Bail Out Capitalism, Not Detroit

by: Vitaliy Katsenelson November 21, 2008 | about stocks: F / GM    

Vitaliy Katsenelson

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Government intervention in the financial system via the Troubled Asset Relief Program made me sick to my stomach, but without it, there is a real possibility that our economy would have come to a screeching halt as trust in the financial system was strained to the point of breaking. Confidence among depositors and banks alike needed to be restored.

The putative bailout of Detroit’s “Big Three” automakers is quite different from TARP, as it will only postpone the inevitable. No matter how much money you throw at them, the Big Three, or at least General Motors (GM), will most likely still go bankrupt. They have managed to lose billions in good times and bad times.

Their business models were broken before the financial crisis hit; the crisis just accelerated the inevitable. The only questions are how soon and how much of the taxpayer’s money they’ll consume before they face their fate, since they have structural problems that will not be resolved until they go bankrupt.

In the 1980s, when the Big Three had virtually no competition, they sold their souls to the devil unions, signing contracts that put them at an incredible competitive disadvantage in today’s environment where consumers don’t have to buy American and have plenty of choices.Unfortunately, these companies are run for and by the unions that have very different objectives than for-profit enterprises. These contracts, for instance, forced GM to run factories at 80% utilization, whether there was adequate demand or not. This, in turn, forced GM to sell cars to car rental companies at cost, killing future demand for its cars as it was only a matter of months before these cars made their way into the used car market.

It is hard to judge the true quality of their management as their unions made management’s job impossible. But management is at fault of being stuck in the past and producing gas guzzlers (SUVs and trucks) when consumers clearly demanded fuel efficient vehicles. To its discredit, GM spends half as much on research and development as does Toyota and for three times as many nameplates. This is not a sustainable business model.

Bankruptcy is a blessing, not a curse. Contrary to common perception, bankruptcy doesn’t mean that the Big Three will disappear. Not at all, and quite the opposite. It will insure that they’ll be around 50 years from now. While in bankruptcy, they will be able to break contracts with unions that are choking them, lower their debt burdens by turning debt holders into equity holders (and regrettably wiping out existing shareholders). Their hands will be untied to right-size by shrinking their operations, cutting costs and becoming competitive again.

Jobs will be lost, factories will be closed, benefits cut. Yes, all these things will take place, but the layers of fat that these companies accumulated over the decades need to be shed to confront the marketplace that is only getting more competitive. Today, the Big Three compete mostly with Japanese and European automakers. But competition will only intensify as the world flattens, the quality of Korean cars improves (in many cases, it already has), and Chinese and Indian cars come to the U.S. and the rest of the developed world.

An automaker bailout is simply bad for capitalism. It will put competitors at an unfair disadvantage. It will cost taxpayers money, which at some point will lead to higher interest rates and higher taxes. It will lower economic growth, and it will send an army of other failing companies lobbying to Washington asking the taxpayers to bail them out (though this will likely happen anyway). Finally, and most importantly, it will raise the likelihood of a Japanese-like 15-year recession. We’ll be repeating their mistakes by not letting failed companies go bankrupt and thereby creating an economy full of zombie-like, semi-dead companies.

Capitalism is what needs a bailout. Though we often don’t appreciate it, capitalism is what made this country great. It allows for the fit to succeed by allowing the unfit to fail. Let’s bail capitalism out by letting the Big Three face their fates and not allowing them to become leeches on the backs of the U.S. taxpayer and our economy.

