bluntlysaid

Company’s fail because the goods they produce are no longer demanded by the market.  This is true of the autmotive industry and partially true of the financial service industry.  Subsidizing a failing business is not the best use of money, but the economic climate present today raises the cost of mega-corporate failures in any industry.  Lets discuss:

Financial services industry:  The market no longer wants their awful securities products.  Institutions originated and held too many of these securities cannot find a market for them and are watching their portfolios near zero as the securities fall in value (i.e. mounting losses, defaults, etc). More diversified institutions seem to be faring better.  This is why deposit-based banks that get money from securities AND cash deposits from regular people are doing so okay relative to the investment banks.  Institutions that were cautious with these secuirites (i.e. Goldman, which shorted its mortgage portfolio before things got messy) are also doing well.  The rest are failing.

However, failing is not an option in many cases.  AIG is instrumental to the world financial system. Letting them fail was not an option, and that’s why the government pursued a controlled bankruptcy.  The same ocurred with Fannie Mae and Freddie Mac.  Equity shareholders in all of these companies have virtually been wiped out.  In order to pay back the massive loans all three companies received from the government, they will have to sell-off portions of their business (AIG) or change their profitability structure forever (Fannie Mae and Freddie Mac). In both cases, the owners of these companies have been punished for their misdeeds of the past.  That’s fair.

The automotive industry is a little different. These companies have been slacking on the competitive front for awhile now.  Really, what 30-year old aspires to buy a car from GM? Ford?  Not many.  These companies sell inferior products relative to their peers (i.e. Toyota, Mercedes, BMW, VW, Mini Cooper, etc).  The market does not value their product, so they sell less, which mean they are less profitable.  Had these companies been innovative and inveted green cars, then maybe they would have changed the terms of the game and reclaimed market share. If they had they created fast, cute cars like Mini-couper or VW maybe they would have reclaimed share.  There’s a lot of IF’S here, and the main point is that the company instead stuck to a stagnant strategy that made them irrelevant in the market.

These companies deserve to fail.

I agree with Romney that bailing them out would only prolong the inevitable. They have to be held accountable for offering shitty products, and the way you do that is by making them liquidate the parts of their business that aren’t competitive.  Then, lending the companies money with the express purpose of creating INCREMENTAL value….this requires innovation. These companies need to create value.

Can the US afford an all-out failure right now? No.  That’s why Mitt Romney proposes a controlled bankruptcy.  You give them money to smooth the bump in the road, to incentivize them to improve…but not for free. The money comes with a steep tradeoff: Make your business profitable, even if that means liquidating the unprofitable parts and substituting these with new, innovative efforts.

However, there’s a major poblem with the pension funds the car companies hold. They are HUGE, expensive, and it would be wrong to fall through on the obligations. Hard working employees depend on these pensions to live during retirement. If the car company’s fail, then the government must take care of these people. It’s the right thing to do. 

What about the trickle down businesses—the steel producers, parts suppliers that will suffer if the car company’s fail? Not sure.  The country will obvoiusly go into recession (perhaps depression) if all of these sectors start suffering. However, holding them up forever with subisdies isn’t wise either because that’s capital that could be used to create new, innovative industries. Again, a controlled failure that lasts for 5-10 years would mitigate the magnitude of GM/FORD/ETC failing today.  It would spread the pain out over several years, allowing the US economy to better absorb the excess labor. 

My suggestion:

-Cover the pension funds for the car industry with tax payer money

-Lend whatever the company’s need to make it through the next 24 months, at very steep interest rates.  The punitive costs of the loan will force the company’s into deep cost-cutting measures. They will have to liquidate those departments that do not help repay the loan.

-Set asdide a LARGE portion of the loan towards R&D.  The United States has to reclaim its position as world innovator.  The car industry has the scale and the expertise to create “the next best thing.” All they need is the motivation to actually discover what this will be.

OBAMA:  You have to balance the human costs of this failure (wide spread economic ripple effect, the pain of an insolvent pension fund, Detroit’s future) with the realities of what it takes to make the United States economy strong in the long run.  We need to get through today, but not at the cost of a competitive future.  The right answer to this problem is somwhere between “bail them out 100%” and “let them fail 100%.”  I trust you will find the balance.