Congress: Vote Yes on Automaker Loans

By Michelle Krebs November 17, 2008

The future of the American auto industry rests in the hands of the U.S. Congress, which this week debates whether the government should make loans to Detroit automakers to get them through the current economic crisis.

We at Edmunds.com urge Congress to vote yes.

Theoretically, we believe the free market is preferable to government intervention. But this isn't theory. This is reality, and an ugly one at that. The pragmatic answer to these unprecedented circumstances demand action.

The simple fact of the matter is this is not merely an auto industry problem. This is a financial crisis, and not one of the auto industry's making. The lifeblood of the auto industry is credit -- credit for the consumer to borrow to purchase a car, credit to keep the assembly lines running and credit to finance the development of future models and innovation.

Further, the impact of the demise of the auto industry on the global economy would be devastating, surely sending the economy into a wider and deeper recession. Already, we are seeing the U.S. recession spread across the globe with more than two dozen national economies now officially in recession.

As for U.S. taxpayers footing the bill -- they will one way or another. They can ante up now for $25 billion or $50 billion loans whatever it turns out to be -- still modest compared with the financial industries' $700 billion bailout. If the 1979 Chrysler bailout sets any pattern, U.S. taxpayers have a shot at getting their money back with interest. 

Or taxpayers will pay exponentially more in massive unemployment, health care and pensions benefits. 

So Congress, go ahead, point fingers. There's plenty of blame to go around, you included.  Debate all you want; in fact, add the debate over a national energy policy and a national industrial policy to your future agenda. Chastise union workers and auto company execs. Attach strings to the loans. Do your political grandstanding.

Do what you have to do, Congress. But get the job done -- now.


 

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georgehughes35 says: 8:53 AM, 11.17.08

While I agree with the concept of industry assistance and have family who is being impacted by the changes in the quasi-American auto industry I find Edmund's political grandstanding and judgmental attitude disturbing. To compare the management/strategic direction mistakes at GM, Ford and Chrysler as being comparable to Honda's is laughable. I do not think it holds up to scrutiny either.
I pray taxpayers obtain an equity stake in this bailout, and it is a bailout.
Love the columns. I do shop American brands despite many lemons earlier in life so keep the hate to yourself.

jkp1187 says: 10:05 AM, 11.17.08

GM has failed. It deserves to take not one red cent from us.

Do not lecture us about the necessity of GM. America will survive just fine without it. If you want to contribute your own money to keep it afloat, be my guest. But to force millions of Americans -- most of whom will have NO connection to the automobile industry at all (and the vast majority of whom do not buy automobiles from GM) is injust in the extreme.

brn says: 11:18 AM, 11.17.08

"America will survive just fine without it"

I can understand your reservations, but I ask you to explain the above comment. America has been exporting its jobs (electronics, technology, software, manufacturing) for decades. It's the leading reason this country has long term issues. Adding automotive to that list will only make things worse.

Automotive alone won't kill us, but it may be the final nail in the coffin.

orangutan says: 12:16 PM, 11.17.08

brn: Maybe you haven't noticed all the "foreign" autoplants spread throughout the United States. Nissan in Tennessee, Toyota in Texas, Subaru in Indiana, Kia in Georgia, Hyundai in Alabama, Honda in Ohio. Even the European automakers have been talking about bringing production stateside. We have plenty of automotive jobs here without the bloated masses that are the so-called "Domestics". Ford is going to survive this crisis, Chrysler is just a corpse animated by Cerberus, and GM is going to die no matter how many billions of dollars are poured down its gullet. Things must change at GM and a bankruptcy will ensure that they do. A few dozen billion dollars thrown at GM won't do a damned thing except waste our money and fatten the wallets of executives and politicians. GM will simply return a few months later and keep doing so until something finally gives.

guy1974 says: 12:34 PM, 11.17.08

jkp1187 - you are wrong that the vast majority of Americans do not buy "domestic cars" - the big 3 get between 45-52% of the market (varies month to month) so they are hardly a small minority.
Second it will effect every state because multiple car dealers will close and all of those staff will have to find work. Unemployment is increasing nationally so adding a load of new people to the jobless queues is not a great idea.
Yes Japanese and European (German) companies do build factories here but the vast majority of their R&D spend is spent in their home countries. The same happens with their profits, so having domestic US auto companies is good for the US. GM certainly does need to restructure (ie lose several brands) but it deserves some support because letting it fail is not cost free either.

flicmod says: 12:55 PM, 11.17.08

Remind me again: did the British economy collapse when every single British car manufacturer was either sold to a foreign company or ceased to exist? Did that send the market plunging into oblivion with record high unemployment?

So explain to me why you think that's what will happen if the "Big" 3 tank. I'd love to hear that.

uponfurtherrev says: 1:40 PM, 11.17.08

The UK didn't offshore the rest of their manufacturing base and so had other industries to create jobs. Secondly, the UK market was far too small to enable competition with international auto makers with global sized R&D. And oh yeah, GM & Ford are global leaders in Europe, Russia, and China, so able to compete on a global basis. Only in the US where their legacy costs (like other industries) were turned against them by states making grabs for foreign plants (without legacy costs) thru state subsidies etc (see preceding Alabama article as an example)

flicmod says: 2:06 PM, 11.17.08

Thank you for making my point, uponfurtherev.

