I thought that I’d weigh in on the question of what to do about General Motors. GM would like some federal help in getting it through the big economic downturn that we’re in. They claim that if the taxpayers don’t cough up $50 billion in loan guarantees shortly, GM will go bankrupt, and that all kinds of dire consequences will ensue. Personally, I think that our government should just say no; but it should also get ready to say yes to the damage control that will be absolutely necessary once GM goes into the bankruptcy ringer. The potential long term benefits to our world from a GM bankruptcy are worth it all.
As to a federal bailout: I think it would be the worst of all evils. GM management would like some fast federal cash and nothing else, other than an obligation to pay the money back someday. There’s no way they’re going to get that. The Democratic Party now runs the federal government, and big labor and environmentalists now largely run the Democrats. These parties are not going to give GM a pass to do what it wants with public money. GM would be partly nationalized much as the big financial institutions have been, through public purchase of a significant equity stake. A Democratic Congress will almost certainly require this as part of a bailout package, putting the federal government on GM’s Board of Directors.
From there, the Democrats will require that GM management pursue a contradictory and ultimately self-defeating mandate: to build high-efficiency “green cars” and at the same time be very good to the labor unions. Sorry, folk, but Honda and Toyota didn’t get as far as they did with affordable high-tech cars by giving the UAW cushy terms like GM’s lazy management did. By the end of the second Obama Administration, it would be quite clear that a “GM – Federal Partnership” would be a boondoggle. GM would continue building second-rate cars, but now second-rate GREEN cars like the Chevy Volt. The Volt sounds great, but I remember how great the Chevy Vega sounded in 1975, and what a dog it turned out to be (along with its successor, the Chevette). GM would continue losing market share, and thus continue losing money. It would anticipate and require continuing injections of taxpayer money to keep it alive. It would probably also inspire Congress to enact new trade barriers for foreign auto manufacturers and parts suppliers. Trade restrictions would certainly make the unions happy and might keep a zombie GM going. But trade protectionism was a big factor in sustaining the 1930s Depression. I truly hope that history doesn’t repeat itself in the 2010’s.
There’s a lot about the creative destruction of capitalism that I don’t like, but if any capitalist enterprise seems destined to experience it, it is GM. GM got where it is today by locking itself in the past. Way back in the first half of the 20th Century, GM was the new kid on the block, who had to innovate or die. But eventually it got fat, happy and complacent, and remained so despite decades of warning signs that America was changing and that innovative foreign car companies were overtaking it. So, I believe that a bankruptcy court is the best place for GM right now. Bankruptcy does NOT mean shutting the showrooms and assembly lines down. Many big companies have gone through “reorganization” bankruptcies whereby they continue operating while a long-term plan is made to either sell-off the company’s operations, reformulate the company so as to re-emerge as an independent enterprise, or some combination of both.
I could see GM going through the “both” scenario, although it might take four or five years. During that time, the federal government would have to provide GM with short-term loans to keep afloat. However, the bankruptcy judge – most likely a Republican appointee, thankfully – would have the Constitutional power to keep the Democrats from controlling the destiny of this once-great industrial empire. There would be other federal involvement, and it would be expensive – no doubt about it. GM would dump its expensive worker pension obligations on the federal government pension guarantee fund, requiring a big injection of federal funding to meet the promises made to GM retirees. And the City of Detroit would go from near-collapse to collapse; the Obama Administration would obviously have to get Congress to direct funding there to avoid some really ugly stuff.
So, for the taxpayer, the GM situation is a damned-if-you-do and damned-if-you-don’t proposition. However, if we don’t bail them out, the damnation will end sooner, and the possibility of eventual salvation will be thrown in as a bonus. GM holds a lot of assets that would be attractive to foreign-based auto companies. The Toyota “wanna-be’s” like Subaru and Nissan might shell out for one or two of GM’s marketing names (e.g., “Pontiac” or “Buick”) and part of its dealership and distribution network. If Congress could resist temptation to fiddle with the bankruptcy laws so as to require that union agreements be protected in all GM manufacturing plants and warehouses, perhaps Nissan and BMW and Volkswagen would buy up some of the newer and better GM facilities; even Toyota and Honda will need to get ready for their increased market shares.
