The Big Three: Belly-up or Bailout?

Now the big three American automakers have made their great journey to the "Land of Milk and Honey" that we call D.C., and they have their hands extended for a bailout. And really, who can blame them? They have seen the federal government give out $750 billion to the financial world, and they want their piece while the getting's good. Unlike Wall Street, Detroit can actually lay claim to making a product that many citizens are reliant on. While it's true that the populace can look elsewhere for automobiles (and many in fact do), it also must be noted that between those who actually work directly for the "Big Three", and all the ancillary companies that support the industry, there are approximately 2.5 million jobs at stake.

I find it completely understandable that folks are resisting forking over more funds for corporations that have a long tradition of mismanagement. I've read estimates that General Motors is losing $1 billion a month. The outstanding question is, "Will any low-interest government loan amount to throwing good money after bad?" If the policies and strategies of car manufacturers in the United States don't change, then there is no reason to believe that an injection of $25 billion into the industry will do anything other than delay its inevitable failure. Still we are told that GM is on the cusp of finally unveiling the Chevy Volt. Maybe this is the chunk of change that will finally put the product over the top?

It's pretty obvious that the reliance on making high-profit SUVs and other large model cars has put these automakers in dire straits. It was fine when gas was consistently cheap... the marketing campaigns were effective enough to convince many suburb/exurbanites that they needed these things for their family trips back-and-forth to Walmart. Once a substantial number were on the road, ownership of such inefficient machines was seen as a status symbol. Then it was easy to justify buying one because you needed to keep up just to be safe among the other behemoths of the road. It was a self-perpetuating cycle that was only stymied by the steep increases in fuel prices. Of course after that it was difficult to give them away.

Still, those who favor such profligate consumer lifestyle choices will say that the state of the "Big Three" has nothing to do with SUVs, but rather the salaries and benefits of unionized auto employees. It's easy to surf the net and find people bitching about "luxury" dental plans and "undeserved" wage increases. Their position is that if we just adjust worker compensation to fall in line with those in third world nations, then we'll be truly competitive. The answer, according to these "free market" capitalists, is "let them go into bankruptcy" so that they don't have to honor their labor contracts. They insist that the preservation of decent jobs is not the business of our national government.

However, I'm convinced that the "Big Three" is going to get their assistance no matter what. The only question is where the money is going to come from. Henry Paulson doesn't want to break it off from the ridiculously large sum he has been given to play with, without oversight. That's for the investment banks. He suggests that Congress take the sum from the legislative allocation that has been made to encourage the production of fuel-efficient cars. But Democrats are not going for it. Apparently they are sick of seeing these large corporations place all their concerns on short-term profits at the expense of technological investments that could serve them well in the future. I can't say I blame them. It sickens me too.

NOTE: One suggestion I've come across that seems just (but not likely) is to pressure oil companies (that have made record profits over the last several years) to extend low interest loans to the automakers. Of course if that did happen, there would need to be close governmental supervision to avoid any resulting influence that Exxon/Mobil would have on the "Big Three". That's already a bit of an unholy alliance.

Trying to Understand Another Wall Street Crisis.

Like many across the nation and in the blogosphere, I've been investing a fair amount of time trying to learn as much as I can about the crisis on Wall Street. The last time I had an economics course was approximately nineteen years ago, and to say this is all new to me is a bit of an understatement. Still, people who have had an extensive background in the field and in universities seem just as confused. I think it's important to figure out as much as I can about the issues facing our nation, even (or perhaps especially) if so many of the major players seem intent on obscuring the reality. So I'm going to continue to plunge in and try and gather as much information from as many diverse sources as possible.

One of the most problematic aspects of the way the Government has responded so far rests squarely with the Bush administration. Along with Henry Paulson (US Treasury Secretary) and Ben Bernanke (Chairman of the Federal Reserve), the president seems bound and determined to force Congress into acting without much reflection. This, of course, comes as no surprise for anyone following along closely over the last eight years. The strategy seems to entail systematically letting things get so out of hand that it's possible to scare the political opposition into agreeing to "emergency measures" that further the Bush agenda for America. I've always suspected that those in power want to bankrupt the federal government in order to stifle progressive action.

So a $700 billion bail-out proposal has been delivered to Congress, and action is demanded this week. Within this proposal is embedded a very simple message- profits are privatized and losses are socialized. Who is genuinely surprised by the audacity being displayed here? There is NO oversight in this plan. There is NO reward for the taxpaying public that is asked to shoulder the financial burden of a cabal of criminals who knew exactly what was at stake when they risked the public welfare for their own material gain. Paulson continues to threaten the US with a deep recession if his rewards package for inefficient and corrupt financial institutions is not approved without change. But most observers suggest that severe economic pain is going to happen regardless.

Exactly who is looking out for the public good? I'm happy to report that both parties are resisting Paulson's onerous package. Yet I wonder about the motivation. Times Online is reporting that McCain's advisers and some senior Republicans are telling him to exercise the "nuclear option". They believe that a "populist" stance might be a "game-changing" move that would win him the election. So they are saying he must oppose the bailout. But for at least a few days John McCain has taken the position that something must be done for the future of the economy. Fortunately he doesn't feel as desperate about his chances for the White House as those around him. He still maintains* that he is committed to a bipartisan resolution. We'll have to wait and see.

Meanwhile no one in Congress seems anxious to accept the Bush/Paulson/Bernanke plan. Everyone insists that there must be more oversight. I find it remarkable that the GOP is abandoning its long-held, unquestioning position as the official standard-bearer of deregulation and "unfettered free-markets". But despite the "bipartisan" opposition to the Bush Administration's "no-condition bail-out", there is a significant difference between what the Democrats and Republicans are seeking. Barack Obama** and the Democrats are trying to ensure that the American taxpayer gets some kind of chance for reward in exchange for assuming risky investments. That condition is noticeably absent in the current McCain plan.

* I think it might serve the reader to have McCain's words documented now, in case he does end up engaging in another flip-flop:

"Inaction is not an option. The American people are watching, history will be our judge and it will judge us harshly if we do not put our country first," McCain said in his first press availability in six weeks." Link.


** Obama also seems to be looking past the crisis in an effort not to continue repeating the same mistakes. "Obama said he would aim to prevent another crisis by pushing for measures to curb the influence of lobbyists, streamline and strengthen regulatory agencies, crack down on no-bid government contracts and make government more open and transparent." Link.