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This article has 51 comments:

  •  
    Nov 21 02:25 PM
    Very good. Couldn't agree more.
    Reply | Link to Comment
  •  
    Nov 21 02:25 PM
    You hit the nail on the head .let them go bankrupt..
    Reply | Link to Comment
  •  
    Nov 21 02:54 PM
    To those who oppose to Auto Industry Bail out;


    In a perfect world of Capitalism only the strong survive and business takes care of itself. But those are not the ground rules we have been playing under. The government has controlled and mismanaged the credit markets with the introduction of the Community Reinvestment Act and followed it up with deregulating and miss managing Fannie Mae and Freddie Mac to the point that our credit system almost collapsed.
    Add to that the deregulation of the futures market that allowed oil to hit $147.00 per barrel and started a consumer driver recession. It is the governments fault, they caused the problem and they should stand good to fix it. Gm has been in a restructure program for the last several years that should reach a majority of it’s goals by 2010. I’m talking about moving the legacy cost of the retirees to the UAW, which with other cuts and changes would drastically improve Gm’s underlying cost
    per vehicle. Some say that GM built gas guzzler SUV’s and trucks that the public didn’t want, but that was untrue, an out right lie. They were built due to demand for such vehicles, look at your local Toyota lot and see the number of full size V-8 trucks and SUV’s. Toyota saw the demand and was trying to tap into that large market. It was $4.00 a gallon gas that killed it in less than a month and no company can change
    production over in less than 6 months and retool especially with the availability of loans gone. The government subsidized these large vehicles with large tax credits for business owners and drove the demand even higher. Another government mess up. We pay more to other countries in the form of aid to help with our security. Those opposed to helping out our manufacturing base survive the mess ups of the government should ask themselves who will build the tanks and planes the next time we need them. It makes me sick to my stomach to see supposedly grown men and women play these political games and argue over the fate of millions of worker’s future when they caused the problem to begin with. It’s time for our elected officials to get off their, he said she said, politically driven backsides, accept the responsibility that they know is their’s and fix this short term problem.
    Reply | Link to Comment
  •  
    Nov 21 02:59 PM
    Agree 100%

    BTW, I could use a bail out for myself, say $5,000,000 would do it.
    Reply | Link to Comment
  •  
    Nov 21 03:01 PM
    Competitors at an unfair advantage, are you kidding? You're worried more about foriegn auto makers than the workers in the US. That statement alone speaks volumes as to where your spin is coming from. As if imports with cheap labor haven't hurt the domestics. What an ass.
    Reply | Link to Comment
  •  
    Nov 21 03:04 PM
    Since when does capitalism need a bailout? Oh yes, since it has been manipulated and turned into something else that we continue to call capitalism despite the dictionary definition being much different than our present reality.

    Economics always wins. Always. True capitalism (in the Austrian School of Economics sense) is not being practised and hasn't been for a long, long time (even before the crash of '29 it wasn't being practised). Yup, socialistic policies and fiat currency have been massive problems for us and they go back a long ways, even to help create the crash of '29. We were printing money back then (even though we said we were on the gold standard - we printed more money than was actually backed by our gold). We tried bailouts. They didn't work. We recovered despite the government actions, not because of them. Things are much different today... worse.

    The only "bailout" capitalism needs is a reversion back to true capitalism by getting rid of socialistic policies and the fiat currency (and Federal Reserve). The present system is not capitalism and it is bankrupting America and Americans.
    Reply | Link to Comment
  •  
    Nov 21 03:15 PM
    Let's crucify out of jealousy the poor american auto worker for making a decent wage. We need our manual labor folks to understand they should be working for $10.00 an hour and shame on GM for having given American workers a decent living wage for 100 years. The same workers who take that money and drive this great economy of ours by buying homes and TV's and sending their kids to college. Let's pull them back to the third world standards they deserve for such low brow work. This company is looking for a loan, no handouts, to be paid back with interest, because the gov'nment has killed the credit makets and the economy for the next 6 to 12 months. You are so worried about the tax payers, we give more cash to third world dictatorships with no payback for purely political reasons. Give them the loan and get out of the way and they will be fine. Arm chair quarter backs with an ax to grind, you ake my backside hurt.
    Reply | Link to Comment
  •  
    Nov 21 03:16 PM
    Yes - the 'American' way out responsibility - bankruptcy. Stick the retirees, the suppliers and shareholders with the bill. They'll figure it out - and in the mean time everything will be made in China and Vietnam.

