Let GM Fail
In 1950, when GM signed a contract with the UAW, the Big Three's share of America's domestic auto market was about 95 percent. The economies of Japan and Germany were still ravaged by World War II and were not a threat. The Big Three and their workers' union were certain their oligopoly was secure.
But now, GM is a huge healthcare and pension liability, with a small and struggling car business attached. GM simply cannot compete with that albatross of obligations around its neck.
The president of the United Auto Workers union recently claimed the parlous state of the three U.S. auto makers is the result of the spike in gas prices and the credit crisis, rather than mismanagement or high labor costs. But that is clearly wrong. GM's problem is not a short-term liquidity crisis that needs a temporary bridge loan. It is a fundamental lack of ability to compete in a global economy. Their troubles have been building up for decades. And while the unions are bestowed with lavish benefits and above-market compensation, the auto business has changed and can no longer support those embedded costs.
And this is the worst time to be strained, because while in America's saturated market, there is almost one car for every person of driving age, in China there are three for every 100, and fewer than that in India. As Chinese and Indians are moving into the middle class, they will be buying more cars. And the GM brands have a special allure overseas.
Yet GM's stock is trading at but a tiny fraction of its peak. For all practical purposes, GM has already failed. It should now be allowed to do so formally.
We must not be afraid of the bankruptcy process. Bankruptcy does not mean liquidation. The process will help the company, not eliminate it. It would give GM the cover to do what it absolutely must: close plants, eliminate unprofitable brands and dealerships, and shed its bloated cost structure. It will enable GM to wipe the slate clean and emerge stronger. Going forward it will be able to compete again, without the inspissating heavy burden of past obligations.
Subsidizing the industry is not going to solve the root of the problem, but will simply mean perpetuating an unproductive structure, which will almost guarantee bigger problems later on. Why should we transfer capital from the successful businesses to the doomed? Throwing taxpayers' good money into that sink hole called the US auto industry will be tantamount to a transfer of wealth from tax payers to GM employees. The capital that will be consumed by GM is needed elsewhere, perhaps for re-training people to make them more employable, and could be used more efficiently if not allocated by Congress or the bureaucrats at Treasury.
In capitalism, the consequences of failing to compete are that you vanish, making way for more efficient organizations. That is how the economy rejuvenates itself.
Let GM fail.
Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment firm.
Read More:
Should the Government Bail Out the Big U.S. Three Automakers? HuffPost Bloggers Weigh In
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This mentality is the reason we need unions now more than ever! Sorry ! Bashing the worker for the execs mismanagement is 100% wrong. The assemblyline worker has no say in the quality, quanity or efficency of the auto they assemble, they have no say in business decisions. The only thing union workers get a say in is their contractual employment.
"legacy costs" or benefits like pensions, healthcare, education etc. are contractual obligations just like any supplier yet the only one vilified and pilliaged.
Oh! Don't get me started on the benefits of unions and contractual employment I'm a 3rd generation union family who has come from dirt poor to almost middle class. My grandfather had no education and I am sending all 3 of my kids to college. Has this just been given to me thru union dues? Hell! No! These men and women have dirty, dangerous, unhealthy, very important industrial jobs and they earn it. Unions are true democracy in action and contractual employment , every worker deserves but absolutely nessecary in the industrial job. Safety, heath and retirement have been the focus of industrial unions for decades not wages. If you've never worked the factory floor you can't imagine the risk but the workers do and united they have improved the workplace for us all!
Lord! We don't need to be busting unions we need to be forming them! We could all use a little grassroots in the workplace!
"Bankruptcy does not mean liquidation."
That is wishful thinking. The car companies are so weak that they could not emerge from Chapter 11 unless they got even larger bailouts than they will require before they go bankrupt.
Who would buy a car from a bankrupt company? The warranties of people who had bought cars from them will be worthless. There is good reason to expect that the warranties on cars sold after the Chapter 11 will be worth anything. There is no guarantee of manufacturer support if problems show up, etc. If GM goes into bankruptcy, car sales will virtually grind to a halt.
Letting the manufacturers fail will do for the auto industry what letting Lehman Brothers fail did to the financial system.
That should have been:
There is good reason to expect that the warranties on cars sold after the Chapter 11 will NOT be worth anything.
This is the same type of liqudationist philosophy that Hoover attributed to his Secretary of the Treasury, Andrew Mellon. ''Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate . . . purge the rottenness out of the system.''
It's deja vu all over again.
