Now that we taxpayers own GM and Chrysler, car buying won't be the same. The next time you buy a car, should you favor your car companies, as opposed to Ford, Toyota, Honda, etc.? After all, if GM and Chrysler sell more cars rather than less, they will need fewer of your tax dollars in bailout money from the U.S. Treasury. And the Treasury's holdings of GM and Chrysler stock will increase in value, which could ultimately ease your tax burdens if the government sells these shareholdings at a profit. Why not make some money while you spend some?
Perhaps you'll see the Secretary of the Treasury or the Vice President on prime time TV, pitching GM or Chrysler products. (Biden's got the smile for the job.) The Social Security Administration could include brightly colored sales brochures along with your annual benefits statement.
The Fed might offer zero percent financing for GM and Chrysler vehicles, but only until the end of the month. The IRS could give rebates for purchases made during this weekend's bargain blowout.
If the GM or Chrysler product you buy turns out to be a lemon, you'll be able to write your Representative or Senator about warranty work that isn't satisfactory. And you can complain to the Treasury, or better yet the White House, if there aren't enough cupholders or the paint peals after a few years.
Bad boys who fear the FBI will learn to look for unmarked GM or Chyrsler sedans, instead of Ford Crown Vics. The EPA Adminstrator's official car will be a Chevy Volt.
If things turn out well enough for GM and Chrysler, maybe Ford will want to sell some stock to the U.S. government. Toyota and Honda, too. After all, business is business.
Showing posts with label GM bankruptcy. Show all posts
Showing posts with label GM bankruptcy. Show all posts
Monday, June 1, 2009
Sunday, May 31, 2009
GM, Chrysler, Lies and Statistics
One of the truest thing ever said is that there are lies, damn lies, and then statistics. One shouldn't confuse statistics with underlying truths. It is easy to become obsessed by statistics, and lose sight of underlying truths.
The Gross Domestic Product (GDP) is a measure of economic activity. In essence it consists of adding up all expenditures for consumption, investment (without accounting for depreciation), government, and exports, and then subtracting imports. GDP, therefore, can be said to measure total national spending. If the government focuses on boosting GDP, then increasing any of these types of spending serves the policy. And when times are good, it may not seem to matter if $1,000,000 is spent investing in a chain of franchised hair salons, a small software company, or a machine tool shop.
However, not all economic activity is the same. That becomes clearer when times are tough. As the unemployment rate rises and the nation looks for ways to create jobs, the need for more hairstylists to give $100 haircuts is a lot lower than the need for skilled computer programmers to create ingenious new software or for skilled workers to operate the precision machine tools used to produce high quality equipment. Economic strength comes from having strong core industries that produce essential or important products. One can't build lasting wealth by processing documents for refinancing mortgages or underwriting asset securitizations. There have been many economically healthy times without refi transactions or a securitization market. But true economic strength is difficult to attain without robust industries that make tangible and valuable products.
That's why the government's bailouts of GM and Chrysler from bankruptcy make sense. Manufacturing motor vehicles not only employs a lot of people, it also uses a lot of technology. Modern cars and trucks require advanced materials; sheet steel isn't enough. They also contain a lot of computing power--dozens of tiny computers are built into today's cars and trucks to do everything from regulating the mixture of fuel and air going into the engine's cylinders to triggering the air bags to operating the GPS system. The days when a 17-year old kid could work on a car with a couple of screwdrivers and a set of socket wrenches are long gone. Thus, the auto industry supports a variety of sectors of the economy.
It also helps to preserve critical manufacturing skill sets. Only a small number of nations have skilled workers who can operate precision machine tools, the foundation of any advanced manufacturing industry. The machine tool industry makes the machines that make the cars, airplanes, and goods that we consume. If you've ever wondered how the HVAC system in your house was made, it was made by machines that were built by the machine tool industry. Without machine tools, we'd be back in the 18th century, relying on fireplaces and open windows. Machine tools also built the machines that built the tractors, harvesters and other equipment used by farmers. Food would be much more expensive and less abundant without machine tools.
The government will no doubt do some dumb and silly things with GM and Chrysler. There are fears that bureaucrats may end up deciding how many cars will be blue and how many will be red. Or how many models and options will be available. Surely, on a day-to-day, granular level, some of the taxpayers' money will be wasted. When that happens, the press will have a field day playing gotcha journalism, which will curb any bureaucratic inclinations toward micromanagement.