    Walk away from your responsibilities - not up to them. It's the American way. Say your sorry and stick someone else with the bill. Nice.
    Reply | Link to Comment
  •  
    Nov 21 03:17 PM
    I agree with Robert Nabloid. The question now is "What free country"? This is not the free country I grew up in. The Federal Reserve in conjunction with the U.S. Treasurer & Wall Street has done enough damage to our country. It needs to end.
    Reply | Link to Comment
  •  
    Nov 21 03:35 PM
    We shouldn't bail out the government, either. They've done the worst job of all.


    On Nov 21 02:54 PM mitchm wrote:

    > To those who oppose to Auto Industry Bail out;
    >
    >
    > In a perfect world of Capitalism only the strong survive and business
    > takes care of itself. But those are not the ground rules we have
    > been playing under. The government has controlled and mismanaged
    > the credit markets with the introduction of the Community Reinvestment
    > Act and followed it up with deregulating and miss managing Fannie
    > Mae and Freddie Mac to the point that our credit system almost collapsed.
    >
    > Add to that the deregulation of the futures market that allowed oil
    > to hit $147.00 per barrel and started a consumer driver recession.
    > It is the governments fault, they caused the problem and they should
    > stand good to fix it. Gm has been in a restructure program for the
    > last several years that should reach a majority of it’s goals by
    > 2010. I’m talking about moving the legacy cost of the retirees to
    > the UAW, which with other cuts and changes would drastically improve
    > Gm’s underlying cost
    > per vehicle. Some say that GM built gas guzzler SUV’s and trucks
    > that the public didn’t want, but that was untrue, an out right lie.
    > They were built due to demand for such vehicles, look at your local
    > Toyota lot and see the number of full size V-8 trucks and SUV’s.
    > Toyota saw the demand and was trying to tap into that large market.
    > It was $4.00 a gallon gas that killed it in less than a month and
    > no company can change
    > production over in less than 6 months and retool especially with
    > the availability of loans gone. The government subsidized these large
    > vehicles with large tax credits for business owners and drove the
    > demand even higher. Another government mess up. We pay more to other
    > countries in the form of aid to help with our security. Those opposed
    > to helping out our manufacturing base survive the mess ups of the
    > government should ask themselves who will build the tanks and planes
    > the next time we need them. It makes me sick to my stomach to see
    > supposedly grown men and women play these political games and argue
    > over the fate of millions of worker’s future when they caused the
    > problem to begin with. It’s time for our elected officials to get
    > off their, he said she said, politically driven backsides, accept
    > the responsibility that they know is their’s and fix this short term
    > problem.
    Reply | Link to Comment
  •  
    Nov 21 03:53 PM
    If the Treasury loaned money to the "Fed" and not the other way around, we would escape the debt spiral.

    Since the "Fed" creates money out of thin air just like the Treasury would, what exactly are these massive and increasing debt payments buying us?
    Reply | Link to Comment
  •  
    Nov 21 03:55 PM
    These sensationalistic articles make me sick and I am tired of loud mouth, uninformed people bashing the home team GM. MitchM you got it right, without a middle class who to we think will support our service econopmy? Drpo0102 also has it right - we are too quick to walk away from our commitments. GM has cut $15 BILLION dollars in cost in the last year and slashed all the fat, negotiated a reasonable union contract, cut salary numbers and benefits as well as slashed production. They make great products now that are as goos as anyone's. If the economy ever comes back they should be able to pay back the money without much trouble.

    Support the home team and stop bashing them with 20 year old data.
    Reply | Link to Comment
  •  
    Nov 21 04:14 PM
    I'd say that article's pretty right on. The problem with GM is they don't make a very good product. How many of you defending them actually own or plan on buying one of their vehicles now? Hummer anybody? Sure that's a practical vehicle. Who could have possibly forseen that a FINITE resource that is the most traded commodity in the world would become expensive? The real shame of course is that the worker suffers because of terrible management. The best thing that could happen would be for GM's factories, assets and workers to be taken over by a company that can design vehicles that people actually want or better yet NEED. You have to think ahead in the auto industry to stay alive.
    Reply | Link to Comment
  •  
    Nov 21 04:16 PM
    actually i would blame the mortgage companies, as they wrote the loans that are going bad, not the banks, and they aren't subject to CRA.. and they are doing it again. but government did contribute to the mess, by not enforing what regulations their were, and by allowing leveraging of $40 (loans)- $1 (capital). and there were other things like refusing to add new regulations so that this mess wouldn't be created. this is just a repeat of old stupid times of the past. every time we cut back transparency in the name of free markets (how can they be free markets with out that?) we end where we are. you would think we would learn.