But the billion-dollar question is whether a “knight on white horse” will show up to buy a “vertical core” GM complete with manufacturing, marketing, product development, distribution and dealership networks, perhaps based around two or three of GM’s better brands (say Chevy, Cadillac and Saturn). Without that deep-pocketed, risk-taking capitalist knight, a lot of GM operations will eventually close for good. There is an apparent candidate that I can think of: China. This would be China’s chance to get into the automobile big-leagues. They have the money and the know-how. They could wait out the US recession until things get better, and then establish a firm foothold in the US and Euro auto markets. They could use GM’s engineering and design assets to better serve their own growing domestic market. If done right, China could have the next Toyota, based upon the firm foundations that GM built.
I’m sure that a lot of Americans would oppose this. And I’m not one of them. Japan has Toyota and Honda, Europe has BMW, Daimler-Benz and Volkswagen, and the USA would probably still have Ford (which might get a boost if GM went into bankruptcy and “controlled-contraction”, just enough to survive). And then China would have “General Motors”; or maybe they’re re-name it “World Motors”. GM to WM, why not. So you and most everyone else in the industrialized world would have a lot of choice as to buying a car. A different choice from 20 or 30 years ago, but still a choice. That’s how capitalism works (when it works).
And if not the Chinese – then perhaps a Latin American consortium led by Brazil might step up. I could see Lula in Brazil making a bold pitch for GM. Brazil is the rising economic star of Latin America (thank goodness that they finally have one!). This might be South and Central America’s chance to finally get onto the world economic map; it could create all kinds of opportunities for economic betterment throughout this long-stagnant region. Or, another bold thought – Saudi Arabia and the Arab oil states might finally realize that their day is coming to an end. The handwriting is on the wall that the oil-economy is not going to last forever. What better way to use their amassed fortunes than to buy into the industry
that now supports them but is eventually going to abandon them as the Middle East’s underground reserves peter out? What better way to guarantee an economic future for their children and help them avoid the siren calls of an other-worldly medieval fate under the auspices of al Qaeda?
Yes, a GM bankruptcy would be rather unsettling, especially given all the other economic chaos now happening. But the long-term prospects for a more prosperous world arising from GM’s ashes are just so incredible, so mind boggling. President Obama will have the chance to become a truly great President if he can grab an opportunity like this and fight off all of the political forces that will try to stop it. If Obama can JUST SAY NO to the UAW, to Nancy Pelosi, to the greenies who think they can run a car company, and to the GM big shots in Detroit who ran GM into the ground and now want to become industrial bureaucrats – if he can withstand the hellish criticism that his former admirers in the press and academia would unleash against him – well, then he has a big chapter awaiting him in the history books of the future (versus the dismissive footnotes that will be afforded to Bush and Clinton).
Jim,
Let me approach your comments from a different standpoint. I have been seriously worried about Henry Paulson’s “economic solution” from the very beginning. I saw him say to his group of advisors before he presented his economic package to GWB that he had “3[!!!] pages of info to present to GWB. I was dumbfounded as I thought then that 3 pages sounded almost “grade schoolish” as a presentation for such a serious and complex problem. If he’d have said 300 pages, I might have thought he had given it at least some more considered study.
Another thing that bothered me seriously about Paulson is that his attitude from the very beginning has been that of an infomercial sales pitch (YOU MUST ACT NOW!!! THIS OFFER IS GOOD ONLY FOR THE NEXT 5 MINUTES!!!) rather than a seriously considered and well-thought-out presentation given to the prez to consider, who would then give some serious thought to what might be a considered solution to the terrible economic problem. True, something had to be done quickly–but the word “quickly” is a relative term. I fail to see that his initial presentation had to be accepted within a day or two. Why couldn’t Congress wait a week, give a semblance of some thorough study to his proposal for a week and then vote on his proposal? Paulson gave me the initial impression that he was seriously afraid that if someone actually looked at what he was presenting, they might begin to see the flaws in it.
