Autopia: A Tale of Two Bailouts

Many Americans are struggling to understand how our government makes decisions on corporate bailouts. When Wall Street companies spent years investing in mortgages that turned out, essentially, to be garbage, the government rushed to bail them out. But when the auto companies neared a similar fate, the government was prepared to stand by and let them perish.

To aid in understanding this situation, it is helpful to look at an example from a galaxy far, far away.

Once upon a time on a distant planet there was a nation that looked a lot like ours -- we'll call it Autopia. They were indeed much like us, only with some things backwards. Autopia's car companies looked and acted like our Wall Street, while Autopia's financial companies acted a lot like our car companies.

In Autopia, the car industry did just fine for many years. It was a good industry and many people worked hard and got reasonably wealthy. But then a fundamental change of viewpoint took over the entire nation. This new and pervasive viewpoint dictated that all companies and this included the auto companies, had only one goal: To earn as much profit as possible. To a very large extent the companies came to care less about product quality, the fate of the middle class, and the overall state of the country. Instead it became accepted and even mandatory to measure everything solely based on profit. Elaborate rationales were invented that justified this new profit-centric doctrine and argued that maximizing the profit margins of the various companies benefitted all people throughout the nation.

This was the setting when HCG arrived. For a very long time cars in Autopia had been constructed out of metals and high-grade plastics. But with the introduction of this new material that the Autopians called HCG, everything changed. HCG was short for Highly Compressed Garbage. Highly Compressed Garbage was created by taking ordinary household garbage, condensing it in a high pressure compressor, and spray painting it. It looked and felt like metal and it was cheap, cheap, cheap. It really paid to introduce HCG into cars.

No one knew if HCG would hold up over time, but that was beside the point. HCG was cheap, and the cheaper the product, the higher the profit. Once the trend started, everyone had to join in or be left behind in the race for the only thing that mattered - profits.

There were a few truly golden years. Profits at the car companies soared to unprecedented heights. There were individuals who made a billion Autopian dollars in a year. The stock prices of the car companies soared, and very few people even noticed that all this wealth and happiness was based on an investment in garbage.

But after a while, bad news started to trickle in. A few HCG cars had started to fall apart, then a few more. This was ignored at first, but the trickle of failures soon became a stream, and the stream became a torrent. Soon all around Autopia, and in countries to which they exported, HCG cars were falling apart, and no one knew which cars would be next. Cars were collapsing and people were being stranded everywhere. Even the tow trucks sent to rescue them often broke down and joined the list of stranded vehicles.

Now you might think this would lead to a disaster for the car companies in Autopia, but fortunately for them, while they had been unwise with HCG, they had acted wisely in a political direction. Car companies always had considerable political influence in Autopia, but during the golden years their influence became immense. All major political parties vied for their contributions and were extremely responsive to lobbying from the car companies. As a result of this quid-pro-quo, many of the corporate beneficiaries of the use of HCG paid little tax. A car company executive even served as Secretary of the Autopian Treasury. So when the HCG crisis hit, the political investments of the good years turned to solid gold.

True, there were some hesitations before the government poured an unprecedented flood of money into the car companies. After all, profit was believed to be the only thing that mattered and the car companies were losing money and collapsing at an unprecedented rate, faster than any other industry ever. But the need for new solid cars to replace the old ones was too urgent. It was pointed out that the world might well come to a stop if there was not a flood of new money that would enable a fresh start, and this fear overcame even the doctrine of profits. The flood of money came, without strings. There was no change required in the way the industry worked; they didn't have to give up their high compensation or buy back the broken garbage cars. After all, they had shown they could be profitable.

This treatment contrasts strikingly with the way the Autopian government handled another down-on-its-luck industry. Autopia's financial companies had all kinds of problems, which started years back. Before profits became the only thing that mattered, and in a less competitive world, the financial companies had made share-the-wealth arrangements with their unionized workers. They had relaxed and become complacent. Foreign companies caught up with and surpassed their services. When they struggled back and provided competitive services, they were handicapped by the binding promises they had made to their workforce--promises that were no longer being made in the new profit-oriented world, and which their new competitors never had to make -- and by the bad reputation they had with the many who used their services in the days before their services improved.

