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Driving Miss Crazy

June 6, 2011

So, does anyone want to be more depressed about the auto bailouts?  I mean, I know it’s hard, but there’s a great summary this morning in the Wall St. Journal from David Skeel. (I just noticed that Hot Air saw this as well).

General Motors was a perfectly viable company that could have been restructured under the ordinary reorganization process. The only serious question was GM’s ability to obtain financing for its bankruptcy, given the credit market conditions in 2008. But even if financing were not available—and there’s a very good chance it would have been—the government could have provided funds without also usurping the bankruptcy process.

Although Chrysler wasn’t nearly so healthy, its best divisions—Jeep in particular—would have survived in a normal bankruptcy, either through restructuring or through a sale to a more viable company. This is very similar to what the government bailout did, given that Chrysler is essentially being turned over to Fiat.

I don’t think that’s a shock to anyone.  The government decided to step in to make things go faster, probably because the administration wanted to look decisive in saving US unions… I mean business.  But in the end, they just delayed a serious recovery of the business because they locked out real suitors for the market.  Mr. Skeel also notes that the administration waived some tax considerations, so that the “apparent” cost of the bailout is likely double what we’re being told.

This is the part that gets to me, though:

The indirect costs may be the worst problem here. The car bailouts have sent the message that, if a politically important industry is in trouble, the government may step in, rearrange the existing creditors’ normal priorities, and dictate the result it wants. Lenders will be very hesitant to extend credit under these conditions.

This will make it much harder, and much more costly, for a company in a politically sensitive industry to borrow money when it is in trouble. As a result, the government will face even more pressure to step in with a bailout in the future. In effect, the government is crowding out the ordinary credit markets.

So the government, by stepping in, has guaranteed that it’ll have to step in at a later time.  And this will be more likely where the company is large and in serious trouble where the creditors wouldn’t want to step in.  So the government will be forced into the role of high-risk insurance for bad business in the US.

On the bright side, after we’re on the hook for the costs, there will be plenty of good business bits left for someone to buy on the cheap.  So while we mourn for Chrysler (okay, I don’t… I’ve always disliked their cars), we should cheer for Fiat who actually can do something with Jeep.

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4 Comments leave one →
  1. June 14, 2011 1:00 pm

    yeah, I’m with you and Level Head. The day I heard that the gov’t was tinkering with who gets what, in contradiction to the contracts and agreements made, I shuddered. How can that not trigger massive alarm bells in every adults’ mind?

    what good is the law, or a contractual agreement, if the gov’t can step in and change it?

  2. June 6, 2011 10:53 am

    We have become a Schumpeterian septic tank, with too many floaters that should have sank.

    Speaking of the moral hazard, few people think that “too big to fail” was resolved by Dodd-Frank. Markets think investment in the big banks come with an implicit government gurantee.

  3. June 6, 2011 9:41 am

    I too think that the largest cost to the bailouts was the damage done to the concept of the US’s rule of law.

    Governments like China can step in and simply dictate a result they want, for their politically favored people or for any other inscrutable purpose. Some businesses will not invest in China because of this tendency. The Obama administration has mandated that the standard rules of bankruptcy don’t apply, because their politically favored unions would be harmed. Thus, this administration moves closer to being added to the list of “governments like China.”

    And then there was the whole “let’s nail dealerships since they’re mostly Republican” business…

    ===|==============/ Level Head

    • June 6, 2011 9:52 am

      The motivations on unions/dealships were obvious, but not things I really saw a focus events. They just helped the decision get made.

      The motivation to step into business affairs as a government entity is more concerning, because that says that business plans mean less than lobbying and contributions. It’s moderately acceptable to use those as ways to get business to be more successful… and lobbying is a great ROI. It’s less acceptable to use those as a substitute for real business planning.

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