And indeed the flaws have show up only too soon. Suddenly, Paulson comes along and said, oh, no, what I said before is wrong; we have to do the opposite thing. Please, give me a break. Paulson gives the impression that he has no clue of what it is he should be doing or is doing.
More specifically with regard to your blog: I think your thoughts, while certainly given some serious consideration to the economic problem, are all speculative. In fact, in one place you speculate on what would happen “by the end of the second Obama Administration.” Obama has not even STARTED his FIRST administration yet!
I have to say that this type of speculation does little for me as life has taught me that it’s futile to speculate so far in advance on issues over which one has no control. Ten million possible versions of your thinking could happen; in fact, ten million possible versions of someone else’s thinking could happen between now and “the end of Obama’s second Administration.” In fact, we really don’t know Obama that well yet to know what he himself might do.
And when it comes to predicting what people might do, I must say that I have found in my life that the more someone knows an individual the less one can predict what he/she might say/do in any given situation–to say nothing of someone one does not really know.
However, I could not agree more with you that “GM got where it is today by locking itself in the past.” GM could have started work years and years ago on cars that work in totally different ways from the way they currently operate; in fact, I recall about 20 years ago reading that the auto companies had all kinds of proposals for retooling their cars. Yet GM (and the other auto makers) would not do anything about these ideas just because it would not consider retooling. I thought then that it was a foolish approach. It could have started retooling years ago on a small basis and by this time would have been in an excellent position to save itself.
I also do not agree that the “greenies” should so easily be dismissed. Perhaps they may not know how to run a car company. But I might think that I’d give them a chance to try. Paulson and his crew seem to have nothing on those who “don’t seem to know what they are doing” (as your comment may be interpreted).
In the end I find Paulson’s handling of this economic situation almost unforgiveable; his lack of serious thought that was given to handling the situation seems almost outrageous. I say give the new administration a chance to actually DO something bef
Comment by MCS — November 16, 2008 @ 3:31 pm
Jim,
Let me approach your comments from a different standpoint. I have been seriously worried about Henry Paulson’s “economic solution” from the very beginning. I saw him say to his group of advisors before he presented his economic package to GWB that he had “3[!!!] pages of info to present to GWB. I was dumbfounded as I thought then that 3 pages sounded almost “grade schoolish” as a presentation for such a serious and complex problem. If he’d have said 300 pages, I might have thought he had given it at least some more considered study.
Another thing that bothered me seriously about Paulson is that his attitude from the very beginning has been that of an infomercial sales pitch (YOU MUST ACT NOW!!! THIS OFFER IS GOOD ONLY FOR THE NEXT 5 MINUTES!!!) rather than a seriously considered and well-thought-out presentation given to the prez to consider, who would then give some serious thought to what might be a considered solution to the terrible economic problem. True, something had to be done quickly–but the word “quickly” is a relative term. I fail to see that his initial presentation had to be accepted within a day or two. Why couldn’t Congress wait a week, give a semblance of some thorough study to his proposal for a week and then vote on his proposal? Paulson gave me the initial impression that he was seriously afraid that if someone actually looked at what he was presenting, they might begin to see the flaws in it.
And indeed the flaws have show up only too soon. Suddenly, Paulson comes along and said, oh, no, what I said before is wrong; we have to do the opposite thing. Please, give me a break. Paulson gives the impression that he has no clue of what it is he should be doing or is doing.
More specifically with regard to your blog: I think your thoughts, while certainly given some serious consideration to the economic problem, are all speculative. In fact, in one place you speculate on what would happen “by the end of the second Obama Administration.” Obama has not even STARTED his FIRST administration yet!
I have to say that this type of speculation does little for me as life has taught me that it’s futile to speculate so far in advance on issues over which one has no control. Ten million possible versions of your thinking could happen; in fact, ten million possible versions of someone else’s thinking could happen between now and “the end of Obama’s second Administration.” In fact, we really don’t know Obama that well yet to know what he himself might do.
And when it comes to predicting what people might do, I must say that I have found in my life that the more someone knows an individual the less one can predict what he/she might say/do in any given situation–to say nothing of someone one does not really know.
