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Ian Welsh

Ian Welsh

Posted April 1, 2009 | 11:46 AM (EST)

The Velvet Glove Comes Off For Carmakers As Obama Threatens Them With Bankruptcy


Well, well, well. I see Obama has pulled out another card from the Bush playbook. Not only has he forced GM's CEO to resign, he's threatening to send them into bankruptcy if they don't get enough concessions from workers and bondholders (Tom Bratwaithe, FT, not online as of this writing):

Officials said on Sunday night that Chrysler would be given 30 days and GM 60 days to reach agreement with debtholders and unions, with new tougher targets for cost cutting, or they would lose their last chance for a government bailout, almost certainly sending them into bankruptcy.

Wow. Tough talk, maybe even tough action. I'm impressed. Impressed by his willingness to talk this way and act this way towards non-financial companies that is. Somehow when it comes to banks and brokers Obama's practically begging them to keep the money they've been given, and assuring everyone that they won't be forced into bankruptcy or nationalized. Somehow his words of outrage at bonuses don't include forcing companies like AIG, Bank of America and Citigroup to renegotiate thier compensation contracts by saying "do it or you go down".

Nope, it's not people making high 6 figures, or 7 figure salaries and bonsues who are forced to take a haircut. It's not bondholders of financial corporations like Freddie and Fannie who are forced to share in the pain. It's only workers and bondholders of industrial companies. Imagine that.

There are a ton of cynical things I could say about this, but I'm going to point out something more fundamental: long run the US needs its industrial sector healthy and strong more than it needs an overpriced, overpaid financial sector. One major long term problem the US has is its trade deficit. Financial companies don't noticeably help that, what they do instead is package up paper assets for sales to foreigners, but those assets are almost all debts. Everytime the US sells a collateralized debt ogligation, it's selling its future to foreigners. Every time it sells a car, it's getting money now for a real item now.

Smart restructuring of the economy would mean figuring out how to create a car industry and an industrial sector that stays in the US and doesn't move all its production and R&D overseas, rather than trying to restart the paper for money financial economy, an economy which caused this financial meltdown and which has been partially responsible for stagnant wages for Americans for 30 years now.

I will also note that a real bankruptcy for the Big 3, would cause in excess of two million job losses and worsen the US's trade deficit.

Tough love isn't necessarily a bad idea, but I hope Obama is playing chicken and isn't entirely serious. Because if the Big 3 go under, well, this economic downturn will get a lot, lot worse. And perhaps, just perhaps, he might somehow find whatever it takes to apply some of this tough love to the financial companies who caused this crisis, rather than the car companies who are largely collateral damage?

Because I find it very hard, as a matter of basic fairness, and a matter of basic policy, to stomach seeing workers earning 5 figures being forced to take wage cuts while bankers are still making huge 6 and 7 figure salaries.