Government subsidies have been crucial in the nation's development. The settlement of the vast farmlands of the Midwest and West was facilitated by the Homestead Act and the government's subsidies to the railroads, which could cheaply ship goods to farmers and bring their harvests to the populous East. The Postal System's mail delivery contracts were crucial to the infant commercial airline industry in the 1920s and 1930s. The Interstate Highway system speeded up all economic activity. The Internet began as a Defense Department experiment, and has evolved into the biggest information revolution in history.
The auto industry historically led the way out of recessions. This time, things will be different. GM and Chrysler have shut down a number of plants and largely halted production for the next few months. They and their suppliers have laid of hundreds of thousands, and many more layoffs are likely by the end of the summer. Production, we hope, will then resume. But without the tens of billions dollars in government bailouts, GM and Chrysler would very likely be headed toward liquidation. In that case, which American industry would lead the way out of recession? There aren't many good candidates.
The government bailouts of GM and Chrysler aren't a sure bet. The taxpayers could be taken to the cleaners. But what's the alternative? A trip to the cleaners anyway for heightened recession, increased unemployment compensation and Medicaid costs, and ripple effect bankruptcies of suppliers and the unemployed. In some communities, the tertiary impact might even lead to municipal bankruptcies and unheated classrooms. Trillions of dollars of federal bailout money has been expended to stabilize the banks. Bank stocks are doing better, and refi activity is up. But you can't build a strong economy just by refinancing mortgages, even if the increased spending from refi increases GDP on a statistical level. We took that approach recently, in the early 2000s, and things didn't turn out so well.
The financial system cannot become truly healthy, and the economy cannot truly recover, until the real economy revives. That's why the GM and Chrysler bailouts, as distasteful and risky as they may be, are sound government policy.
The Gross Domestic Product (GDP) is a measure of economic activity. In essence it consists of adding up all expenditures for consumption, investment (without accounting for depreciation), government, and exports, and then subtracting imports. GDP, therefore, can be said to measure total national spending. If the government focuses on boosting GDP, then increasing any of these types of spending serves the policy. And when times are good, it may not seem to matter if $1,000,000 is spent investing in a chain of franchised hair salons, a small software company, or a machine tool shop.
However, not all economic activity is the same. That becomes clearer when times are tough. As the unemployment rate rises and the nation looks for ways to create jobs, the need for more hairstylists to give $100 haircuts is a lot lower than the need for skilled computer programmers to create ingenious new software or for skilled workers to operate the precision machine tools used to produce high quality equipment. Economic strength comes from having strong core industries that produce essential or important products. One can't build lasting wealth by processing documents for refinancing mortgages or underwriting asset securitizations. There have been many economically healthy times without refi transactions or a securitization market. But true economic strength is difficult to attain without robust industries that make tangible and valuable products.
That's why the government's bailouts of GM and Chrysler from bankruptcy make sense. Manufacturing motor vehicles not only employs a lot of people, it also uses a lot of technology. Modern cars and trucks require advanced materials; sheet steel isn't enough. They also contain a lot of computing power--dozens of tiny computers are built into today's cars and trucks to do everything from regulating the mixture of fuel and air going into the engine's cylinders to triggering the air bags to operating the GPS system. The days when a 17-year old kid could work on a car with a couple of screwdrivers and a set of socket wrenches are long gone. Thus, the auto industry supports a variety of sectors of the economy.
It also helps to preserve critical manufacturing skill sets. Only a small number of nations have skilled workers who can operate precision machine tools, the foundation of any advanced manufacturing industry. The machine tool industry makes the machines that make the cars, airplanes, and goods that we consume. If you've ever wondered how the HVAC system in your house was made, it was made by machines that were built by the machine tool industry. Without machine tools, we'd be back in the 18th century, relying on fireplaces and open windows. Machine tools also built the machines that built the tractors, harvesters and other equipment used by farmers. Food would be much more expensive and less abundant without machine tools.
The government will no doubt do some dumb and silly things with GM and Chrysler. There are fears that bureaucrats may end up deciding how many cars will be blue and how many will be red. Or how many models and options will be available. Surely, on a day-to-day, granular level, some of the taxpayers' money will be wasted. When that happens, the press will have a field day playing gotcha journalism, which will curb any bureaucratic inclinations toward micromanagement.
