President Bush’s multi-billion bailout of GM and Chrysler,
festooned with a fig leaf, a faux restructuring
requirement, airily deferred to spring, well into Barack Obama’s
administration, may be the last great expression of
“compassionate conservatism.” Yet, it is neither compassionate
nor conservative. It certainly isn’t going to be very effective
from the perspective of the companies, the plant workers, and the
American taxpayer.
What economist Larry Kudlow calls “bailout nation” has come to
Motown.
What the Bush administration has essentially done is hand out
many billions of dollars with essentially zero leverage over the
final restructuring of the companies including the product lines
and platforms, dealerships, UAW wages, benefits and work rules.
The so-called conditions are so much hot air. Absent a
pre-arranged or “orderly bankruptcy,” the Big Two will most
assuredly become perpetual wards of the federal government with
two of three branches firmly in control of the Democratic Party
and, pari passu, the UAW. There will be no true reform
or accountability. It is the same old same-old.
The President’s plan extends an immediate $13.4 billion loan-with
$4 billion more to come in February-to prevent a “disorderly
bankruptcy.” This money will come from the previously authorized
Troubled Assets Relief Program (TARP) funds, a source of
questionable legal provenance. Is this really what Congress
intended? Theoretically, the auto companies are to use this money
to achieve financial viability. If they do not achieve this happy
state by the end of March ‘09, the loan will be called and
previously disbursed funds will be returned to the Treasury.
Right.
Senator Bob Corker (R-TN), who did yeoman work on the failed
congressional legislation to mandate a restructuring of the auto
firms, released a statement (December 19) indicating that the
“best solution” would have been “definite terms, within a finite
time period, committed to law, that protected taxpayers.”
“Instead, we have ended up with an agreement open to
interpretation, that eliminates the sense of crisis, where
taxpayer dollars are expended and we are left to hope that the
next administration has the will to enforce the tough concessions
necessary to make these companies viable for the long term,”
argues Corker. “Unfortunately, it is clear that stakeholders are
already working to undo those tough concessions.”
What are the odds that (a) GM, Chrysler, thousands of auto
dealerships and the UAW will achieve viability by March, and (b)
the next administration will actually call in the loan if they
don’t? Somewhere between zip and zero, I would guess.
The willingness to put more money into Chrysler, thereby
subsidizing the private equity fund which owns it, is truly
mind-boggling. I have not heard or read a single commentator or
knowledgeable observer who doesn’t believe the company is on its
last leg. Shouldn’t we be talking more about a merger or
assistance to employees to re-tool and move into other
industries?
Unless President Obama, with the guidance of his first-rate
economic team, does a Nixon-goes-to-China, and lowers the boom in
March or revisits the pre-arranged bankruptcy idea, his
administration, with the full support of Congress, will
inevitably come up with even more money for Detroit. Under this
scenario, the Bush plan is, basically, just a down payment. Mark
Zandi, a supporter of bailing out the auto industry, chief
economist and co-founder of Moody’s.com, testified to the Senate
Banking Committee on December 4 that the federal government
should spend between $75 and $125 billion to keep the industry
out of bankruptcy. Moreover, there is no assurance that even this
robust amount will be sufficient to save GM and Chrysler if they
don’t take the tough steps to restructure their balance sheets.
WITHOUT THE STRONG medicine prescribed by the likes of Senator
Corker, the Big Two will become permanently dependent on
Washington, unable to succeed and likely to continue in an
inevitable death spiral that will mean the loss of numerous jobs
some of which could have been saved in a pre-arranged bankruptcy
reorganization. Federal dollars could have backed up warranties
and customers throughout the process.
The Bush plan bravely defines auto company viability in terms of
positive net present value, not to be equated with immediate
profitability, and the ability to repay the government loan, a
highly unlikely eventuality. Taxpayers are unlikely to see much
of a return on their investment.
“No one enjoys a crisis but sometimes it is the best opportunity
to bring real reform,” says Corker. Again, this present
arrangement will work only if the Obama administration can summon
the nerve to stand up to congressional Democrats and supporting
constituencies. Again, maybe the Obama economic team will hold
the line.
This episode is another very disturbing indicator of a political
culture, maybe an entire society, that is incapable of coming to
grips with the tsunami-like challenges and threats to its
financial and civic health. Social Security? A political third
rail and off limits to reform. $53 trillion in
entitlement liabilities? Let’s not think about that today. The
national debt? Let the Chinese take care of it. Farm subsidies?
The more the merrier. All of these issues require rigor and
self-discipline in analyzing and diagnosing the problem and, most
importantly, executing solutions.
Compassion is a worthy sentiment and a legitimate motive for
action, but it is not a substitute for sound policy much less a
justification for fiscal recklessness and self-defeating bailouts
and subsidies.
The Republicans failed to confront these threats to America for
nearly a decade. Hoping for better from the Democrats probably
qualifies for Samuel Johnson’s taunt as the triumph of hope over
experience. But hope is a theological virtue, not grounded in
pure rationality. So this Season let us hope.