The financial services companies, clearly ailing, also asked the government for help. But their reception was very different. Government officials pointed out that their troubles were of their own making. They said it was inferior service that had brought them down and injured their profitability, and that there was no chance of their becoming profitable unless they restructured the arrangements they had made with their workers. If these concessions were made they might be given some very small fraction of the money being given to the car companies.

From across the great distances of outer space this might look a little odd. The Autopian financial companies were being reproached for product failure while the car companies whose garbage products brought the whole Autopian world to its knees were being patted on the back and sent on their way.

It appears the financial companies had worshipped the wrong gods. Although the car companies had made fortunes with Highly Compressed Garbage and impoverished the whole Autopian world by so doing, they had been profitable while doing it, so there was faith that they could be profitable again. But the financial firms made the additional mistake of occasionally putting some things ahead of profits, and they needed to be taught the error of their ways.

From a great distance across outer space the history of Autopia does look odd. So perhaps it is no surprise that many in America also find what we are doing here puzzling.

Comments

[jakemi6]

Is therean opportunity for common sense to triumph in the auto bailout? As the White House and Congress debate, I wonder why we don't just buy cars. The Military and every state local and county government needs cars. Why don't we put in an order for $14 Billion worth of Hybrids and Electric vehicles. That should be somewhere between 400 and 500 thousand cars. If we use LOCAL infrastructure to process the orders, the money filters UP, distributing the funds along the value chain rather than putting more cash in the hands of a success-challenged executive elite. Congress can build new fuel efficiency standards into the order - 40-50 mpg sounds about right. This amounts to instantaneous success for several fuel efficient models. We don't have to reassess how capitalism works because the government is normally one of the biggest customers for a lot of industries. The auto companies can go to the banks with government orders - which should move the bankers to loan the mountain of cash they re simply hoarding now. If any more justification is necessary, the Congress and the Pentagon, the world's largest single user of oil, can peruse the statements and actions of our enemy, Al Qaida, who are still plotting to destroy the oil infrastructure from the Middle East to Mexico. Is there any more urgent National Security issue?

[Oakland]

So the moral of the story is that autos, like finance, need to pay policitians more graft money. Then they can produce nothing or garbage and still get bailed out without a plan or even showing up. MI and Ohio were had by Obama and the Democrats. People don't need EFCA. Like Italy and many other countries in Europe, we all just need to strike. Shut the whole damned country down and keep it there until the bought and paid for ruling elite in DC end up tossed out. Give me any opportunity to abandon this fascist sink hole they turn my beloved country in to, and I'm out of here.

[w8aminute]

Great post - but I don't find what we are doing here puzzling. What I see is a continuation of GOP values - they value the rich & greedy over the working class, which explains why they let Wall Street get away with the credit default swaps, derivatives, etc. No talk about wage concessions there, huh? Instead fo putting all the blame on Detroit as so many here do, the blame should be put on the failed economic policies that brought us this disaster. Why no one is upset about Corker's war on middle-class wages is beyond me. And obviously many here are anti-union, but I wish you'd understand that bashing Detroit and further harming the middleclass is not helping our economy. Read this article about a Sony plant closing in Westmoreland County, PA. It's only losing 500 workers, but the lost revenue is causing sewage rate hikes. Now imagine all the towns across America that are tied one way or the other to the auto industry. Imagine their effect on tax revenue and how that will raise the cost for everyone.:
http://www.thepittsburghchannel.com/westmoreland/18283993/detail.html

[GlobalInvestor]

Go to the Global Investment Watch blog to read a good article related to Republican attempts to use the auto bailout to attack labor unions ...

http://globalinvestmentwatch.com/2008/12/14/demint-vitter-and-mcconnell-the-three-horsemen-of-the-hypocracy/

[DuganS1]

The US and entire global economies can't function without a functioning financial system. The US and world economies can function if GM files for bankruptcy. The global economy sank like a stone after Lehman Brothers was allowed to collapse. The US and global economies have functioned just fined when all the airlines filed for bankruptcy earlier this decade, when the auto parts companies filed for bankruptcy this decade, when so many technologies filed bankruptcy this decade, when energy companies filed for bankruptcy in the late 90s, etc. etc. In fact, companies filing for bankruptcy can be a good things as it speeds of the process of creative destruction, purging ourselves of weak enterprises and allowing stronger ones to take their place. GM and Chrysler are not viable businesses. AIG and Fannie and Freddie have been nationalized while the financial institutions that received the TARP had equity stakes taken by the govt to provide liquidity so the financial system wouldn't have to continue deleveraging causing a complete economic collapse. There's a big difference here.

