The Detroit Bailout

Compared to the Bush-Pelosi Wall Street Bailout, which is twenty-eight times more expensive, the Bush-Pelosi Detroit Bailout is downright fiscally prudent!

US Congress passes 25 bln loan guarantees to automakers
The US Senate Saturday approved 25 billion dollars in loan guarantees for the financially strapped US auto industry, intended to spark a wave of automotive innovation.

The loan guarantees were included in a continuing resolution that included funding for the US government and the wars in Iraq and Afghanistan.

The Detroit Bailout is a companion to McCain’s gas tax holiday, Obama’s energy tax credit, and other such give-aways. Obama is right to say that the price of gas should be high, but it went up too fast. Industries did not have the time to adjust, because we did not implement my plan in time.

The loan guarantees to Detroit will help speed development of high-tech ways to minimize gas consumption. Or at least, they better.

47 thoughts on “The Detroit Bailout”

  1. “loan guarantees for the financially strapped US auto industry, intended to spark a wave of automotive innovation.”

    The guarantees will have the opposite effect.

    Companies innovate faster when they are have a culture of confidence & innovation, or are motivate by the threat of extinction.

    The US Auto industries don’t have the first, and the loans guarantees take pressure off the second.

  2. The choice is not between this, and spurring free-market innovation from Detroit. The choice is between this, and the end of Detroit.

    Again, this is may not be a bad outcome. Certainly it would be good to shake out the backwards-looking car companies and get something better. Toyota and Honda have been ahead of Detroit for generations.

    Fortunately (IIRC) two Japanese manufacturers are included in the company list, so the incentives aren’t completely deviant.

  3. When I feel down I believe that I don’t think Detroit wants to survive.

    Their idea of innovation is creative layoffs, downsizings, and early retirement incentives.

    There is room for an American auto industry, but it is going have to out of something else (entrepreneurial startups, or maybe GE).

    BTW, I drive a Ford.

    When I page through the spring Consumer Reports circling cars that look interesting, they don’t seem to from Ford, Chrysler or GM.

    They have squandered their human capital and their market share advantages.

  4. Big players wisely make big bets when they perceive their existence to be at stake.

    John McCain chose Sarah Palin for such a reason.
    HM chose the volt for that reason.

    Wall Street knows it has friends in high places, and so asks for $700 billion. [1]

    [1]http://www.tdaxp.com/archive/2008/09/26/the-bush-pelosi-bailout.html

  5. “There is room for an American auto industry, but it is going have to out of something else (entrepreneurial startups, or maybe GE).”

    As I’ve read about the Volt [1], I’ve often thought that GM should downsize radically and reinvent itself as a company focused completly on R&D. They would get out of the manufacturing and financing business 100% and just focus on coming up with inovative solutions and concept vehicles. When it comes time to turn a concept into a production car, they would either outsource the manufacturing to a independent contractor or liscence the rights to some other car company.

    [1] http://gm-volt.com/

  6. Another possibility–the Big Three could survive by selling off or trading all but their most profitable assets (including patents, trademarks and copyrights). They wouldn’t be big anymore, the unions would hate them (they’re the ones needing bargained with to get the pension and health-care burdens of their backs), but they might survive.

  7. FYI – Chrysler & GM discussing merger

    http://hosted.ap.org/dynamic/stories/G/GM_CHRYSLER_MERGER_TALKS?SITE=DCUSN&SECTION=HOME&TEMPLATE=DEFAULT

    This is why the American auto industry is failing. For 30 years, there primary strategy has been financially-oriented (economies of scale, layoffs/downsizing, vehicle financing, political lobbying, etc,) instead of innovation-oriented (100mpg cars, the $8,000 starter car, the electronic drive train, the electric car, kaizan/lean, owner modular/customizable cars….)

  8. What we need out of Detroit now are something like E85 plug-in hybrids: tools that will help end the massive transfer of wealth from us to rentier economies.

    If bail-outs help in this, good. If mergers help in this, good.

    If all we get is more of the same… not good.

