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November 18, 2008

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Besides, I get a little annoyed with complaints about wasting $25 billion.

How many months of SCHIP coverage for poor children will that cover?

First, it’s technically a loan.

That would be relevant if you have good reason to believe that the money will be repaid. Which you haven't presented. Until you do, I see no reason to assume that this is a direct subsidy, regardless of the legalese used to get it through congress.

But even if it’s completely lost, it’s not all that much money. I mean, it’s 2 months in Iraq. I haven’t heard the stewards of fiscal austerity complain too much about throwing $1 trillion into Iraq.

I was against the Iraq debacle from the start because, among other reasons, I thought it would be too expensive. Do I get to complain that burning $25 billion without good reason to believe that the money can't be better spent?

I'm really confused as to why you think we're only talking about $25 billion. Looking at the big three's financial problems, $25 billion seems like a drop in the bucket. And once we make the first bailout, the sunk costs cognitive bias will make it harder to walk away and stop pumping more money. Did you like that glorious dynamic where people insist we can't do anything but stay in Iraq forever because some soldiers died there and their feelings would be hurt if we didn't stay there forever? Because we're going to play the same psychological game regarding GM. We may be talking about $100 billion or we might be talking about $300 billion, but absent legislators far smarter than we've seen to date, it is highly unlikely we're talking about "only" $25 billion.

Even under all these assumptions, I think the bailout (i.e., doing something) still makes sense. The main reason is simply the timing of the companies’ collapse. I’m not opposed to letting the Big Three go under – that’s how market economies work. I am opposed, however, to letting it happen right now. We’re in the middle of a dire economic downturn. People are suffering

If we are going to interfere, we are not a market economy. Get that straight first, or nothing else you say will make sense.

If the government is going to intervene, it should intervene to ensure this: every American who wants to work can find a job.

This is easy for a government to ensure. There will be arguments over the best way to do this, and maybe keeping a corpse of an automaker around until the economy can generate new jobs is a good idea.

But let's not lose sight of what we are doing here. Any American who wants to work for a living should be able to do that. And if the capitalists fail at that, government has to step in. History shows the cost of failing to do this.

Why is everyone bashing Cohn's article? It wasn't as if it just created a recommendation from his own impressions.

Publius, if the idea is to minimize the suffering that workers experience is giving money to the car companies the best way to do that? With GM burning through $2 billion a month a $25 billion bailout will only last one year, even discounting the other Detroit companies. They're projecting that car sales will be lousy until 2010-2011, so a bailout wouldn't even be an adequate stopgap measure, leading to a high likelihood that even more money will be thrown down the hole.

Perhaps, instead of propping up failing companies the $25b could be used to directly assist displaced workers. I have no idea what mechanism could be used to do that, but giving money to the auto companies is a ridiculously inefficient way of achieving the goal of warding off the ill effects of our current recession.

Heck, we would probably be better off giving that money to anyone who wanted to go back to school and get a college degree or some sort of technical certification. At least that would be spending the money on something that would have lasting value.

Also, seconding Turb's comment.

If we are going to interfere, we are not a market economy. Get that straight first, or nothing else you say will make sense.

It's not like we've ever have a pure market economy in this country, so I don't see why you're being so snippy about it. We've interfered before, we're interfering right now in multiple sectors of the economy, and we will do so again in the future when the political will to do so exists.

The question is not whether we should or shouldn't interfere in the market economy. It's whether or not we should interfere this time in this way. I tend to agree with Publius--that even if all this interference does is delay the inevitable for a while, if it delays it long enough to let the rest of the economy recover, it's money well spent.

it’s not all that much money. I mean, it’s 2 months in Iraq.

This form of argument can't be permitted to run wild. "Hey, let's buy the Irish a year's supply of beer! It's only five days in Iraq!"

It is a lot of fun, though, which is why there's an entire blog devoted to it.

I'd like to mention some important complicating factors (which do not contradict Publius' main point), and then propose a different solution:

1. A big factor in GM's predicament is its dealerships. Due to a tangle of state laws it is very expensive for GM to drop dealers, and they have way to many for their present 20% market share. It is not clear that anything short of bankruptcy can cut GM free of these contracts and obligations. Closing dealerships is the sort of pain that could be managed even in bad times, because the jobs are widely dispersed, but there may be no other way.

2. The second factor is psychological. Will people buy cars from GM if it becomes a zombie company? Cars are big long-term investments where the consumer's assessment of the caarmaker's survival is part of the buying decision. If sales drop off the cliff GM could burn a lot more than 2 billion per month.

3. If GM does go bankrupt the buyer might well be Chinese (look at Rover/MG and Lenovo). For all the sneering you hear the Chevy and Cadillac brands are really worth something, and GM Shanghai (SAIC & Buick) is very successful in China and has TONS of cash. I have nothing against China, but selling GM to China pretty much guarantees an end to large-volume domestic production, and if the Volt is posed to be a revolutionary car that technology would pass out of US hands.

It is as complicated as one could ask for.

I propose that the best course of actions is:

1. Do a Chrysler style bailout, even though it will mean some job losses in depressed areas. We cannot look only at the short-term; some smaller losses now might be better than a zombie firm that loses all consumer confidence and cannot sell its wares. This means demanding painful concessions from management and the UAW and (if possible) the dealerships.

2. Apply all possible pressure to the states to allow GM to close dealerships. This will mean federal $$. This will really improve GM's long-term chances of survival.

3. Take a cue from the Chinese and instigate a massive stimulus package aimed at infrastructure improvements (roads, high-speed rail, subways). This creates jobs across the country and the improvements work toward competitiveness and energy independence in the future. We will worry a lot less about the job impact of closing some plants if we are creating manufacturing jobs elsewhere in the economy. This will entail some creativity. For example Bombardier (Canada) is the only major player in N. America for subways, but we can make the subway contracts contingent on US production. This is what the Chinese do. Their big subway contracts (and they are BIG) entail production at Bombardier Changchun, not in Canada. The Chinese stimulus package is 7% OF GDP. Imagine that. It is like a $3 trillion infrastructure stimulus package in the US!!! This sort of public investment can allow GM to shuck some jobs without going under, while opening up similar jobs elsewhere in the country. Having to move is a lot less horrible than losing a good job and going onto unemployment with no future prospects.

Publius,

Your argument hinges on the claim that a bankruptcy would be more painful today than in a year or two. This seems to be false for several reasons.

First, the condition of these companies continues to deteriorate. They have bad labor agreements, bad management, and bad products. Chapter 11 can help with the first two. But these are critical. Right now, these firms are bleeding money. Restructuring can staunch that bleeding by renegotiating the bad contracts which both labor and management enjoy.

Second, their competitors are using those weaknesses to grab market share and position. Waiting will only exacerbate that and make eventual recovery less likely.

Third, a $25 billion loan while collapse seems inevitable sets up huge incentives for all parties to try and secure their own positions. These perverse incentives can only accelerate the current decline.