However, I could not agree more with you that “GM got where it is today by locking itself in the past.” GM could have started work years and years ago on cars that work in totally different ways from the way they currently operate; in fact, I recall about 20 years ago reading that the auto companies had all kinds of proposals for retooling their cars. Yet GM (and the other auto makers) would not do anything about these ideas just because it would not consider retooling. I thought then that it was a foolish approach. It could have started retooling years ago on a small basis and by this time would have been in an excellent position to save itself.
I also do not agree that the “greenies” should so easily be dismissed. Perhaps they may not know how to run a car company. But I might think that I’d give them a chance to try. Paulson and his crew seem to have nothing on those who “don’t seem to know what they are doing” (as your comment may be interpreted).
In the end I find Paulson’s handling of this economic situation almost unforgiveable; his lack of serious thought that was given to handling the situation seems almost outrageous. I say give the new administration a chance to actually DO something before we start speculating on what it MIGHT do 8 years in the future.
I admit that our economy, perhaps our entire economic system, is likely on the verge of a massive change of some kind. In fact, the massive change has already taken place in some areas–after all, the gov’t already owns most of/portions of banks. And as a side point: I recently read that American Express, the credit card arm, has just this last week become a “bank holding company” to qualify for part of the bail-out money.
Now it seems to me that if a credit card company has done that, who knows what other companies have done to apply for part of the bail-out money. All of which is evidence of the inadequate (to say the least) forethought that was given by Paulson to his bail-out package in the first place. Is it just me or does it seem that with some careful forethought Paulson could have foreseen just such a situation and provided for it.
The most I can hope for at this point is that Obama will be a moderating factor in this whole “bail-out” situation and come into office with some serious recommendations for fixing what is already proving to be a problem that only adds to the problem it was trying to fix in the first place.
MCS
Comment by MCS — November 16, 2008 @ 3:31 pm
Jim,
Let me approach your comments from a different standpoint. I have been seriously worried about Henry Paulson’s “economic solution” from the very beginning. I saw him say to his group of advisors before he presented his economic package to GWB that he had “3[!!!] pages of info to present to GWB. I was dumbfounded as I thought then that 3 pages sounded almost “grade schoolish” as a presentation for such a serious and complex problem. If he’d have said 300 pages, I might have thought he had given it at least some more considered study.
Another thing that bothered me seriously about Paulson is that his attitude from the very beginning has been that of an infomercial sales pitch (YOU MUST ACT NOW!!! THIS OFFER IS GOOD ONLY FOR THE NEXT 5 MINUTES!!!) rather than a seriously considered and well-thought-out presentation given to the prez to consider, who would then give some serious thought to what might be a considered solution to the terrible economic problem. True, something had to be done quickly–but the word “quickly” is a relative term. I fail to see that his initial presentation had to be accepted within a day or two. Why couldn’t Congress wait a week, give a semblance of some thorough study to his proposal for a week and then vote on his proposal? Paulson gave me the initial impression that he was seriously afraid that if someone actually looked at what he was presenting, they might begin to see the flaws in it.
And indeed the flaws have show up only too soon. Suddenly, Paulson comes along and said, oh, no, what I said before is wrong; we have to do the opposite thing. Please, give me a break. Paulson gives the impression that he has no clue of what it is he should be doing or is doing.
More specifically with regard to your blog: I think your thoughts, while certainly given some serious consideration to the economic problem, are all speculative. In fact, in one place you speculate on what would happen “by the end of the second Obama Administration.” Obama has not even STARTED his FIRST administration yet!
I have to say that this type of speculation does little for me as life has taught me that it’s futile to speculate so far in advance on issues over which one has no control. Ten million possible versions of your thinking could happen; in fact, ten million possible versions of someone else’s thinking could happen between now and “the end of Obama’s second Administration.” In fact, we really don’t know Obama that well yet to know what he himself might do.
And when it comes to predicting what people might do, I must say that I have found in my life that the more someone knows an individual the less one can predict what he/she might say/do in any given situation–to say nothing of someone one does not really know.