  9. One of the things that has surprised me over the last few years is that Chrysler has not come out with an E85 only hot rod for sale mostly in the northern Midwest where E85 is plentiful and cheap.

    E85 is 105 octane fuel so you can boost the compression ration to something like 14:1 which makes the engine a lot more efficient and really boosts power. Since the Ethanol burn takes place over a longer time period, you don’t get the sudden sharp power spike that you get with gasoline so you can use standard wrist pins, connecting rods and bearings. You should be able to get a car with a 500 horse power engine that gets ~30 miles to the gallon.

    In days gone by, Chrysler would have developed one of these things and put it on the market just because they could.

  10. “Chrysler CEO Nardelli: U.S. Auto Industry About to Collapse”

    http://www.thetruthaboutcars.com/chrysler-ceo-nardelli-warns-of-us-auto-industry-collapse-but-were-ok-go-figure/

    –>
    According to Automotive News [sub], Boot ‘em Bob is having visions of Carmegeddon. “Bob Nardelli, just 14 months into his tenure as CEO of Chrysler LLC, now fears the collapse of an ‘extremely fragile’ auto industry amid the credit crisis and Wall Street meltdown.” Uh, I think Big Bob means the domestic auto industry. And anyway, why would the ChryCo’s CEO conjure visions of doom when his company is OK? I mean, Chrysler’s doing fine right? “Nardelli said cash is ‘the number-one metric for the auto industry.’
    <–

    The number one mtric is Cash. Nothing about innovation, or sales, or market share, or concept-to-sales span, etc.

  11. Mochael: “Another possibility–the Big Three could survive by selling off or trading all but their most profitable assets (including patents, trademarks and copyrights). ”

    I think the above is very interesting.

  12. Governmental pressure will naturally be in the direction of job preservation. In the medium term this will cause us problems, as the far more important goal is building cars that require less gas.

    Considering this is the hour of nationalizations, even a governmental takeover of Detroit would be fine if we get E85 plugin hyrbids out of it.

    Dan

  13. “Ford May Lose Potential Funding Source As Kerkorian Exits”

    http://money.cnn.com/news/newsfeeds/articles/djf500/200810211421DOWJONESDJONLINE000615_FORTUNE5.htm

    –>

    “Ford is losing one of its last-resort strategies – the ability to tap Kerkorian’s deep pockets to help with any future liquidity crises,” said Global Insight analyst Aaron Bragman. Were Ford’s liquidity position to fall to dangerously low levels, Kerkorian might have been able to offer up a few billion dollars to buy the company time, Bragman noted.

    <–

    I wonder what their dividend yield is now?

  14. As the GM-Chrysler merger approaches (on our dime) [1] and Kerkorian sells Ford stock [2], we should ask ourselves what we want from the auto industry. If it is going to be saved, again, what price should we extract?

    Between these bailouts, delaying the FTA with Korea, etc, it’s clear that Detroit is now a quasi-socialized industry, in the sense that home mortages were under Fannie Mae and Freddie Mac.

    We need to move off foreign hydrocarbons. We can’t enrich countries like Iran, Russia, Saudi Arabia, and Venezuela through natural resource purchases and expect things for or from those states. We need more regulations of the auto industry to force higher fuel economy, both from traditionally fuel efficient vehicles as well as hybrids, E85 engines, and so on.

    [1] http://ap.google.com/article/ALeqM5gN2p_jkvRRBeQ6oqznKZ2dTJ3_gwD93V4OQ80
    [2] http://www.chinadaily.com.cn/world/2008-10/22/content_7128094.htm

  15. I guess I am treatingthis as a US Auto Open Thread…I hop ethatis okay.

    http://hosted.ap.org/dynamic/stories/C/CHRYSLER?SITE=DCUSN&SECTION=HOME&TEMPLATE=DEFAULT

    Reports that Chrysler LLC is being shopped for sale by its owners are just speculation, a top Chrysler executive said Wednesday night.