Fourth, Chapter 11 gives a well defined structure for dealing with complicated issues like dealer networks. There's no credible way to negotiate across the patchwork of state laws without that kind of known structure.

The primary question for the general welfare in these areas is what plan has the best chance for preserving a local auto industry. An assisted Chapter 11 seems to be the best chance that this industry has. Like a critical surgery, waiting while the patient deteriorates is not a good way to avoid pain, it simply weakens the patient and decreases the chance of ultimate survival.

The choice isn't between equal pain now or later, it's between a smaller pain now or catastrophic pain later.

tomtom,

A sale to China seems like an ideal solution. But if a restructuring goes through, GM will be a very attractive property which will have a much easier time getting financing on its own. The primary reasons it's market cap is so ridiculously low are (1) labor agreements (current contracts and pension commitments) (2) management (3) the mess of it's dealer network.

Still, if China did buy it, they'd have even more more reasons than the Japanese firms have to keep production in the US. Given China's superior access to capital, it is likely the best hope for keeping those jobs around. Sadly, I don't know which party would be screaming most loudly about the horrors of China buying this "American icon".

The other thing you're ignoring, publius, is the consequences of creating a massive incentive for continual political venality. GM is a bloated, rotting corpse of a company, but it's a bloated, rotting corpse that's very connected politically, from both the management and labor ends. If Congress approves a bailout now, to deny another bailout a year down the road when the company burns through this $25 billion will become even more difficult for any member of Congress with a significant number of GM employees in his or her district (and that's a lot of members of Congress), because opposing continuing bailouts will be harder once there's a precedent. As any psychologist knows, it's harder to cure an addiction than to prevent it from developing in the first place - I'd rather GM die the death it deserves now than get into a cycle of annually bleeding the public till for more money. Will it hurt? For damn sure. But it's not like the company's going to completely disappear if it goes into bankruptcy, and as tomtom and others have suggested, there are other ways to spend $25 billion that would provide additional jobs to replace those lost in the downsizing of GM AND create products of lasting value to society (as opposed to more crappy cars that nobody wants to buy).

Only the prospect of a bailout forces the automobile crisis to be right now, so the argument that we can't let them go under right now fails. They wouldn't, if we told them to go pound sand.

This isn't a bailout of GM, I think, it's a bailout of the UAW. It's meant to keep the situation from deteriorating so much the UAW has to renegotiate contracts that are part of what makes GM uncompetitive. That being the case, and given who's running the government now, there's not a chance in hell GM isn't going to get bailed out.

This isn't a bailout of GM, I think, it's a bailout of the UAW.

Which is why the heads of the Big Three are on the Hill begging for this. Cause they are so in the pocket of UAW. Yeah, right.

Save two companies and let the other one fail.

Why do we need to save all three?

Supply and demand. Reduce supply in a fixed market and the remaining companies see increased sales, et cetera, et cetera.

Let Ford fail. I don't like their commercials. A good enough reason in my book.

Besides, I get a little annoyed with complaints about wasting $25 billion. First, it’s technically a loan. But even if it’s completely lost, it’s not all that much money.

I think we’re losing track of the fact that this is not $25B – this is another $25B for a total of $50B. They just got legislation for $25B in low interest “retooling” loans in September. Two months later and they want another $25B. $25B here and $25B there, at some point we’re talking real money…

And if the number of employees and impact on supply chain employees is a significant factor, I can’t wait to see the conversation here when the decline in consumer spending hurts Wal-Mart and their 2 million plus employees and gi-normous supply chain.

Which is why the heads of the Big Three are on the Hill begging for this. Cause they are so in the pocket of UAW. Yeah, right.

It does not follow that because the management of the Big Three does not want to declare bankruptcy, the bailout does not primarily benefit the membership of the UAW. Legacy costs are one of the main reasons the Big Three are in trouble, for which the UAW and management share responsbility, and a good portion of any bailout package would go toward paying off those costs.

I'm sure the UAW and management are both happy to hold off on the bloodletting that would result from the company going bankrupt if they can get the taxpayers to pick up the tab.

Xeynon, I'd agree with that, but our libertarian laws must be obeyed banner holder Brett, argues that "This isn't a bailout of GM, I think, it's a bailout of the UAW." As I said, I'm agnostic about the bailout, and if there are 10 reasons against and 5 for, or even 5 against and 4 for, I would say no bailout. But trying to make it out to be that the bailout is simply an appeasement deal for UAW is less an attempt to try and get at the reasons for and against and more an attempt to blame this on UAW to the exclusion of other factors.

It would be interesting to see what the state of the industry would be in if the company were employee-owned.

All of this prompts me to ask a couple of questions.

GM to the side, do we think it's important, at all, to retain manufacturing as a sector of our economy?

If so, what would be a good way to make that happen?

Thanks -

Penn Central went belly up and we nationalized them, turned it into Conrail, and sold them at a profit...well, twenty years later.

Bankruptcy would be the best option - followed by an asset sale to China. If we continue to pour all of our resources into propping up the dinosaurs there will not be enough left to invest in new green technologies. Let's invest in some of the startups with electric, hydrogen and hybrid autos. There could be substantial credits given for relocating to old GM/Chrysler plants and hiring displaced auto workers. It will be painful - but lets get it over with.

The UAW needs a little tough love. It derailed the Cerberus deal at Delphi. Today GM suffers a loss of about $2,000 per vehicle sold. On the other hand Toyota whose employees are not part of the UAW earns a profit of about $1,200 per vehicle sold. If GM was able to operate with labor prices near Toyota’s it would have pocketed an additional $29,715,200,000.

GM bailout nonsense

Good question, Jane. But why not apply this same solution to bankers? I see a geat deal of social value having displaced bankers tune up the windmills.

My question is this: Why do "solutions" that propose putting retired workers (cut pensions and health benefits, i.e., expropriation) and current workers (layoffs)on the chopping block but not past or current executives (let's be frank, expropriation)even one iota of credence?

russell: In reply to your query, I don't know. Given the reality of peak oil, the mass industrial model of production may be a thing of the past. For what it's worth.

There is a good article in the NY Times explaining why GM would go straight to liquidation instead of getting to reorganize under a normal chapter 11. It is also unlikely that the Chinese would buy GM given the problems in its own auto industry.

Given that a normal chapter 11 is most likely impossible, and the fact that a liquidation of GM would cause enormous pain, suffering and social dislocation, I think that a tailor made Publius referred to is the last bad option.

It's worth mentioning that Ford and GM have thriving overseas operations which bring income in, help the trade balance, and perhaps most importantly, provide some of the best products and brainpower that's available. In contrast to their American operations, Ford of Europe is on a roll with a lineup of smart, efficient vehicles. I'm very leery when pundits (not necessarily you) speak of turning over the leadership of the big three to outsiders. These are very specialized companies. How about a change in the board of directors, coupled with design requirements which would force the company to adopt more progressive policies - within reason? If you want to kill them, just try and force pie-in-the-sky items like mandatory electric vehicle conversions on them.