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. purge the rottenness out of the system
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And the problem with this is... What exactly???
Michale.....
In 1932 the people decided they needed to liquidate the Hoover administration. That was the real rotteness.
Everything in the economy is connected with everything else, like a stack of dominos. If you try to "purge the rottenness" by liquidating some segments in the economy, other parts of the economy get pulled down with them and thereby you bring about a cumulative downward spiral that results in more things being liquidated that originally were not rotten. When these things go down, more additional things get pulled down, which causes still more things to be pulled down, etc. bringing about a depression.
The problem with the "everybody should be on his own" philosophy of the Republicans is that it ignores the fact that things are connected and so what happens to one element of the economy has major effects on other elements, so that we are all in this together.
Retrain for what jobs, Alan? You need humming factories to create jobs.
Actually, your blog is what I'd expect from a financial wizard. You are one of these guys who has five LCD screens and spends all day moving money from this to that, hoping to skim from the fruits of creative speculation. Personally, I think the guy who inserts the dipstick into the engine block on the GM production line does more for the common good than you. I might mention that one of your forebears, a certain gentle carpenter from Nazereth, reportedly threw a temper tantrum only once in his life when he encountered guys like you (moneychangers) in the holy temple.
I'll give you one good reason to keep GM going - the GM Volt project. This is the best idea in decades to undermine the stranglehold the OPEC cartel has on us.
He's also one of those guys who was all for bailouts when the subject was 700 billion dollars to save his useless industry from the results of their own mismanagement. Then, when it's 30 billion to save 1.5 million jobs at a minimum, he turns back into the free market capitalist.
Everyone in America should pull their money out of their 401Ks and go buy a car. Let Goldman Sachs eat cake.
Of course, you do realize that GM came up with the EV1 back in 1996 (because they were forced to do so by legislation in California) but then did everything they could do to tank the project (and successfully did so). So, the GM Volt project is not the "best idea in decades." We could have been 15 years ahead of where we are now with respect to alternative energy automobiles if GM had not tanked the EV1.
"Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment firm."
That says it all. Why should he care about all the workers who will lose their jobs, not only in the auto industry, but in the many other businesses that will be pulled down along with them if they fail?
Clearly the Republicans and their spokespersons think that this recession is not yet bad enough and the unemployment will not yet get high enough and therefore want to make these things still worse by letting the auto makers fail.
I'm sure that he would feel differently about it if this would cause him to lose his job.
Heck, he probably wants some of his clients to go try to buy GM at a fire sale price.
If you as a taxpayer want to be on the hook for $200 Billion, and 3 million people collecting unemployment, not paying taxes, and having the US Taxpayers pick pensions up for about another 3 million people that the government will pay for, then by all means save the $25 Billion to bail them out, and pay $200 Billion more in higher taxes.
There is a reason Obama and the Democrats support this, and Republicans are against it: It'll push our economy into a depression, in which Republicans will have an opportunity to say Obama can't lead us. There are WAY more jobs connected to this (from engineering, to health care and advertising beyond manufacturing that will go down the tubes) than banking.
Or, maybe Obama and the Democrats support this so that it will keep our economic problems from getting worse in the short term and they don't care about the fact that bailing out these companies is going to cause even greater economic problems in the long term. (Then again, Republicans also do this.)
@therealredstateblues
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Let me help you on this
A bailout is money given outright
a loan is money lent that is expected to be paid back
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In THAT context, yes it would be a loan..
However, in the context that, if the government refuses, then the Auto makers go under, it is a bailout..
It's bailing out the industry from it's greed and shortsightedness..
As children we are told we must learn, and sometimes suffer, from our mistakes..
The Auto makers have been very bad children..
They need to learn from their mistakes...
Bailing them out (AGAIN) will not teach the lesson that needs to be learned..
Michale.....
You cannot learn from your mistakes if they cause you to die.
If these companies are allowed to fail, they will not be around to learn from their mistakes.
And from their ashes, new companies will arise that have (hopefully) learned a valuable lesson..
Survival of the fittest.. Innovate or die..
Choose your anecdote...
Michale.....
I live in Michigan. My step-daughter's husband has just been told he will no longer have a job after ThanksGiving. He worked as a service manager at a GM dealership. My step-daughter works at a bank and a big part of her job is processing loans (or at least it used to be).
