to fly.

One of the better things about being a centrist is that you get to look at a problem like this as a practical matter without worrying that your ideological comrades will denounce you for an insufficiently zealous commitment to markets or a callous disregard for Michigan and Main Street, USA.

Sure, it is appalling that GM, Ford and Chrysler are looking for help from taxpayers after having screwed up so much, so often, for so long. Yes, it's troublesome that an auto bailout could lead other companies and industries to put their hands out, too. And no one can guarantee that federal money will bring a genuine renewal at The Not-So-Big Three.

Nonetheless, it is something that must be done. In the face of a potentially severe and prolonged recession, it would be foolhardy in the extreme to avert one's eyes, cross one's fingers, and hope that a bankruptcy at GM would not be all that bad. As Jonathan Cohn writes in The New Republic, taking into account the spillover effects on suppliers, dealers, communities, etc., a shutdown at GM alone could result in a loss of as many as two million jobs, a devastating blow to an already damanged economy.

Of course, a bailout will have to have some very tight strings attached -- perhaps on a scale we've never seen in this country before. The bailout process should be approached as if it were a Chapter 11 bankruptcy restructuring, with a special federal official (chosen for his/her detachment and skill), much like a bankruptcy judge, given wide latitude to force the companies and their employees' unions to downsize, reshape cost structures, and focus on a return to profitable operations.

This is no time for partisan wrangling, preening for political credit or arguing about economic theories. While a bailout carries some risks, the failure to act may prove as catastrophic as anything that might have happened if the feds had not intervened in the financial markets.


  1. I have to agree. As much as it pains me to reward the inefficient auto-makers and the unions that help make them that way, the consequences on inaction are severe, and not something we need just now.

    Eventually we need to let at least one of these guys fail, but not until the economy can absorb the loss better.

  2. As someone who spent 2.5 years at GM (as a contractor), I can assure you that we can keep throwing money at GM as long as we want, and it will fix nothing. The problem is structural, in that the union and dealer contracts force costs above that sustainable in the market, and cultural, in that all the high-quality managers and workers were driven off or replaced by contractors, and the remaining managers could not manage their way out a wet paper bag. Secondly, since the total employment related to the auto industry is around 2 million, the odds of all of those people suddenly finding themselves out of work are rather low.

    Let GM fail, and someone else will pick up the pieces and make more efficient use of them. Otherwise, we'll be back here in another 6 months discussing a third bailout of the auto industry.

  3. What's cool is that, in order to have a bailout that is approached as if it were a Chapter 11 restructuring, Congress need do nothing, we don't have to pass any new bills, change any laws, or spend any extra tax dollars.

    How do we work this magic?

    It's called Chapter 11.

    It'll happen with or without throwing our money down the toilet. January, or July. Let's get it overwith so we can get on with an economic recovery, rather than dragging out the pain for years. Some of us won't live forever, and would rather get on with our lives and see new opportunities sooner, rather than later.

  4. oops "over with"

    Although I suppose it ought to be a word.

  5. This is no time to argue about economic theories, so just swallow my own theory without argument! What a pleasant dismissive. This is EXACTLY the time to argue about economic theories. Doing so might prevent us, for instance, from nationalizing the auto industry.

    If something like Chapter 11 bankruptcy is desirable, than I have the perfect option available. It's called Chapter 11 bankruptcy! Not only is it just like Chapter 11 bankruptcy, but it doesn't involve fleecing the public out of another $25 billion dollars.

  6. Why not let it be a by-god Chapter 11 bankruptcy? On the assumption that Congress is better able to handle this than a bankruptcy judge? Because it's better to throw taxpayers' money at the problem than apportion risk and loss among private investors? On the assumption that Chapter 11 reorganization will result in a prolonged shutdown whereas a Chapter-11-like reorganization under Congressional auspices will not?

  7. Pointed comments all. The trouble with a "normal" Chapter 11 is that in the current environment, there are not going to be any private-sector creditors able and willing to provide the necessaey debtor-in-possession financing. So if GM is going under, it will be a liquidation. If this had happened a year ago, I'd say, let it roll. Now, however, we risk too much. No doubt we'd feel better about it for a while -- but not if it set off a cascade of events that pushed the economy down.

    In yesterday's New York Times, business writer Andrew Sorkin offered a smart variation on this idea -- what he called a "government sponsored bankruptcy" -- where the feds would provide the D.I.P. and GM would have to accept a prepackaged restructuring plan, meeting strict standards of cost reductions, etc. in exchange for the credit. Then the process would proceed through a US Bankruptcy Court.

    It's worth keeping in mind that Congress has essentially unlimited power to set the terms of any Big Three bankruptcy process by virtue of its explicit Constitutional authority to make bankruptcy laws.