But more to the point, historically cars for the American market have been dumbed down, because it's lucrative and they can get away with it. It's not just our companies that do it. The Germans in particular have made a point of selling us technology that's a generation removed from what they sell overseas. If Ford simply flip-flopped their domestic and overseas product lines, we'd see everything that we want in a car company. They can do it. We just need to properly structure a program of incentives and rules that limits the low-hanging-fruit approach and maximizes intellegent design (It's a pity that term has been hijacked by the theocons.)

Good lord, are people seriously considering selling GM to the Chinese? Talk about a country with accountability issues! Go on U-tube sometime and see crash tests of Chinese vehicles. There's any number of clips where the "crumple zone" is the driver's body.

Also, Chinese industry has cheap labor as a hallmark. Can anyone seriously imagine that they'd succesfully mesh with a company with the highest labor rates in the world (for their industry)?

Yeah, let's allow all the car companies to crash, and import most of our vehicles. Then all the U.S. has to do to achieve third-world status is outsource our food production.

There's also the side benefit that we can blame the GOP for the death of stock car racing and NASCAR.

TJ -- would that be "blame" or "thank heartily for a rare public service"?

Okay, every criticism I had of Pub's post has already been made.

I favor the "tailor made Chapter 11." Detroit sucks, and so long as it can depend upon the taxpayers to subsidize its suckery, the sucking will continue. (Sucking cash out of our wallets, verily.)

I'm very sorry for the workers, but it's not the duty of their fellow taxpayers to subsidize those jobs forever. It's just not.

"Yeah, let's allow all the car companies to crash, and import most of our vehicles."

Hooray, we can get quality Toyotas and Hondas for cheap. And if we want crappy cars that look nice we can import Jaguars.

Seriously, I'm happy to entertain the idea that *SOMETHING* is better than nothing, but I haven't seen anything close to the idea that the actual 'loaning' the bad management money with very few string attached is a good idea.

Compare again to the AIG bailout. I don't think anyone has any trouble believing that AIG will be a very profitable going concern by the middle of 2009 and by the beginning of 2010 at the latest. We strongly suspect that they will be so profitable that they will be able to pay back the government loans at what would normally be considered crushingly high interest rates.

Who believes that about the auto companies?

Also I'm not sure you're understanding the magnitude of the destruction of wealth that goes on by having the Big 3 continue operations. They have been ENORMOUS money losers for decades:

Over the past decade, the capital destruction by GM has been breathtaking, on a greater scale than documented by Mr. Jensen for the 1980s. GM has invested $310 billion in its business between 1998 and 2007. The total depreciation of GM's physical plant during this period was $128 billion, meaning that a net $182 billion of society's capital has been pumped into GM over the past decade -- a waste of about $1.5 billion per month of national savings. The story at Ford has not been as adverse but is still disheartening, as Ford has invested $155 billion and consumed $8 billion net of depreciation since 1998.

As a society, we have very little to show for this $465 billion. At the end of 1998, GM's market capitalization was $46 billion and Ford's was $71 billion. Today both firms have negligible value, with share prices in the low single digits. Both are facing imminent bankruptcy and delisting from the major stock exchanges. Along with management, the companies' unions and even their regulators in Washington may have their own culpability, a topic that merits its own separate discussion. Yet one can only imagine how the $465 billion could have been used better -- for instance, GM and Ford could have closed their own facilities and acquired all of the shares of Honda, Toyota, Nissan and Volkswagen.

Read that again. For the amount of money that they have spent getting to the point where few people want their cars and they are on the verge of bankruptcy, they could have purchased outright the ongoing PROFITABLE businesses of Honda, Toyota, Nissan and Volkswagen.

That is losing money on a grand scale. And they've been doing it for 30 years or more. The only reason they have survived this long is because they have worked the government at every single turn for political handouts. The Detroit 3 automakers are the very most classic case other than farm subsidies of how the political clout of business distorts both politics and the market.

Furthermore, what does keeping them afloat mean? It means another year of having thousands of workers make products that consumers don't want. It is the equivalent of paying workers to move sand back and forth. Even if it were to put 100,000 people out of work (which seems unlikely under some sort of modified Chapter 11), wouldn't it almost be better to just straight up give those workers $250,000 each or a special $25,000 per year transition-to-a-useful-job stipend for 10 years?

If we are going to spend an additional $25 billion (and it isn't a loan if there is no realistic expectation of getting it back) why is just throwing it at the company a good idea.

It is the worst liberal "money has to fix it" impulse.

Compare again to the AIG bailout. I don't think anyone has any trouble believing that AIG will be a very profitable going concern by the middle of 2009 and by the beginning of 2010 at the latest. We strongly suspect that they will be so profitable that they will be able to pay back the government loans at what would normally be considered crushingly high interest rates.

Who's this we? Personally, looking at their performance and the fact the the CRE swaps are just starting to tank, I personally think they might see a profit around the fifth of never.

And as far as importing all our cars, there's a term for nations who are incapable of producing their own necessities. It's "client states". I wouldn't think for a national security type that would be a good state of being.

And as far as importing all our cars, there's a term for nations who are incapable of producing their own necessities. It's "client states". I wouldn't think for a national security type that would be a good state of being.

There are lots of car factories in the US that are not owned by the big three. They're owned by Toyota, Hyundai, and friends. If there was ever some national security emergency whereby the United States absolutely required native automobile manufacturing plants to survive, then the government can simply seize those plants. Seizing a few factories seems like an easy thing to do when national survival is at stake.

But this whole notion that we "need" native manufacturing capability for national security reasons is ridiculous. Let's say that we keep GM alive forever with government bailouts for national security reasons. That does not help us in a crisis because everything that GM factories make requires computer chips to run and the vast majority of our semiconductor fabrication facilities shipped out to Asia years ago. If we can't buy chips from Asian fabs, the cars that roll of GM assembly lines literally won't run. But the same people demanding that we keep GM alive for "national security" reasons don't seem to be aware of that and certainly don't seem to have ever raised the issue of semiconductor fabs before during good times. I guess "national security" is only important when it can be used as a prop to keep GM living off of bailouts, zombie-like, forever.

When Sebastian and I agree wholeheartedly on something, the times they are a-changin'.

I am sympathetic to the complexities and human cost inherent in the failure of any one of the Big Three, let alone all of them. But I am not convinced that the money spent on bailing them out, with no credible plan to return to profitability, would not be better spent on the social programs necessary to assist the workers and families who would be affected by the collapse of these companies.

Honestly, the best idea I've heard that involves propping up GM et al in any way was the one that essentially nationalized these companies on a term--say, five years--recapitalizing them on the condition that we use them as an R&D organization for the next generation of truly green vehicles, part of Obama's "Apollo Program" for renewable energy. There's not guarantee that would keep them afloat either, but it has a strong likelihood of producing technologies that will benefit us all for generations to come.