[Teritt]

Dug, I don't understand why you are so certain that GM is doomed to fail. It's obvious from your other posts (we seem to be interested in the same subjects) that you are so completely anti-union, & pro-Bush/Reagan tinkel down economics that I am beginning to wonder if you work in the WH or are one of their Halliburton lobbyists.

[therealredstateblues]

You are spot on, I have often wondered if he is one of those paid shills that come to these boards to spout off their talking points, which he sticks to despite all the evidence, facts and logic to the contrary.

He is indeed a global tinkler-onner

[sposton]

Financial system has made itself indispensable in our minds! We need a financial system but we do not necessarily need what we've got now. If a company is too large to fail that should be an additional burden on that company for it be extra prudent in its behavior. If we are then forced to rescue such a company because of its indispensable nature than the irresponsible shareholders and management of that company ought to suffer the consequences. And the consequences ought to be severe. You need help because you screwed up? OK, the government will step in because it must but your ownership no longer exists and those who were responsible must go. A government controlled entity takes over, recapitalizes the business, rationalizes it, restarts the processes that made it indispensable and at the end disposes the assets on the market, preferably at a profit for taxpayers. Have we done anything resembling this?

[Ralph Gomory - Huffpost Blogger]

The bailout argument for finance given above is basically this: so many financial institutions would fail that the whole industry would go down with them. In this situation we would expect the government would strongly insist on changing the rules so that the ability to make massive fortunes and then demand salvation on the basis of threatened industry collapse would be eliminated. This did not happen. The Treasury Secretary carefully avoided setting any substantive conditions for change. His argument was that any restrictions would cause the financial institutions not to participate. This is more consistent with financial institutions shaping a government that behaves in ways useful to them, than it is with a government trying to shape financial institutions useful to the country.

[berkawoo]

The Detroit 3 has certainly caused many of their problems, by being arrogant and greedy in past decades. But I do think that the perception that domestic cars are as awful in the here and now as in the past is very unfair. Reliability is becoming comparable to that of import brands. The public and the media don't care to acknowledge that. The Detroit 3 can certainly be called out on reliance to selling profitable large SUV's and Trucks, but if you look at all the import brands especially Toyota and Nissan they want to pursue that same market as much as the domestic automakers. Small cars small profits applies as much to import automakers as the domestics automakers, make no mistake about that. The media refers to this as an "auto bailout" but my understanding it that it is a loan that the Detroit 3 would be expected to pay back to the taxpayer. People can and will have contempt for them (especially 3 scary southern senators)
but compared to the Wall Street bailout at least they made something. The financial industries products were often shady fraudulent incomprehensible and vaporous and more so geared to the very few becoming very wealthy. Wall Street is far more thuggish and nefarious that the Detroit 3 ever were.

[DuganS1]

GM will never be able to pay back these loans. They already have over $60 billion in debt with a market capitalization of only just over $2 billion. GM hasn't made money in many years. They lose more money every single quarter and did so even when they sold a lot of cars (see 2005). They are a failed business and need to reorganize under chapter 11 - if not now because of the fragility of the economy, then later next year or the year after.

[StellaDuBois]

GM was profitable in 2004 and for two of the four quarters in 2006. They have substantial revenue, even in a downturn, and have been in the process of restructuring themselves for a while. They will be profitable in the future. The problem they are having now is LIQUIDITY because none of the banks are lending, even though they have collateral to secure a loan. GM and Chrysler had to turn to the government for a loan because the banks aren't functioning.

As far as helping customers to find financing both GM and Chrysler have made arrangements with credit unions to assist customers so the bank issue will be somewhat mitigated. http://www.lovemycreditunion.org

[EconoMc]

All very true - but I think the problem is Congress realizes they made a dumb move bailing out Wall Street, and now they are trying to make up for that by making Detroit suffer - of course the private planes don't help matters