    On Nov 21 02:54 PM mitchm wrote:

    > To those who oppose to Auto Industry Bail out;
    >
    >
    > In a perfect world of Capitalism only the strong survive and business
    > takes care of itself. But those are not the ground rules we have
    > been playing under. The government has controlled and mismanaged
    > the credit markets with the introduction of the Community Reinvestment
    > Act and followed it up with deregulating and miss managing Fannie
    > Mae and Freddie Mac to the point that our credit system almost collapsed.

    >
    > Add to that the deregulation of the futures market that allowed oil
    > to hit $147.00 per barrel and started a consumer driver recession.
    > It is the governments fault, they caused the problem and they should
    > stand good to fix it. Gm has been in a restructure program for the
    > last several years that should reach a majority of it’s goals by
    > 2010. I’m talking about moving the legacy cost of the retirees to
    > the UAW, which with other cuts and changes would drastically improve
    > Gm’s underlying cost
    > per vehicle. Some say that GM built gas guzzler SUV’s and trucks
    > that the public didn’t want, but that was untrue, an out right lie.
    > They were built due to demand for such vehicles, look at your local
    > Toyota lot and see the number of full size V-8 trucks and SUV’s.
    > Toyota saw the demand and was trying to tap into that large market.
    > It was $4.00 a gallon gas that killed it in less than a month and
    > no company can change
    > production over in less than 6 months and retool especially with
    > the availability of loans gone. The government subsidized these large
    > vehicles with large tax credits for business owners and drove the
    > demand even higher. Another government mess up. We pay more to
    > other countries in the form of aid to help with our security. Those
    > opposed to helping out our manufacturing base survive the mess ups
    > of the government should ask themselves who will build the tanks
    > and planes the next time we need them. It makes me sick to my stomach
    > to see supposedly grown men and women play these political games
    > and argue over the fate of millions of worker’s future when they
    > caused the problem to begin with. It’s time for our elected officials
    > to get off their, he said she said, politically driven backsides,
    > accept the responsibility that they know is their’s and fix this
    > short term problem.
    Reply | Link to Comment
  •  
    Nov 21 04:17 PM
    don't forget the SEC. they allowed the over leveraging to begin with! or regulators who think those they regulate are customers. how dumb was that?


    On Nov 21 03:17 PM sheople wrote:

    > I agree with Robert Nabloid. The question now is "What free country"?
    > This is not the free country I grew up in. The Federal Reserve in
    > conjunction with the U.S. Treasurer & Wall Street has done enough
    > damage to our country. It needs to end.
    Reply | Link to Comment
  •  
    Nov 21 04:21 PM
    not sure if you know much about what they make (and that could be there fault too i suppose). they make some of the most fuel efficient vehicles on the market. the Ford Escape Hybrid is more efficient than most cars. and thats just one example. and the domestics have been in the top 10 in quality as judged by those who buy them. and they sell almost 50% of the entire market, so some y is buying them. Its just is buying thing. Toyota down double digits 2 months in a row, and is expecting a 70+ % percent drop in profits.