I wish Sebastian would just 'fess up and admit this is all about crushing a large union. Then we wouldn't be treated to assertions that AIG was just a victim of bad luck and the auto industries are bad management sinkholes.

There is a precedent; in the early 70's, the feds bailed out Chrysler. Chrysler managed to pay off the loan seven years early and the US Treasury realized a nice return.

"But the same people demanding that we keep GM alive for "national security" reasons don't seem to be aware of that and certainly don't seem to have ever raised the issue of semiconductor fabs before during good times."

I don't know about "people" but I, personally, think no domestic chip manufacture (or fabrics, or what have you) was a pretty bonehead move also. And I take thirty years of increasing trade deficits as agreement. We do not live in a post-industrial world. YMMV.

"A sale to China seems like an ideal solution."

Look at what happened to MG Rover when Nanjing Automotive bought part of their operations. They didn't keep making cars in Britain. They dismantled the entire factory, shipped it to China, and reassembled it there to be staffed with Chinese labour. This is not some anti-trade speculation, this is what actually happened.

I have no bias against the Chinese, but we already have enough trade problems with them. Allowing them to buy the American car industry's capital at fire-sale prices and ship it over there - giving them maybe 30 years of technology for virtually nothing - is a spectacularly bad idea. I know that thinking about physical industrial capital is out of fashion, but it really matters where that stuff is located.

That anyone would be talking about this as "ideal" strikes me crazy. The stripping of a massive part of the American industrial economy to be shipped to our main competitor is "ideal"?

I talked in a previous comment about the drawbacks with this bailout, but the more I think about it the more it seems like a bargain. The US car industry almost makes money, and supplying the small difference between "almost" and "actually" is probably the cheapest way of keeping all those people who work for it employed. It's all very well to talk about creative destruction, but it's not as if there exist endless jobs for all those auto workers that are just waiting for them to be available. Allowing the US car industry to implode out of pure dedication to market ideals - well, that sounds like the kind of thinking that said that we didn't need to do anything about house prices because the market will take care of it.

That people are talking about a fire sale to China as desirable is seriously scary. Have we not learnt anything at all from the last ten years?

Honestly, the best idea I've heard that involves propping up GM et al in any way was the one that essentially nationalized these companies on a term--say, five years--recapitalizing them on the condition that we use them as an R&D organization for the next generation of truly green vehicles, part of Obama's "Apollo Program" for renewable energy.

I'm skeptical about this. The automakers are large organizations but only a small portion of each of them does research. So what do you do with the rest? I'd be shocked if even 5% of employees were suitable for an R&D organization. GM isn't like AT&T back in the day -- it doesn't have its own Bell Labs. It would be very very expensive to keep paying most of the employees just to keep the research group running.

In fact, I'm a little skeptical that a research organization stitched together from the internal R&D groups of the big three would be successful. R&D is a very challenging endeavor and the incentives that these corporate R&D groups were operating under probably might leave them ill-suited for serious work on green tech. They've probably had a focus on short term minimal risk development which means that the kind of people that want to do really interesting work just aren't there. The institutional culture might also be...problematic.

I wish Sebastian would just 'fess up and admit this is all about crushing a large union.

That presumes that Sebastian actually thinks that. Which, so far as I can tell: facts not in evidence.

Allowing them to buy the American car industry's capital at fire-sale prices and ship it over there - giving them maybe 30 years of technology for virtually nothing - is a spectacularly bad idea. I know that thinking about physical industrial capital is out of fashion, but it really matters where that stuff is located.

What high tech manufacturing technology do you think GM has that does not already exist in China? GM already has factories in China. It is building a $250 million research facility in China to design hybrid cars. The notion that failing to support American automakers indefinitely will cause China to get access to secret technology that they could not get any other way is absurd. If you're really concerned about American competition, you should be begging for GM to completely fail: stopping the construction of that research center will probably do a lot more to limit technology transfer than preventing Chinese companies from buying up pieces of a bankrupt GM.

I don't know about "people" but I, personally, think no domestic chip manufacture (or fabrics, or what have you) was a pretty bonehead move also. And I take thirty years of increasing trade deficits as agreement. We do not live in a post-industrial world. YMMV.

Talk is cheap. Each fab costs several billion dollars to build, let alone operate. What do you think we should have done to keep fabs in the US and how much money would you have been willing to pay to accomplish that? Massive government subsidies to tech companies in CA are not politically feasible -- technicians in CA just aren't real American like Iowan factory farm workers. Plus there's the question of accepting trade sanctions for illegally supporting a local industry at the expense of foreign competitors. The costs could be massive.

It is all well and good to talk about what you wanted to have happen, but unless you have a financially and politically viable plan, talk of your wants is pointless.

It's not "secret technology" so much as it is the actual physical capital - the layouts and machinery of the plants themselves, the designs of every car and every engine. Producing that stuff costs tens of billions of dollars and great expertise that China does not possess in large quantities yet. It's not secret, but it does represent an enormous technological advantage for the US.

As I said it's apparently very unfashionable to think that the location of mere physical objects like factories and industrial machinery makes any difference to anything. The rest of the world does not share this Friedman-esque indifference to location, though.

It's not "secret technology" so much as it is the actual physical capital - the layouts and machinery of the plants themselves, the designs of every car and every engine.

All of this capital already exists at GM manufacturing plants in...China! The Chinese autoworkers that staff those plants already know about the designs of every car and probably every engine. Heck, I'd bet that much of the machinery used in GM factories in the US was made in...China. Please explain to me how giving China technology that it already has can cause problems for us.

More importantly, so what? Do you really think that cars are the pinnacle of high technology?

It is all well and good to talk about what you wanted to have happen, but unless you have a financially and politically viable plan, talk of your wants is pointless.

Hell, I'm just an engineer. My "plan", such as it is, consists of agreeing with Roubini
that the major reason the U.S. is in its current pickle is the large current account deficit we've been running and it's a good idea to stop digging when you're in a hole. Moreover, if he's right, there's no need for a plan. Soon, import substitution is going to be forced upon us. Whether cars, chips, or what have you, we will produce them here because we will not be able to afford imports. I merely think that preserving aa admittedly mediocre starting place rather than absolutely nothing is a good idea.

I'm skeptical about this. The automakers are large organizations but only a small portion of each of them does research. So what do you do with the rest?

Why do you assume that I mean that to be the /only/ thing they do during that time? They have to maintain/create a revenue stream in order to have any hope of returning to profitability. I would think that making this R&D work a condition of a bailout means that we are, in fact, interested in keeping them up and running.

