Cars vs. Cash

[babylonsister]

http://www.motherjones.com/kevin-drum/2009/03/cars-vs-cash

Cars vs. Cash
— By Kevin Drum | Mon March 30, 2009


In one sense, I was surprised and impressed by Barack Obama's auto bailout announcement this morning. He was, appropriately I think, fairly tough. From GM, he insisted that they fire their CEO and submit a tougher restructuring plan. From Chrysler, he insisted that they consummate a deal with Fiat and said flatly that they'd be allowed to go under if they didn't. This is appropriate: a private investor wouldn't treat Chrysler and GM identically, and there's no reason the federal government should either.

Still, it's hard not to do a double take at his actual words:

"We cannot, we must not, and we will not let our auto industry simply vanish. . . . It is a pillar of our economy that has held up the dreams of millions of our people. But we also cannot continue to excuse poor decisions. And we cannot make the survival of our auto industry dependent on an unending flow of tax dollars. These companies — and this industry — must ultimately stand on their own, not as wards of the state."

In the same way that GM is different from Chrysler, the banking industry is different from the auto industry. Still and all, don't you wish that Obama were willing to treat bankers the same way he's treating the carmakers? It's pretty much impossible not to compare his tough words this morning with the conciliatory tone and even more conciliatory actions he's taken with the financial industry.

As for the news that the stock market plunged on the news, spare me. Investors are idiots if they think this is bad news. A tougher restructuring plan is better in the long run for everyone but the auto industry's bondholders, and I'll bet that even most of them have either hedged their positions or else sold off their holdings at 70 cents on the dollar to speculators. Save your tears for someone else.

[HopeOverFear]

1. kick and rec'd

[amandabeech]

2. This restructuring plan will undoubtedly require an even more significant reduction in pay to GM

workers, not just the unions.

It's likely that retirees, including the most vulnerable among them, will take a hit as well.

I expect that this will reduce the number of vehicles that GM and Chrysler will be able to sell, and it will increase unemployment by perhaps 1,000,000 jobs in the middle of a bad recession.

Also the state government of Michigan will be in even more trouble, and Indiana and Ohio will have to tighten their state budgets.

That means that anyone who is now working for those states will see more layoffs, and there will be less money to go around for state aid programs.

Retirees are probably protected from cuts in their pensions and health insurance programs, but will see no future increases even if inflation goes through the roof in a few years.

More layoffs mean more people leaving those states to compete for jobs elsewhere. The misery will not be contained.

I remain skeptical as to whether GM and Chrysler will avoid bankruptcy in this case. There are reports that the Obama administration wants them to go through a supposedly "fast" prepackaged bankruptcy which is the reason why I think that 1,000,000 jobs are likely to be lost. In that case, I expect a Chapter 7 bankruptcy liquidation for both of them, in the end.