Thursday, December 11, 2008

Goodness Gracious, Great Balls of Economic Suicide

NEW YORK, New York
-- Jesus. The unthinkable happened. Senate Republicans refused to offer a bridge loan to the Detroit Three (formerly the Big Three). Apparently it violated their "principles."

Unless some extra-congressional funding is found, GM and Chrysler could go bankrupt. Normally, they'd be able to get loans from banks to restructure after filing Chapter 11, but given that otherwise-healthy companies can't even get short-term loans to pay employee wages, there's little chance of that happening now. An inability to restructure after going bankrupt would mean liquidation. The evaporation of the auto industry. And if Chrysler and GM go, so would their parts suppliers. Meaning Ford and the "healthy auto industry in the US" -- foreign makers' US plants -- would probably be in deep trouble. The aftershocks would go well past the US.


The Senate's outright failure to exercise common sense may not spell doom. Hank Paulson probably doesn't want to be the guy who fiddled while both the financial system and the manufacturing sector fell apart, and the Treasury can potentially find some money or persuade the Energy Dept to use the $25 billion earmarked (that merely means it's directed at a certain purpose -- outside of John McCain's head it isn't a four-letter word) for "greening" the auto industry to keep it alive. 

But the facts are what they are: We're on the brink of depression. Every .1% rise in the employment rate sends stocks plummeting and investment running. Losing 1.5 million to 5 million auto-related jobs would have a huge knock-on effect on every other sector of the economy, as if it wasn't hurting enough already. But at least the Southern Republican senators (who have the Toyota, Nissan, etc. plants in their states) didn't have to violate their "Milton Friedman free-market" principles.

Senator Richard "Smug Dick" Shelby: If you see him, kick him in the head.

As if there wasn't a lesson to be learned about letting massive companies fall apart after Lehman... Allowing the companies to undergo managed bankrupty would be one thing. It'd probably be a good solution for the government to agree right now to offer restructuring loans should the companies go bankrupt. Then they could restructure and be guaranteed funding. 

But Congress is doing nothing like that. Not offering any guarantee creates doubt in people's mind about the arbitrariness of the system -- whom will the government bail out? Whom not? There are no ground rules being put in place, and that's going to freeze credit and scare off investment just as it did after Sept. 15. Do the Southern Republicans not realize the sh%$ hit the fan after that date? Don't they know why? Or are they too busy barbequeing and seeking campaign donations from the Toyota and Nissan plants in their states?

But, regarding those plants, it should be noted: Republican congressmen love to say that the US auto industry is doomed because its workers are overpaid, but David Leonhardt did a good job bursting that myth in the Times this week. The Detroit companies have actually aggressively improved the quality of their cars in recent years. In particular, Ford (most popular foreign car in Russia) and GM (Buick is the top foreign maker in China) have become world-beating operations overseas, where they can't rely on cheap oil and undiscerning customers to buy high-margin SUVs. If you want to look at an American product that can compete and be sold internationally today and in the future, it is -- strange to say -- US cars.

Now, in the truest Southern Republican spirit of capitalism (a weird, zealous brand of capitalism that is not really informed by economic thought or data the way an academic or banker's capitalism is, but is vaguely inspired by Christianity, which itself is a strangely socialist religion) , shouldn't any business be expected to want to sell its highest margin products? Can you blame Detroit for selling high-margin SUVs and trucks if they were able to? It's the fault of Congress for not raising the gas tax for years or increase fuel economy standards and forcing them to make the kind of cars Japanese rivals were making for their home market, which had fuel and emissions standards with teeth. Of course, senators faced pressure from Detroit not to adopt those standards, but the buck should stop with the lawmaker, not the lobbyist. Lobbyists will always do what they do; lawmakers should rise above their venal interests.

Milton Friedman died for Rick Wagoner's sins

But even in North America, Detroit has been restructuring and building better, non-SUV cars; Ford and GM (Chrysler's another story, largely because it was bought by a private equity fund with no interest in anything but its financing arm) were on track to profitability before the Lehman-induced meltdown. The Chevy Malibu and Cadillac CTS were the top two cars in North America, respectively, in 2008, leaving only third place to a foreign car (Honda Accord). And Detroit's sales in the battered US market are little worse off (GM, at 40% down) or better off (Ford, at 30%) than Toyota & Co's (35%) this year.

2008: Best car in North America. 2009: Headed to the trash bin?

Should liquidation occur, or a chaotic restructuring where government continues to muddle about with no clear rules, we'll potentially see millions lose their jobs, an unspeakable chain effect of other lost jobs and collapsed companies, and a depression worse than the one in the 30s. All because somebody once told Richard Shelby about a halfway-cracked economist who died a few years ago at the age of Six Hundred and Yoda. And maybe, just maybe, Shelby and his cronies are also influenced by the fact the "healthy auto industry" they keep praising -- Honda and other foreign automakers with plants in Alabama -- donate to his campaigns. Good job, America. I encourage everyone to beat the tar out of anyone still dumb enough to call themselves a Republican if the Big Three are liquidated.

P.S. Senate Republicans and any American who thinks they have any credibility may yet taste a sweet, sweet irony: Given that companies across the world, from Volkswagen to Chinese makers like Chery, are in need of government loans, in allowing US companies to fail in order to let the free market, economic evolution, creative destruction, etc., etc., do their magic, the "naturally selected" winners in this game will be companies lucky enough to be based in countries whose governments aren't ideologues. Sure, let GM fail. But the only reason Volkswagen will be around to gain is because the German government and people have the sense not to let their biggest companies and employers fall apart during a once-in-a-lifetime economic maelstrom.

P.P.S. As the WSJ reports Republicans balked at any loan because of a
sharp partisan dispute over the wages paid to workers at the manufacturing giants.
So the Republican senators are going to let the economy tank because they think US workers don't deserve their salaries. How can these people EVER expect anyone to vote for them again? And yet, in the US, alone among nations, they still will get votes from the very people they want to be poorer. Bravo.

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