The fact is, though, that they do have fairly large R&D organizations within them that dedicate a large amount of man-hours and resources into developing concept vehicles and new technologies. I don't think it's out of line, if we're going to invest that kind of money in them, to mandate the direction of that research and use their product lines as a way to "test-drive" new tech for higher mileage and viable alternative-fuel vehicles. If the taxpayers are going to absorb the cost of GM producing vehicles that are losing them money, I'd rather we be spending that money on unproven energy-efficient vehicles and bold green ideas than ones that have been unquestionably demonstrated as both inefficient and unprofitable.

Nice Horsey cartoon, although the comments following seem like a bit of a replay of this blog

From the comments to the Horsey cartoon:

Keep in mind this was the company that manufactured an all-electric car in the early 2000s FOR WHICH THERE WAS A WAITING LIST. They refused to sell them outright, only leased them, and fought the California Air Quality Board to eliminate the requirement for zero-emissions vehicles in the state. They won, repossessed all the electric cars and smashed them into scrap metal. The lessors BEGGED and FILED PETITIONS to keep their cars. GM refused, and continued destroying them until none were left.

For that alone, GM should be squashed like a bug. Bail out Ford and Chrysler if need be, but feed GM to the vultures.

For that alone, GM should be squashed like a bug. Bail out Ford and Chrysler if need be, but feed GM to the vultures.

Really they all should be denied. It may be just gilding the lily but the fact that all 3 CEOs flew on company paid private jets to the hearing really doesn't help their case. If a ran the committee hearing I would have sent them home then and there and told them to come back when they have cut excutive perks like that before asking for $25B.

Ah, yes. Sure, we'll turn the Midwest into Flint writ large, but the schadenfreude will be worth it! Ha! Take that, nose!

we'll turn the Midwest into Flint writ large, but the schadenfreude will be worth it! Ha! Take that, nose!

Right because it's not like there is such a thing as unavoidable consequences. TANSTAAFL.

Speaking as a Midwesterner, and a native Michigander -- albeit one who hasn't lived in Michigan since he was a wee thing -- I say, let'em fail. I wouldn't be averse to some kind of nationalization/refocussing plan as mentioned by Catsy upthread but otherwise: these are the companies that, when the market was ripe for fuel-efficient green(er) vehicles, decided to pump the hell out of the SUV and deliberately close their eyes to the onrushing future. The institutional culture -- or at least, the intellectual capital -- is bankrupt as all hell, and it doesn't deserve to exist any more.

So take that $25 billion, screw the companies, and give it straight to the workers. I'm dead serious. Retraining, expanded college loans, venture capital, whatever; but let the management starve.

I don't understand where the argument for keeping them around comes from.

A free market analysis definitely says let them fail.

A good left wing analysis would be that the government is supposed to help the PEOPLE not the corporations, so unless propping up the corporations is the best way to help the workers, the corporations should be allowed to fail.

Pretty much any economist you ask would suggest that the reality is that all of the Detroit auto manufacturers are going to have to shed workers by massive amounts to become going concerns. The bailout and the testimony around it suggests that the political aim is to avoid losing jobs. $25 billion isn't going to serve that aim. So far as I can tell it isn't going to serve that aim even for a few months. But it is more than enough to fund a good Chapter 11 bankruptcy, and it is more than enough to pay off huge sums of money to the hardest hit workers.

So what they heck are we doing?

It is like some sort of weird industrial fetishism to keep the money losing brand "GM" around.

If the Big 3 fail, the suppliers fail. After that, cascade effect. Its not nearly as simple as letting them fail and picking up the pieces.

That is why you do Chapter 11, so that everyone can transition in an orderly fashion.

That is why you do Chapter 11, so that everyone can transition in an orderly fashion.

That's the problem. There's enough suspicion that GM could go straight from Chapter 11 to Chapter 7 that I'm leery of letting them go down that road unassisted.

If GM goes into Chapter 7 bankruptcy the various componenets of the company will go to the highest bidder. That is the law, because it reimburses creditors at the highest level, nd the court's duty is to attempt within reason to make creditors as whole as possible.

When people discuss selling GM to the Chinese, it isn't like we would prefer the Chinese as the buyers. It is instead the opinion of some analysts that the Chinese would be most likely purchaser, with India next behind. In a Chapter 7 bankruptcy if a Chinese (SAIC most likely) or Indian (Tata) buyer offers the most money the court would be ublikely to turn them down for nationalistic reasons. That isn't part of the criteria in standard bankruptcy law.

GM has a lot to offer a Chinese or indian buyer:

1. Good brands with established products and international reputations, particularly Chevy and Cadillac (and Buick in China).

2. The Volt technology

3. Profitable overseas operations, especially GMDAT (Korea) and GM Brasil that provide entree into large markets.

4. Some pretty decent cars. They don't just make gas guzzling SUVs.

5. An incredible amount of technological knowledge.

If GM is sold to an overseas carmaker the production won't leave the US right away, because some US plants are quite good and with the legacy pension, health care, and work rule entaglements stripped away they would be profitable. However, production would go overseas in over time, and the threat of moving production overseas would lead to much less generaous UAW contracts, much more similar to those enjoyed by Toyota and Honda for US plants.

Before going to bed, I checked in over here after addressing the subject of bankruptcy in an older thread, hilzoy's "I'm Baffled."

Since I am aligning myself with publius' sentiments that it is better to do something than nothing, I wanted to reiterate what I said over there about bankruptcy being a fool's errand.

Namely:

I would not want to buy a new car or truck no matter how much I wanted it, no matter how much the price was slashed, if I knew the maker of that automobile was in bankruptcy. Would you?

An automaker is not like an airline, where you fly their plane -- perhaps savoring the special low rates bankruptcy caused them to charge -- land and go about your business.

When you buy a car, you see it every day in your driveway. You touch it every day. You are obligated to pay for it every month for, usually, five or six years.

You are shelling out thousands of dollars over this time -- $15,000; $25,000; $35,000; $45,000. Most people are making their second biggest purchase outside of buying a home.

You want faith in the company you are buying that product from. You want to know it will be there tomorrow.

You want to know that 3-year, 36,000-mile bumper-to-bumper warranty -- 5-year, 100,000-mile powertrain -- means something.

And as someone noted upthread here, Chapter 11 would require capital for GM to restructure itself -- lack of capital is the very reason it is seeking a bailout.

Bankruptcy just does not make sense.

Not being in love with the idea of a bailout, either, I was intrigued upthread by Catsy's proposal of nationalizing the Big Three -- or simply GM -- as a way of keeping it alive and making it a viable member of industry.

Let's not fool ourselves into refusing a bailout because that sort of thing does not occur in a free market. Or did we all do a Bobby Ewing and wake up just now to find out the past two months were a dream?

We have nationalized Fannie and Freddie and some of the banks that would have otherwise went under. Princely Wall Street firms such as Goldman fully took advantage of the recent turbulence and became pseudo banks -- no longer pure investment firms -- in order to enjoy the cover of government protections.