    On Nov 21 04:14 PM JSL15 wrote:

    > I'd say that article's pretty right on. The problem with GM is they
    > don't make a very good product. How many of you defending them actually
    > own or plan on buying one of their vehicles now? Hummer anybody?
    > Sure that's a practical vehicle. Who could have possibly forseen
    > that a FINITE resource that is the most traded commodity in the world
    > would become expensive? The real shame of course is that the worker
    > suffers because of terrible management. The best thing that could
    > happen would be for GM's factories, assets and workers to be taken
    > over by a company that can design vehicles that people actually want
    > or better yet NEED. You have to think ahead in the auto industry
    > to stay alive.
    Reply | Link to Comment
  •  
    Nov 21 04:34 PM
    Here, here. Time to stop wasting money propping up broken industries and start stimulating what works and will provide some return on investment... Tax cut and infrastructure spending plan!
    Reply | Link to Comment
  •  
    Nov 21 04:38 PM
    By the way $73.20 per hour is a bit more than a decent wage ($150k per year). Can't you make due in Detroit with $100k per year per worker?
    Reply | Link to Comment
  •  
    Nov 21 05:08 PM
    ?//??/
    Reply | Link to Comment
  •  
    Nov 21 05:15 PM
    @eternitus: That is not the hourly wage they make. That figure is flawed. Go find out how it was figured out. Actual workers start at $14-16 and top out in the high $20's... Not $73...
    Reply | Link to Comment
  •  
    Nov 21 05:33 PM
    I sincerely believe that God is now punishing USA and corporations .
    The evility has been done for last 500 years by the US Governemnt and the corporations alike whether it is unethical wars or slavery or colonism or mistreating people unfairly or promoting pornography or keeping profit above people's rights..
    Remember,the largest profits GM and Ford and many hotel industry get are not from a creative product design but from pornography.
    Reply | Link to Comment
  •  
    Nov 21 05:38 PM
    @vs7578: Huh? Why would God wait 500 years to punish people who are dead, or punish people at all in this life, when punishment comes after death? Not every person supported wars, slavery or colonialism. Why are you talking about hotels? GM and Ford make most of their money on porn? I guess I was uninformed - I thought they tried to make money building and selling automobiles - Glad you cleared that up.
    Reply | Link to Comment
  •  
    Nov 21 05:39 PM
    @mitchm: the solution is not *more* government interference -- they created the problem, and they do *not* know how to fix it!! What we really, really need is government to get the he11 outta our lives and our businesses!! Yes, we do need to be concerned with foreign competition -- chiefly because the government is too busy with their globalism to protect the American worker!! Ever hear of tariffs? Bring 'em back!!

    Constitutionally the federal government is tasked with very few things, chiefly national security. It is acceptable and prudent for it to do others, when they are beneficial across the board...such as highways and bridges, food & drug safety, etc. They have zero business giving entitlements or subsidizing businesses!!

    Our tax code is rife with fraud and abuse. It's high time we abolish the income tax and the property tax, and fund the government solely with consumptive taxes. THAT gives control back to the people over their OWN money...and we can then decide if and when to buy discretionary items, or when not to, to deny funding to the government.

    fairtax.org

    That, along with a Balance Budget Amendment, are needed post-haste!!!
    Reply | Link to Comment
  •  
    Nov 21 06:10 PM
    The truth is that just like our planet and the rest of the universe are at the mercy of the higher nature, the same applies to countries and corporations.There is nothing in Man's control.Every event and person and corporation is under the Divine control.
    GM and Ford unfairly enjoyed 100years producing junk cars . Their creative spirit is zero and so is their enterpreneurship. It wil be better if they quit making cars altogether. Why reward sick and inefficient companies. It is like continously allowing a drunk , intoxicated and a bad surgeon operate on your stomach.
    Reply | Link to Comment
  •  
    Nov 21 06:19 PM
    Balderdash! Your last paragraph, author, does not jive with your belief in "bailouts being necessary" for the finance sector. What hypocrisy! You work in the finance sector obviously.
    Reply | Link to Comment
  •  
    Nov 21 06:25 PM
    My Chevy Tahoe was built in Mexico and fell apart at 40K miles. THAT is the ongoing issue w/ the Big 3.

    My Toyota, now with 210K problem free miles, was built in Indiana. THAT is why Toyota is being chosen over the crap cars and trucks the Big 3 put out.

    My heart goes out to the actual workers who bust their butts each day to make a living. However, the blame points directly at the management of these companies who have driven each one straight into the ground with failed vision and mismanagement to the highest degree. Greed, incompetence, failure, and avoidance.

