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.
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.
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