The Wall Street bailout was given with the intent of loosening the credit markets, yet I see no real sign of that. I did see, however, AIG taking its employees on a party-hardy junket that clearly showed it needed taxpayer money.

So let's pile on bloated, no-good General Motors -- sell 'em to the damn Chinese, where, a bank rep who recently visited the dealership told me, the nouveau riche over there have fallen in love with Buicks. The irony.

My populism blood is too rich to applaud the failure of any company in this country that will put a million more people -- and probably more -- on George Bush's unemployment rolls.

And we think the Not-Yet-In-A-Recession Economy is fragile now. I wonder how Dow 4,000 sounds.

Good night.

However, production would go overseas in over time, and the threat of moving production overseas would lead to much less generaous UAW contracts, much more similar to those enjoyed by Toyota and Honda for US plants.

My understanding, based on some simple Googling, is that wages and benefits paid by Toyota and Honda in US plants is not much different than what is paid under UAW contract.

Even more so with recent concessions made by the UAW.

Here's my prediction.

If GM is dissolved and sold off to the highest bidder, it will break the back of the UAW.

Toyota and Honda currently keep their wages and benefits at close to par with what's available under the UAW so that their workers won't unionize.

Why would they? They get what the guys in the UAW get without paying union dues.

When the union is busted, folks working at Toyota and Honda will see their compensation go down. Those plants are (intentionally) in places with lower costs of living. The cost of living is lower because there ain't much else going on. When there isn't a union to compete with, Toyota and Honda will basically be competing with WalMart for labor.

Thanks -

My populism blood is too rich to applaud the failure of any company in this country that will put a million more people -- and probably more -- on George Bush's unemployment rolls.

I hear that.

Couple of final data points from me.

We can find $700 billion to backstop the financial industry, but $25 billion to backstop the auto manufacturing industry makes our heads explode.

I'm not saying we should or shouldn't "do something". I'm just putting two numbers side by side.

Thanks -

I hope people don't mind if I repost a ">http://www.washingtonpost.com/wp-srv/nation/interactives/healingfields/"> link I posted on a different thread - there seem to be lots of GM conversations going on here at Obsidian Wings, and I just hope people remember what unions fought for. It's a video of what goes on in Virginia, a "right to work" (union busting) state. Obviously, universal health care is the answer. But in the meantime, let's swear off of the "unions are so greedy" meme. Sure, they've made mistakes, but we just shouldn't have the situation that video describes in this country.


Yer link is busted, Sapient; you want to go here.

Thank you, Gary. Just wanted people to see it.

A free market analysis definitely says let them fail.

There is no free market in the automotive industry. A free market analysis of the auto industry is like a veterinary examination of a brick.

A good left wing analysis would be that the government is supposed to help the PEOPLE not the corporations, so unless propping up the corporations is the best way to help the workers, the corporations should be allowed to fail.

This is better. What we, the leftist justice league of America, are trying to do here is keep people employed. In a free market, unemployment is an unnatural phenomenon. In free markets, labor markets clear. But labor markets aren't clearing right now, and cutting a huge number of jobs is not going to help.

The question is what is the best way to keep people working until labor markets come closer to clearing again. Government can always act as the employer of last resort. Nobody can be unemployed if the government decides they will not be allowed to. But I see no sign that people are ready to take that step yet. They'll give a brazilian dollars to banks to....well who knows what, but people don't seem to be at the point that they'll accept the government paying someone to dig a hole and the next day paying someone else to fill it back in.

So if you aren't going to let government act as employer as last resort - and that would be my choice in this situation - it seems like a really bad idea to let an already skyrocketing unemployment rate skyrocket even faster. That would be a great way to end up with the worst economic disaster since 1873.


Couple of final data points from me.

We can find $700 billion to backstop the financial industry, but $25 billion to backstop the auto manufacturing industry makes our heads explode.

I'm not saying we should or shouldn't "do something". I'm just putting two numbers side by side.

Thanks russell. I'd been wondering about that too. I've been wondering why we keep talking about two different hypothetical realities:

1) Banks on Wall St. get $700 billion, Detroit Big-3 get $25 billion, consequences ensue.

vs.

2) Banks on Wall St. get $700 billion, Detroit Big-3 get zippo, consequences ensue.

and for some reason the third possibility:

3) Banks on Wall St. get $675 billion, Detroit Big-3 get $25 billion, consequences ensue.

does not seem to be on the table. Why is that, anyway?

The logical flaw in your question, TLTIABQ, is the assumption that all the same people who are objecting to the auto bailout (or putting strict conditions on it, like me) did not also consistently object on principle to the financial bailout. I don't recall if I commented on them anywhere, but I've been harshly skeptical of the $700 billion giveaway and its effectiveness myself.

I admit that part of my leaning towards the conditional term nationalization I mentioned upthread comes from the opportunity it presents to advance the science of clean energy and efficient vehicles as much as the space race did for other sciences in its time, and with all the potential attendant trickle-down technologies that we take for granted today.

People don't want enough GM cars to justify the number of people the GM has.

It is that simple. End of story.

It would be better to pay them $250,000 each to find productive jobs than start (and lets not pretend it is anything but a start) by throwing $25 billion dollars at the 30 year proven losers of the Detroit 3 who have pretty much only made money off of SUVs.

Paying people to make useless things is ridiculous. If the government is going to pay them anyway, help them find jobs in useful companies.

Paying people to make useless things is ridiculous

Is it more or less ridiculous than having people who want to work sit at home doing nothing?

People don't want enough GM cars to justify the number of people the GM has.

I don't know if this is true or not, but I find it completely believable.

I also think it's completely reasonable to begin a discussion of how to spend $25 freaking billion dollars with the question, "Why is that a good idea, and what do we get out of it?".

There are lots of reasons why GM is in a world of hurt. We can all pick our favorite villain, if that's what we want to do. I probably have some of my own.

The bottom line is that the range of ways it can possibly play range from "pretty crappy, at least in the short term" to "might just sink the whole US economy". Not intervening at all, IMO, tilts the table toward the latter.

GM executives made dumb decisions. Part of the issue there is that they made the decisions they were incentivized to make. Want executives to be wise and think long-term? Pay them for doing that.

The UAW has arguably been reluctant to be flexible regarding compensation and work rules. Part of the issue there is that the only way labor gets a place at the table in this country is if they put a gun to everybody else's head. Want to get rid of unions? Fix that, and we won't need them.

And, of course, nobody's buying cars because nobody can shake any money out of the banks. At this point, there should be at least $300 billion somewhere in the system, but for some reasons the banks prefer to spend it on things other than making loans.

FUBAR. Potentially a perfect FUBAR storm.

But doing nothing WILL NOT make it better.

Thanks -

"The logical flaw in your question, TLTIABQ, is the assumption that all the same people who are objecting to the auto bailout (or putting strict conditions on it, like me) did not also consistently object on principle to the financial bailout."

