Category Archives: Bailouts

The GM/Ford/Chrysler Bailout

The Senate is discussing a $25 billion or so bailout for the 3 three automakers. Like the $700 billion bailout to financial companies, and the $300 billion or so for AIG, Freddie, and Fanny, this bailout rewards reckless management.

Senator Feinstein of California believes a loan should not be made unless the industry agrees to produce more competitive, fuel efficient cars. However, the American auto industry has had years to compete with the Japanese on reliability and fuel efficiency and with the Germans on performance and they have failed miserably. Their short sighted management refused to deal with the increase in the price of oil. Instead they continued to produce gas hogs for short term profit. Management has made unsustainable agreements with unions that has added to the their inability to compete. Management has chosen to produce cars that are far less reliable than their Japanese counterparts. They refused to innovate in the hybrid electric market until the Prius was flying off of Toyota’s lots. Loaning these completely ineffective companies money doesn’t change the fundamentals a stitch and simply postpones the inevitable.

I also don’t believe that a symbolic replacement of management will be able to transform the auto industry’s culture of mediocrity – although it will help the politicians look like they’re playing hard ball, even though the move is unlikely to have any real impact.

The best thing for the industry is bankruptcy. Yes, the shareholders and management will lose their entire investments, lenders will lose some of their investment, and union contract will be renegotiated (probably a net loss for union workers). However, this is the best option for restructuring the American auto industry. It doesn’t use tax payer money to pay for it (assuming congress doesn’t make some asinine move like bailout the UAW pension plan). It is the most sustainable long term for making America globally competitive and keeping manufacturing jobs here.

Senate Passed Bailout Bill

You probably saw the news today that the Senate passed their version of the bailout bill. It was expected to pass and did so by a wide margin – 74 to 25. It also appears that many members of the house are changing their mind since they had many constituents call in Monday and Tuesday after the vote and following stock market tumble. Come on people! Do not be so short sighted. A single day in the stock market means nothing. Committing $700 billion to a financial rescue package is going to have serious consequences: increased government power, allowing the financial institutions that behaved so badly to continue, and increasing our deficit – the money has to come from somewhere and you know how much government hates trimming their wasteful programs.

The Bush administration has used fear and little evidence to scare congress and the citizens into an expensive project with no exit plan. Sound familiar?

We need to keep the pressure on the house. They are the only thing standing in the way of this bill turning into law. Let’s take care of our current problems today instead of having our grandchildren pay for them down the road. Let’s keep government power in check. Call your congressperson and give them a piece of your mind!

McCain’s Scare Tactics

I subscribe to John McCain’s, Barack Obama’s, and Bob Barr’s supporter news letters (i.e. propaganda).

Today I received an e-mail regarding the bailout from John McCain. Here is an excerpt:

If we do nothing, many businesses may fail. Sonic Corporation, a drive-in restaurant chain based in Oklahoma, learned on Thursday that one of its lenders, GE Capital, had stopped extending new loans to the chain’s franchisees. That will block plans to rebuild restaurants, add equipment and open new locations. 

When financing dries up, students can’t get loans. In Wisconsin, more than 100 Milwaukee Area Technical College students couldn’t access private loans to fund their education. Fortunately the school was able to come up with emergency loans, but this temporary arrangement cannot continue. Markets need to work so that people can get financial help and students can be educated.

What pathetic fear mongering! And baseless too! Take the first example, Sonic. Supposing that Sonic does actually want to expand at this point in time (seems like a wise time to put expansion plans on hold), all McCain has said is that ONE of it’s lenders has stopped extending loans. How is that bad? Perhaps GE is overextended and wants to ensure it is adequately capitalized. That is a good thing. Lack of adequate capitalization is what got us into this mess in the first place.

Now take the second example. First of all, John McCain doesn’t give a rats ass about this issue – he’s just using it because he knows the people who may vote for him do care. The student loan industry has been a mess for at least 6 months now. Funny that the issue should pop up now, since McCain needs support of the common man to bailout Wall Street. McCain also fails to mention that tuitions, which have risen much faster than inflation and wages over the last 8 years, will fall as a result of higher borrowing costs – otherwise the school will not have enough students who can afford to attend.