I have very mixed feelings about this issue. I know that if GM goes under, Michigan will be little more than a ghost state. 1 in 4 jobs here are directly connected to the auto industry. Many more provide products and services to those employees. Part manufacturers will not be able to stay in business if they lose such a large customer, making it impossible for other car companies to continue. I have a very close family and I am sick that many of us may have to leave Michigan to find work.
That being said, I'm not sure a bailout/loan can save us. People are not buying cars in this economy. Filling chapter 11 would make even more unlikely that someone would buy GM. And certainly, they need to do things differently or no amount of money will save them.
Still, if some concessions are made, I am leaning towards giving it to them. The $ would be coming out of the $700b anyway, and Paulson isn't using it for it's intended purpose. If it can help them through this period, it would be worth saving not just jobs, but entire states.
People are not buying cars because they can't get loans. The banks we spent half the TARP money on are hoarding the cash, not lending it out.
Giving some of that money to Detroit to finance new loans, would that make a difference?
The republicans are banking on the hope that when the middle class collapses, all they will have left is their religion and their guns. Then they will make perfect repub voters.
The people working on an assembly line are not middle class. They are called working class, blue collar etc.. Middle class would be a dentist, a merchant, a lawyer, an architect, an accountant etc., all people with college education or higher who can independently support themselves.
How do they support themselves .. . . blue collar workers for patients, customers, clients?
Independent -- I don't think so.
Well guy I know for a fact now you have never set foot in a factory nor know the first thing about how they operate or the people in them.
The people on assembly lines are the heart and soul of the middle class. There wouldn't be a middle class in this country if it weren't for them.
The people you talk about are white collar upper middle class.
The blue collar factory workers support them selves and the rest of this nation, without them the dentist, merchant, lawyer, and architect would be the beggars on the side of the street. Without the pay checks of the blue collar workers those who in your middle class will suffer as well.
You know so much yet know nothing. There are allot of college grads out there in the factory floor as well. Jobs on the factory floor aren’t so easy you can just pick anyone up off the street to do, despite how easy you think they are.
The bottom line is you are just some burger flipping know it all who cant hold down a real job, and resents those who actually work for what they have and long to see them brought down to your level.
Zorak1704, the Republicans never said that middle or lower classes cling to their religion and their guns. Obama said that. Furthermore, Obama regrets having said it, but you trumpet it as the truth. Logic and reason are clearly not your friends.
If Detroit is allowed to fail, The bailout money should be pulled from those greedy banks.
I have a 1996 Geo Tracker (body by Chevy, motor by Suzuki). The motor still has plenty of life in it, and needed no repairs at all for the first 12 years. During the 13th year, I replaced the alternator. The body, on the other hand, is rusting out at the speed of light. Needless to say, when I was ready for a new vehicle, I didn't even consider an American car. I bought a Honda Element, and am confident I'll still be driving it 13 years from now.
The problem with the Big 3 is that they can't compete with the quality of Japanese cars. So, what if we take another approach to the problem?
We must be the only industrialized nation without a high speed rail system. Loan GM the money so they can transform themselves into the company that makes that happen. Let them build passenger and freight train cars instead of autos.
You have a 12 year old car and you don't think it should have any rust? Where do you live? Arizona?
I see the problem not being the employees, rather than the corrupt management and their 1940 mode of thinking.
I would fire all executives within 90 days with good replacements who are 'with it' and will not get over 500K max as a salary for ANY of the positions.
Ed Coughlin, love your post!
As for the topic of letting GM go bankrupt, this is yet another wise comment from someone willing to throw millions of union employess and working class people out of work, while $700 billion goes to support the industry peopled by the top 5% of Americans.
No noticable consideration is given to the consequences to the nations economy if the Big 3 go into Chapter 7 (which is apparently all that's truly available to them), and the employees go the unemployment office.
Funny how Wall Street investment houses were too big to fail, but not the employers of millions.
Is it a bad business model? Could be. How good was the AIG model, or that of any investment bank that took bailout money? Why save them, and not Detroit? The only real difference is union employees.
Hedge-funder supporting job eradication...Interesting...
therealredstateblues
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Loans. Loans, Loans
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If it was truly a loan, then the Auto makers could get it from a bank..
But they can't....
So, it's not really a loan.. It's a bailout..
Michale.....
Would be able to had the finacial sector not melted down
In the 70's chrysler paid back their guaranteed loans with interest and ahead of schedule. the taxpayers made money on that deal and hondreds of thousands of jobs were saved
Let me help you on this
A bailout is money given outright
a loan is money lent that is expected to be paid back
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