The real problem here is that GM, Ford, and Chrysler have all been running outdated business models for the last 30-odd years. Because they haven't changed that model to compete better with the foreign brands, they have suffered. Yes, unions have been involved in that suffering. Yes, the foreign companies have the opportunity to work outside of the UAW and CAW territories. But the Americans did not a single thing to change this or any of their other problems. Appeasement of the unions and the government itself was the only remedy they were willing to supply.

So, I ask the question, why should a failing business model be rewarded with billions of tax dollars? What consequences do you foresee happening if the bailout is approved? And, conversely, what consequences do you foresee happening if the bailout is NOT approved?

The $25-$50 billion the manufacturers would get wouldn't even pay for those legacy costs you mentioned. Additionally, you say:

"Only in the US where their legacy costs (like other industries) were turned against them by states making grabs for foreign plants (without legacy costs) thru state subsidies etc (see preceding Alabama article as an example)"

So I take it that you think that state intervention was the cause of the problems for the Big 3. If so, then why do you think more state intervention is the cure?

The fact of the matter is that Keynesian economics does NOT work. And that is all this is. Government spending does nothing except to put the American people more in debt. And a bailout is nothing more than a proverbial band-aid on the slit throat of a failing business. Chapter 11 would be a much more responsible, just solution.

fulcrumb says: 10:34 PM, 11.17.08

I am struggling with this. I go back and forth between a bailout and letting them go under. I live in Wisconsin near the St Paul-Minneapolis area and two things have occured to me while reading all of the preceding posts.

(1) Minnesota Governor Tim Pawleny has made persistent and generous proposals to Ford Motor to keep the Twin Cities Assembly Plant open. It now is to remain operating until 2011. Beyond...? So it seems that at least Ford is willing to listen to proposals that make sense. I worked at Whirlpool Corp. in St Paul and little was done to keep them here when they left in 1984.

(2) Detroit's argument that bankruptcy won't work because few people would buy a car from a bankrupt company is rather thin. Northwest Airlines is headquartered here. Still. After bankruptcy. Who would fly on a bankrupt airline? Apparently, enough have for them to emerge from Chapter 11. To be sure, it was a long, heartbreaking at times vitriolic most of the time ordeal. Thousands of high paying jobs were shed. and, like it or not, NWA survived and prospered.

$50,000,000,000 divided amongst all of the US taxpayers comes out to about $322/ea. Plus the interest on the T-bills sold to finance a bailout. Most of the countries that would be buying the T-bills also export and/or build, or would like to export vehicles here - why would they care if Detroit survives?

brn says: 5:11 AM, 11.18.08

fulcrumb, buying an airline ticket is quite a bit different than buying a car. With the airline ticket, you could potentially have taken the trip before you have to pay your credit card bill. If something goes bad, it only sucks a little bit. Buying a car is a long term investment (typically, two to ten years). You've an expectation of a warranty and a dealer network to support you for years to come. If GM isn't paying their vendors, good luck getting the services you need.

If GM went bankrupt, I'd have a hard time buying from them.

guy1974 says: 6:21 AM, 11.18.08

uponfurtherev - I am British and yes losing a large engineering section of the economy has left the UK economy base dupon the financial services industyr (largely based in London). As you may have noticed in the news the financial services industry is not doing too well (Citi shedding 50,000 extra jobs in NY and London). For a succesfull economy you need multiple sectors like finance, engineering, IT, movies, agriculture etc.

knorberg says: 11:20 AM, 11.18.08

The $50 billion dollars now (if it works) will be cheaper than the government having to pick up the costs the for the workers pensions. I really do not want to pick up the pensions for people who don't pay in to social security. However, the entire American economy is in the tank. Letting the automakers fail will be bad in the short term; but maybe it will allow the middle class to return.

flicmod says: 11:28 AM, 11.18.08

knorberg,

I think you need to study Chapter 11 more. The government (via the judicial system) would be merely protecting the company from the likes of the unions in the event of a bankruptcy. A bank would be in control of the company and would be subject to better reorganization and restructuring that would return said company to a better state of affairs. The only way to shed the baggage of the union, the legacy costs, and the excess bureaucracy of management is to file for Chapter 11 and be protected from legal action by those groups I've listed.

Not only is it the only way, but it's the only LEGAL way the government can actually help the car companies. A bailout is unjust and unconstitutional. The federal government has no authority whatsoever to take money from the people and give it to corporations, let alone failing ones. Please research this more.

estreka says: 12:14 AM, 11.27.08

Sorry I'm late to the party! For whatever reason, my home computer doesn't allow me to post here.

There's very little I can add that Flic hasn't already stated. After all, we seem to agree wholeheartedly about the situation and the path that must be taken.

While the US government has indeed contributed to the delinquency of the US auto industry (many Union-backed policies have occured in the past 60 years) and bankruptcy is a gamble (just look at still-ailing Delphi), I don't think it is in anyone's best interest to nationalize or even subsidize Detroit.
I don't just disagree based on the commonwealth of the taxpaying public, but also on the philosophical ideaology of this great nation. To bail out Detroit is to say that free market economics works well, but only during the good times. And to answer any impending questions, no, I do not agree with any bailout plan.

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