But the logical flaw in that is: Many of the same lawmakers -- the same Bush Administration -- that yelled from the treetops about how urgently needed the Wall Street bailout was are now reversing field and turning their back on Detroit.

Have to run to a meeting, but correct me if I am wrong: I remember Congress legislating the $700 bailout for Wall Street. But I do not remember it giving the bank CEOs the same browbeating it gave the Detroit CEOs (not that they did not deserve it).

Seems to me Congress was just as worried about getting home to campaign as it was about bailing out the banks, creating a whole different (selfish) level of urgency on their part.

"Is it more or less ridiculous than having people who want to work sit at home doing nothing?"

First of all, it is slightly less ridiculous, because at least those people aren't actively spending money building cars no one wants. GM cars aren't just labor, they are a waste of electricity, materials and shipping too.

But the problem in this discussion isn't that I (or pretty much anyone else) am proposing that 'nothing' is a good response. *Nothing to save GM as a company* might be a good response, but that doesn't mean that *nothing to help current GM workers* is a good response or that *nothing to mitigate the damage of GM instantly vanishing* is a good response.

The constant conflation of those positions (starting with publius' post and continuing all over the place in the comments) is exactly the kind of distration-in-rhetoric that the left complained about in the "if you oppose the Patriot Act you must love terrorists" discussion.

There is, again, practically nothing in Sebastian's last comment with which I can disagree.

Yikes, when did you become so reasonable Catsy? ;)

There is, again, practically nothing in Sebastian's last comment with which I can disagree.

Nor I.

Thanks -

Yikes, when did you become so reasonable Catsy?

Ask my wife, she may be willing to respond to this more colorfully. ;)

Cats and dogs living together...MASS HYSTERIA!

Sebastian,

Close to 4 million Americans in 2007, the last year full-year sales figures are available, disagree with you that GM workers are making "useless things."

The precise number is 3.87 million.

Moreover, saying, "I don't understand where the argument for keeping them around comes from," is ignoring, among things, this.

Working at a Chevrolet dealership, albeit on the pre-owned side, I am not so naive as to ignore this.

Or this.

As those two bad-news links show, the current car contagion extended to vaunted Toyota and Honda in October -- sales down 23 percent and 25 percent, respectively.

That suggests -- that while it's plain that GM's problems are huge, rooted in bad management decisions and labor challenges that the Japanese automakers don't face -- the current credit crisis has brought General Motors in front of Congress asking for financial help.

And despite all of the bad news, as that second bad-news link reports, October's devastating overall sales figures revealed additional evidence GM is not "useless."

Namely:

*** Chevrolet Malibu retail sales were up 129 percent. For the month, Malibu total sales reached nearly 11,000 vehicles. For the year, Malibu retail sales have totaled nearly 98,000 cars, up 134 percent from year-ago figures.

*** The all-new Pontiac Vibe recorded a 6 percent total sales increase in October. Almost 42,000 Vibes have been sold this year, up 36 percent from the prior year.

*** Saab retail sales were up 7.4 percent compared with a year ago, driven by the strong retail performance of the 9-3, which was up more than 16 percent.

*** GM sold 44,500 Chevrolet Silverado, GMC Sierra and Chevrolet Avalanche full-size pickups in October, further solidifying its segment leadership.

And lastly:

*** GM hybrids continue to build sales momentum and the company has broken through the 10-thousand vehicle sales mark. A total of 1,496 hybrid vehicles were delivered in the month. Hybrid sales included: 372 hybrid Chevrolet Tahoe, 193 GMC Yukon and 230 Cadillac Escalade 2-mode SUVs delivered. There were 325 Chevrolet Malibu, 22 Saturn Aura and 354 Vue hybrids sold in October. GM has sold 10,549 hybrids so far in 2008.

The heavily R&D-invested Volt, could be a game-changer and quite useful when it comes out, targeted for 2010.

So there are facts on the side of keeping GM (and the Big Three) alive -- along with millions of jobs.

If it were so crucial to keep AIG and its Wall Street brethren alive -- if only to avoid a financial collapse -- I wonder why you think the death of GM would not precipitate such a crash and not deserve a course of action that would prevent one.


As those two bad-news links show, the current car contagion extended to vaunted Toyota and Honda in October -- sales down 23 percent and 25 percent, respectively.

Another data point indicating that the Big 3 are not the only ones with a big problem selling cars - Yves Smith points out via an NYT article that imported cars are effectively being warehoused dockside after unloading at Long Beach, CA rather than being trucked to dealerships inland:

And for the first time, Mercedes-Benz, Toyota, and Nissan have each asked to lease space from the port for these orphan vehicles. They are turning dozens of acres of the nation’s second-largest container port into a parking lot...

So I wonder what is being done to crush those German and Japanese unions which are pulling down Mercedes-Benz, Toyota and Nissan with their uncompetitive wages and benefits?

Some additional news in our edition of All Quiet on the midWestern Front:


Obama transition team examining possible plan for a pre-packaged Ch 11 BK.

I think the idea is to let one or more of the Big 3 go into Ch. 11 bankruptcy with the fiscal assets already in place to ensure that they don't slide into Ch. 7 liquidation before the process begins.

h/t: Nemo

Yeah, I saw something on the news the other night about what LeftTurn linked -- imports taking up acres and acres of dockside space, not being transported to dealerships.

Which leads me to believe the dire straits the auto industry is in right now is systemic.

After all, Honda, Toyota, Nissan and Mercedes aren't going anywhere.

So, yes, the Big Three -- and GM in particular -- must address all sorts of challenges for their long-term survival. But in the current climate, I think it would be devastating to let one of them die.

No one can remember a tougher year for the car business -- the first half of it consumed by the gas crisis; then once that "passed," the credit crunch took over, a crisis with no end in sight.

It will end. But we might be deep in the throes of a 2009 recession then -- CNBC this morning was talking about one that would last longer than a year.

I sarcastically wondered how Dow 4,000 sounds upthread. But GM dies, and excuse any hyperbole, 1 million workers hit the unemployment line. On. The. Same. Day.

No one really knows how extensive the economic effect the death of General Motors would be. But I think its reach is more far-reaching than the obvious.

I had a customer a couple of Fridays ago who bought a 2003 Jeep Liberty. She has worked as the office manager of a dentist up the street 20-some years and told me -- due to the closing of the local Chrysler plant -- their patients have had to forgo care, and business is down (their dental plan limiting them to certain dentists, hers being one, now they have no dental plan). We have a GM plant nearby -- they make the Saturn Sky -- it's down to one shift, and if it goes, there will be a similar trickle-down effect.

My friend who owns a local pizza joint is feeling the pinch. Our dealership and many on the strip have stopped buying Saturday lunch for their employees; Tony got most of this business because he gives everybody good food at a good price. This was a dependable part of his weekend income since the usual office crowd is off.

Pizzeria owners. Dentists. They are not parts suppliers, but they are already feeling the downslide in the auto industry.