    Management at the Big 3 made (and did not make) the choices that were needed, and they couldn't even pull profits in boom times. Enough said.

    Screw the taxpayer 'bailout', it's a cop-out and the Big 3 must fail on their own accord. Capitalism says so.
    Reply | Link to Comment
  •  
    Nov 21 06:27 PM
    The 'home team' isn't even putting together the 'Made in the USA' vehicles. That's where you're brainwashed my friend.

    Reply | Link to Comment
  •  
    Nov 21 06:49 PM
    Dude, were you even around in the 80s?

    You stated that, "But management is at fault of being stuck in the past and producing gas guzzlers (SUVs and trucks) when consumers clearly demanded fuel efficient vehicles".

    Really? Thats why there are so many "city" trucks, SUVs, and hummers on the street? Because consumers were clearly demanding fuel efficient vehicles? Really?

    Further, you statee that Unions have a strangle hold on the big three. Really? Have you been to Detroit lately? You should tell that to anyone in the union. Wheres the outcry that CEOs are paid crazy money? Oh no, its mostly the union's fault.

    Oh, but hey its ok to underwrite the financial industry because there is nothing to fix there! Yeah, there is no way the financial industry is going to sodomize the U.S. taxpayer again is there? Last time I checked it was the financial assholes that got us into this mess or wait maybe it was the big three. Yeah, the big three colluded with the oil companies and the mortgage companies so that no one would buy their cars anymore.

    Really,
    Reply | Link to Comment
  •  
    Nov 21 06:58 PM
    GM has 2 cars in Car & Driver's top 10, Ford has 1 and Toyota has NONE. Honda's brand new Fit gets worse gas mileage than the Chevy Aveo & the Chevy Cobalt, which has a more powerful engine. Consumer Reports new paper on Auto quality states that Ford's quality is equivalent to the "good' Japanese companies (Toyota & Honda) and many of GM's vehicles are as good or better, including their mid-size Chevy Malibu.

    You can always spot somebody who knows nothing about the industry or the business when they use the Hummer as if it were the most important GM vehicle. Hummer fills a niche, a very expensive & profitable niche, but was never more than a way to sell very high priced versions of GM's high volume SUVs. Low cost & high profit is typically a good combination.

    I would stay away from Professor Katsenelson's business classes. The truck market sells high volumes (+1MM per platform) of high priced(40K+ per vehicle) vehicles and the GM/Ford/Chrysler brand name is still very strong. The small car market is lower volume(+100K per platform) and much lower priced(<20K per vehicle) and the Toyota/Honda brand name is much stronger than the US brands. Additionally, the $2K/vehicle penalty the US 3 pay for pension and healthcare can't be covered by the margin on a sub-20K price.

    Why would the US 3 invest more heavily in a market where they get a much smaller return? For the 3 months when gas goes above $4/gallon? I am really tired of this moronic argument.


    On Nov 21 04:14 PM JSL15 wrote:

    > I'd say that article's pretty right on. The problem with GM is they
    > don't make a very good product. How many of you defending them actually
    > own or plan on buying one of their vehicles now? Hummer anybody?
    > Sure that's a practical vehicle. Who could have possibly forseen
    > that a FINITE resource that is the most traded commodity in the world
    > would become expensive? The real shame of course is that the worker
    > suffers because of terrible management. The best thing that could
    > happen would be for GM's factories, assets and workers to be taken
    > over by a company that can design vehicles that people actually want
    > or better yet NEED. You have to think ahead in the auto industry
    > to stay alive.
    Reply | Link to Comment
  •  
    Nov 21 07:36 PM
    You are correct. These bail outs sends the wrong message which is if you're big enough, we won't let you die and no other need apply to take their place which will eventually put us as a third rate power.

    The car makers need to make it on their own, if they can't someone will replace them.

    Same with the financials. What is disturbing now is everyone wants to buy a bank to qualify for the money and another angle coming is after they get the money an