Government subsidies have been crucial in the nation's development. The settlement of the vast farmlands of the Midwest and West was facilitated by the Homestead Act and the government's subsidies to the railroads, which could cheaply ship goods to farmers and bring their harvests to the populous East. The Postal System's mail delivery contracts were crucial to the infant commercial airline industry in the 1920s and 1930s. The Interstate Highway system speeded up all economic activity. The Internet began as a Defense Department experiment, and has evolved into the biggest information revolution in history.
The auto industry historically led the way out of recessions. This time, things will be different. GM and Chrysler have shut down a number of plants and largely halted production for the next few months. They and their suppliers have laid of hundreds of thousands, and many more layoffs are likely by the end of the summer. Production, we hope, will then resume. But without the tens of billions dollars in government bailouts, GM and Chrysler would very likely be headed toward liquidation. In that case, which American industry would lead the way out of recession? There aren't many good candidates.
The government bailouts of GM and Chrysler aren't a sure bet. The taxpayers could be taken to the cleaners. But what's the alternative? A trip to the cleaners anyway for heightened recession, increased unemployment compensation and Medicaid costs, and ripple effect bankruptcies of suppliers and the unemployed. In some communities, the tertiary impact might even lead to municipal bankruptcies and unheated classrooms. Trillions of dollars of federal bailout money has been expended to stabilize the banks. Bank stocks are doing better, and refi activity is up. But you can't build a strong economy just by refinancing mortgages, even if the increased spending from refi increases GDP on a statistical level. We took that approach recently, in the early 2000s, and things didn't turn out so well.
The financial system cannot become truly healthy, and the economy cannot truly recover, until the real economy revives. That's why the GM and Chrysler bailouts, as distasteful and risky as they may be, are sound government policy.
Friday, November 14, 2008
What Might a GM Bankruptcy Look Like?
The Bush Administration has made clear that it will not sign off on a bailout of GM. GM's management has said that the company might have to file for bankruptcy by the end of this year. If so, the company will be in the tank before President Obama has a chance to put together a bailout bill. Let's take a look at what might happen in a GM bankruptcy.
Sales would probably fall off. A new car is a five or more year proposition for many buyers. They wouldn't want to buy a car from a bankrupt company that might not be around in a year or two to support the warranty and ensure a steady supply of replacement parts. GM would have to institute large, and perhaps massive, layoffs. Its suppliers would, in turn, have to make large, or even massive, layoffs. If the suppliers go into bankruptcy, their ability to supply not only GM, but also Ford and Chrysler, could be adversely affected. Ford and Chrysler, already seriously weakened, could begin circling the drain.
In order to reorganize and emerge from bankruptcy, GM would need "debtor-in-possession" financing, a special form of financing provided to bankrupt companies. But how many lenders are there, in these days of the credit crunch, who would fork over the billions needed by badly crippled GM for a reorganization? Maybe only a few. Very possibly none.
So GM might be unable to reorganize. In that case, its bankruptcy would be converted to a Chapter 7 liquidation. Some argue that this would be a good thing, that competitors would buy pieces of GM and get those pieces up and running again. But what competitors have the money to buy parts of GM? The financially strong ones, like Toyota and Honda. What might Toyota and Honda do if they bought some of GM's plants and facilities. Hint: it wouldn't be to operate them. The auto industry is plagued by serious overcapacity. Toyota and Honda could expand their share of the U.S. auto market by permanently closing any GM plants and facilities they bought in a Chapter 7 liquidation.
Would any leveraged buyout firms buy parts of GM? Not after Cerberus got clobbered for its investment in Chrysler. There don't appear to be any American investors who could come up with the money to establish a new company to take on Toyota and Honda. Any such transaction would require billions of dollars in bank credit lines, and what banks in the credit crunch era would finance such a business plan against such capable competitors? Today, banks only want to invest in U.S. Treasury securities. There wouldn't be a lot of them volunteering to finance a startup to compete against the likes of Toyota and Honda.
So GM's bankruptcy could end up with the U.S. auto industry seriously diminished. No nation remains great without a strong industrial base (compare the U.K. before and after World War II for proof of this proposition). Bailing out GM would be distasteful, since government bailouts are, as a matter of principle, not to be encouraged. But after the hundreds of billions of federal dollars that have flowed to Wall Street, it's hard to stand on principle because one ends up standing on hypocrisy.