Kill GM, and I wonder what happens to our Hyundai store. It is a growing brand, but probably not strong enough to survive on its own without the Chevy anchor.

Dow 4000? A year-plus recession? None of it seems insanely crazy.

So Sebastian, I still wonder:

If it were so crucial to keep AIG and its Wall Street brethren alive -- if only to avoid a financial collapse (or a worse one) -- I wonder why you think the death of GM would not precipitate such a crash and not deserve a course of action that would prevent one.

In this week's edition, Newsweek's Robert J. Samuelson offers How to Bail Out General Motors in a column titled just that.

Samuelson consistently breaks down complex economic issues in a very readable manner, and this piece is the best, fairest assessment of the GM predicament I have read to date.

I wanted to respond to some of Sebastian's more recent comments on this post yesterday afternoon because he seems so anti-GM, but sometimes, thankfully, work gets in the way, and I was too tired when I got home.

Even if one would accept his harsh view on GM's viability, I felt it was worth noting, as I did above, how watching the collapse of General Motors -- Ford or Chrysler, for that matter -- at this point in an economy in freefall would be a risk not worth taking.

So while I would have preferred to do so while the debate was still hot, it's still worth asking:

If it were so crucial to keep AIG and its Wall Street brethren alive -- if only to avoid a financial collapse (or a worse one) -- why would the death of GM not precipitate such a crash and not deserve a course of action that would prevent one?

I'm now counting on Sebastian to oppose any bailout of Citibank, along with the rest of us lefties.

TJ: These are confusing times. "Lefties" are against bailouts; right wingers are for them, if it saves white-collar jobs, of course.

Watching the business channels more than usual, Citibank's under-$5 stock freefall -- Citibank! -- seems to have Jim Cramer, Ali Velshi and Erin Burnett perplexed and concerned.

No worries. There will be a bailout/merger for Citibank, just as there has been for every Wall Street concern -- except Lehman Bros.

The general consensus by economic minds greater than mind is that not bailing out Lehman was a mistake and caused a cascading effect. Cramer opened his show the other night giving a lesson on how the collapse in the financials -- using Citibank's falling sotck as Exhibit A -- is systemic.

I'll go with these economic minds and their opinion that a bank bailout was/is necessary.

I just don't like the way we were rushed into it. I don't like the way Paulson seems clueless on how to implement it. And I don't like the way $250 million or so of the $700 million has already been spent, seemingly ineffectively.

I don't like the way there is a double standard placing urgency and or-else declarations on bailing out Wall Street and not the automakers.


If it were so crucial to keep AIG and its Wall Street brethren alive -- if only to avoid a financial collapse (or a worse one) -- why would the death of GM not precipitate such a crash and not deserve a course of action that would prevent one?

IIRC Sebastian has not come out in favor of saving AIG and IB's, so this characterization is not directed at him - to the best of my ability to interpret the thoughts of other people who are in favor of bailing out Wall St. but not Detroit, it is because of two factors:

(1) Perversely Detriot is being punished for actually doing something useful and productive, because the presumption is that when the Big 3 fail other companies (possibly including a drastically restructured version of one or more of the Big 3) will step in to take over that manufacturing niche.

In other words we will still make cars, just fewer of them and everyone who is a current stakeholder in the Big 3 (including the unions with their pension and health care benefits) will have taken a big loss, but the net loss of jobs won't be that bad because the car making industry will continue, just under different management.

(2) The Wall St. firms have to be saved because they are juggling live explosives - the structured investment vehicles which they hold are so large and so dangerous (in terms of how leveraged they are) that they threaten a much larger share of the total economy than Detroit does. By Wall St. standards the "Big 3" aren't big enough to qualify as too big to fail, and there is no presumption that successor companies can just step in and take up the slack in the wake of major failures on Wall St.

To the extent that this is true it is a tacit admission that Wall St. switched from mark-to-market over to mark-to-myth accounting a long time back and now the only thing keeping us from a true 1930-1933 style hyperdeflation is to keep pretending that our worthless paper is actually worth something and hope that we can play the same game that the Japanese did in the 1990s with a slow ZIRP based deflation. But we can only do this so long as all the current players are frozen in place, sort of like a game of musical chairs where you just stop the music and nobody moves.

In other words, Detroit is a pile of blocks, but Wall St. is a house of cards. You can rearrange the blocks, but you can't move any of the cards or the whole pile will come down. And the perverse part of this is that Detroit comes off worse in this comparison because they are less leveraged and more sustainable in their business model than Wall St. is. It is a sort of reverse triage where the most deathly ill patient is the one who gets all the medicine.

bedtimeforbonzo, may I make a suggestion? Jim Cramer is really not a terribly bright guy. If you follow his stock picks, you'll do worse than if you just invest in an index fund. His understanding of economics (as opposed to finance) is...weak. He's fun to watch and his energy is infectious, but if you want to understand what is happening, he is a bad person to watch. The reason he has a TV show is because he is a very stimulating character, but right now, we could all do with a lot less stimulation and a lot more knowledge.

TLTiA: Enjoyed your comment and analysis.

Re: "Perversely Detriot is being punished for actually doing something useful and productive, because the presumption is that when the Big 3 fail other companies (possibly including a drastically restructured version of one or more of the Big 3) will step in to take over that manufacturing niche."

Other companies like this?

Re: "In other words, Detroit is a pile of blocks, but Wall St. is a house of cards. You can rearrange the blocks, but you can't move any of the cards or the whole pile will come down. And the perverse part of this is that Detroit comes off worse in this comparison because they are less leveraged and more sustainable in their business model than Wall St. is. It is a sort of reverse triage where the most deathly ill patient is the one who gets all the medicine."

Different take: Detroit gets penalized for actually making things.

Present-day America: Manufacturing -- bad; moving money around to the point where no one knows what the hell you are doing with it -- good.


Turbulence: I have issues with Cramer; namely, his recommending stocks one day and shouting sell, sell, sell -- everything! -- the next. A calming influence he is not.

His over-the-top style masks his intelligence. I figure he was smart enough to make millions as a hedge-fund operator and founder (and seller) of thestreet.com during the dotcom boom.

Or he just got lucky.

I agree he can be entertaining, but I can only take him in 5-minute, channel-surfing increments, and could not abide taking investment advice from a screamer. That goes for you, too, Suzy Orman (not a screamer, but a screecher).

I don't need stock advice. All $30,000 I had in the market went to financing my three trips to Russia in 2003-04 and bringing my wife and son over; we celebrated our fourth anniversary Nov. 3.

All that money was in mutual funds.

With the current equity collapse, I figure my 401K can't be much over $1,000. And right now I am having trouble making ends meet, much less putting fresh money in the market -- but it would be nice if I did, and dollar-cost average at these levels.

For an overview on economic issues, Newsweek's Samuelson is as good as they come and the link I posted above provides the most reasonable, sobering analysis on why and how to bail out GM I have read.

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