However, I could not agree more with you that “GM got where it is today by locking itself in the past.” GM could have started work years and years ago on cars that work in totally different ways from the way they currently operate; in fact, I recall about 20 years ago reading that the auto companies had all kinds of proposals for retooling their cars. Yet GM (and the other auto makers) would not do anything about these ideas just because it would not consider retooling. I thought then that it was a foolish approach. It could have started retooling years ago on a small basis and by this time would have been in an excellent position to save itself.
I also do not agree that the “greenies” should so easily be dismissed. Perhaps they may not know how to run a car company. But I might think that I’d give them a chance to try. Paulson and his crew seem to have nothing on those who “don’t seem to know what they are doing” (as your comment may be interpreted).
In the end I find Paulson’s handling of this economic situation almost unforgiveable; his lack of serious thought that was given to handling the situation seems almost outrageous. I say give the new administration a chance to actually DO something bef
Comment by MCS — November 16, 2008 @ 3:31 pm
Jim,
One more thought: I did hear one suggestion by an “expert” who truly might have been an “expert.” I say this because of the sense his comment made about how to “fix” the economy. First, I must admit that I am remiss in citing who this man is as I tuned in late to a program and missed his name, but he was on a PBS station out of Chicago.
His comment on the economy was that the place some of the bail-out money should go is to homeowners with mortgages. His suggestion very specific. Specifically, he said that the interest on ALL mortgages should be reduced to one percent. This reduction in interest should include all those who have mortgages, even those whose mortgages are “underwater” (i.e., the value of the house is less than the mortgage) AND those who are and have been in good standing with their mortgages.
His reasoning went this way: If the interest rate is reduced to one percent on ALL mortgages, then those who are in financial trouble and in danger of losing their homes will be able to keep their houses and all the homes in danger of foreclosure will be out of trouble (at least most of them would be).
In addition, he further stated that even those people who have been and still are up to date on paying their mortgages and may not even be in trouble with regard to foreclosure should have their mortgage interest reduced to one percent; these people will then have additional discretional income to spend on “priming the pump” of the economy and thus helping the economy get back on its feet.
I have heard not one person of the lame duck administration saying one word at all about people, foreclosures, and mortgages. Obama has mentioned that he’s interested in some help to the mortgage holders. But this man’s idea was about the best I have heard–specific and very sensible. Dare I say too good for anyone to even listen to? But with any luck someone in (at least) the new, incoming administration will have heard this suggestion and heed it.
I should really apologize to this gentleman who made this suggestion for not getting his name as he certainly should receive credit for such a good idea.
MCS
Comment by MCS — November 16, 2008 @ 7:02 pm
Jim,
One more thought: I did hear one suggestion by an “expert” who truly might have been an “expert.” I say this because of the sense his comment made about how to “fix” the economy. First, I must admit that I am remiss in citing who this man is as I tuned in late to a program and missed his name, but he was on a PBS station out of Chicago.
His comment on the economy was that the place some of the bail-out money should go is to homeowners with mortgages. His suggestion very specific. Specifically, he said that the interest on ALL mortgages should be reduced to one percent. This reduction in interest should include all those who have mortgages, even those whose mortgages are “underwater” (i.e., the value of the house is less than the mortgage) AND those who are and have been in good standing with their mortgages.
His reasoning went this way: If the interest rate is reduced to one percent on ALL mortgages, then those who are in financial trouble and in danger of losing their homes will be able to keep their houses and all the homes in danger of foreclosure will be out of trouble (at least most of them would be).
In addition, he further stated that even those people who have been and still are up to date on paying their mortgages and may not even be in trouble with regard to foreclosure should have their mortgage interest reduced to one percent; these people will then have additional discretional income to spend on “priming the pump” of the economy and thus helping the economy get back on its feet.
I have heard not one person of the lame duck administration saying one word at all about people, foreclosures, and mortgages. Obama has mentioned that he’s interested in some help to the mortgage holders. But this man’s idea was about the best I have heard–specific and very sensible. Dare I say too good for anyone to even listen to? But with any luck someone in (at least) the new, incoming administration will have heard this suggestion and heed it.
I should really apologize to this gentleman who made this suggestion for not getting his name as he certainly should receive credit for such a good idea.
MCS
Comment by MCS — November 16, 2008 @ 7:02 pm