One good thing about a Chapter 7 liquidation is that GM's current management would lose their jobs. That needs to happen anyway. After 8 years as GM's CEO, Rick Wagoner hasn't got the job done. He bet the company on a commodities play: that the price of oil would stay low and that the company could keep building high profit, low fuel economy trucks. He was wrong, and even though he is CEO, he like everyone else should pay for his mistakes. Is Rick Wagoner a bad man? No. Is he stupid? No. Did he try his best? No doubt he did. But he gets paid millions and should deliver performance commensurate with his pay. He hasn't. Besides, GM needs a new face in order to credibly promise better future performance. If GM goes into bankruptcy, its one real chance may be federal assistance in lieu of debtor-in-possession financing. A new face has a better chance of winning over skeptics with a believable promise of improved future performance.
Let's recall that the 1979 Chrysler bailout, along with management changes at that company, worked and provided U.S. taxpayers with a profit. GM can produce quality vehicles (check out the new Buicks). It has innovative engineers and perhaps the best styling among the U.S. auto companies (most of the time; the Cavalier was sad looking on its good days and the Lumina was hardly luminous). If we deviate from dour, rigid application of free market principles and provide some taxpayer support, we might end up a lot better off than we would without GM.
Sales would probably fall off. A new car is a five or more year proposition for many buyers. They wouldn't want to buy a car from a bankrupt company that might not be around in a year or two to support the warranty and ensure a steady supply of replacement parts. GM would have to institute large, and perhaps massive, layoffs. Its suppliers would, in turn, have to make large, or even massive, layoffs. If the suppliers go into bankruptcy, their ability to supply not only GM, but also Ford and Chrysler, could be adversely affected. Ford and Chrysler, already seriously weakened, could begin circling the drain.
In order to reorganize and emerge from bankruptcy, GM would need "debtor-in-possession" financing, a special form of financing provided to bankrupt companies. But how many lenders are there, in these days of the credit crunch, who would fork over the billions needed by badly crippled GM for a reorganization? Maybe only a few. Very possibly none.
So GM might be unable to reorganize. In that case, its bankruptcy would be converted to a Chapter 7 liquidation. Some argue that this would be a good thing, that competitors would buy pieces of GM and get those pieces up and running again. But what competitors have the money to buy parts of GM? The financially strong ones, like Toyota and Honda. What might Toyota and Honda do if they bought some of GM's plants and facilities. Hint: it wouldn't be to operate them. The auto industry is plagued by serious overcapacity. Toyota and Honda could expand their share of the U.S. auto market by permanently closing any GM plants and facilities they bought in a Chapter 7 liquidation.
Would any leveraged buyout firms buy parts of GM? Not after Cerberus got clobbered for its investment in Chrysler. There don't appear to be any American investors who could come up with the money to establish a new company to take on Toyota and Honda. Any such transaction would require billions of dollars in bank credit lines, and what banks in the credit crunch era would finance such a business plan against such capable competitors? Today, banks only want to invest in U.S. Treasury securities. There wouldn't be a lot of them volunteering to finance a startup to compete against the likes of Toyota and Honda.
So GM's bankruptcy could end up with the U.S. auto industry seriously diminished. No nation remains great without a strong industrial base (compare the U.K. before and after World War II for proof of this proposition). Bailing out GM would be distasteful, since government bailouts are, as a matter of principle, not to be encouraged. But after the hundreds of billions of federal dollars that have flowed to Wall Street, it's hard to stand on principle because one ends up standing on hypocrisy.
One good thing about a Chapter 7 liquidation is that GM's current management would lose their jobs. That needs to happen anyway. After 8 years as GM's CEO, Rick Wagoner hasn't got the job done. He bet the company on a commodities play: that the price of oil would stay low and that the company could keep building high profit, low fuel economy trucks. He was wrong, and even though he is CEO, he like everyone else should pay for his mistakes. Is Rick Wagoner a bad man? No. Is he stupid? No. Did he try his best? No doubt he did. But he gets paid millions and should deliver performance commensurate with his pay. He hasn't. Besides, GM needs a new face in order to credibly promise better future performance. If GM goes into bankruptcy, its one real chance may be federal assistance in lieu of debtor-in-possession financing. A new face has a better chance of winning over skeptics with a believable promise of improved future performance.
Let's recall that the 1979 Chrysler bailout, along with management changes at that company, worked and provided U.S. taxpayers with a profit. GM can produce quality vehicles (check out the new Buicks). It has innovative engineers and perhaps the best styling among the U.S. auto companies (most of the time; the Cavalier was sad looking on its good days and the Lumina was hardly luminous). If we deviate from dour, rigid application of free market principles and provide some taxpayer support, we might end up a lot better off than we would without GM.
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