    …and…

    People familiar with the talks have told The Associated Press that Chrysler’s owners are talking to General Motors Corp., the combined Nissan Motor Co.-Renault SA, and others about a possible sale or merger.

    …and…

    Chrysler reportedly has about $11 billion in cash, something that cash-starved GM is interested in accessing. GM is burning through $1 billion in cash per month and would have difficulty borrowing more money. Analysts say it could reach the minimum amount needed to run the company sometime next year.

  16. Not, US, but related and interesting: “Australia Developing Massive Electric Vehicle Grid ”

    http://tech.slashdot.org/article.pl?sid=08/10/24/0440204

    “A US firm Thursday unveiled plans to build a massive one-billion-dollar charging network to power electric cars in Australia as it seeks cleaner and cheaper options to petrol.
    […]
    Under the plan, the three cities will each have a network of between 200,000 and 250,000 charge stations by 2012 where drivers can plug in and power up their electric cars. The points would probably be at homes and businesses, car parks and shopping centres. In addition, 150 switch stations will be built in each city and on major freeways, where electric batteries can be automatically replaced in drive-in stations similar to a car wash.”

  17. “Chrysler to Launch ‘PeaPod’ Electric Cars Worldwide in 2010”

    http://gas2.org/2008/10/22/chrysler-to-launch-peapod-electric-cars-worldwide-in-2010/

    Chrysler has announced plans to launch its PeaPod electric car worldwide in 2010. The compact city EV will be available as a one-seater, a two-seater or a utility van, at prices starting from around $20,000.

    Developed by Chrysler-owned Green Eco Mobility (GEM), the PeaPod is capable of travelling 40 miles on a single charge. According to the company’s innovation chief, Peter Arnell, this is more than enough for most daily commutes.

    Personally, I want a $5k urban car I can use and feel safe in.

    I do not need a penis extension. I do not need my own assault vehicle.

    I don’t want to pay more for a car then I pay for Rent in a year.

  18. Michael: Good on Fiat. I hope Ford and GM learn something.

    Also, just in-case people think I am just a basher of US cars: Every car I have owned has been a Ford. I bet the next one won’t be though.

  19. Depending on how much capital Detroit needs, it may be wise to begin discussion the outlines of a ‘United States Motor Corporation,’ a partially nationalized form of our auto industry.

    The Big 3 are close to being hopelessly intertwined with the federal government, and are a strategic industry because of the resources they consume (foreign hydrocarbons).

    If they need capital and we need to get off foreign hydrocarbons, then there is a deal to be had.

  20. Question:

    Given how many opportunities and how much capital Ford and GM have wasted the last 25 years (as indicated by the decline in their market capitalization), why should we expect that giving even more money to these companies, while removing the “Creative Destruction” effect (which is an incentive for survival, innovation, productivity, risk taking and improvement, that also has positive externalities to society in the form of jobs, better stuff, more individual freedom of consumer choice and better quality-of-life), would get better results?

    I am just thinking outloud here…why not….

    …force GM into an ATT-like split (a s a condition of the infusion of capital) where some of the companies are made interdependent, and some becomes units of GE or Berkshire Hathaway? How would Jeff Bezos run a a car company? How about meg Whitman?

    …why not fund Tesla or that $2000/car Indian company in the USA since these places are innovating?

    …why not fund US production and engineering activities for winning companies like Toyota ?

    I guess if the USGOV is going to Kenysian stimulus spending (which I don’t think is a good idea) instead of spending it on individual companies, I would prefer to spend it on infrastructure type stuff that new entrepreneurial venutures can be built around:

    -GPS/Robot controlled cross-country freeway lanes
    -Alaska to Russia Bridge
    -Cleanup/Upgrade of the Great Lakes shipping loches and a better way to handle invasive species coming from dumped ship’s ballast
    -a Nation network of Smart Power Grids that can be plugged into
    -Small underground nuke power plants (or at least a friendly regulatory environment so new nuke power can actually be built)
    -Municipal plasma furnaces across the country to replace land fills (and to generate some electricity)
    -Fiber-based Broadband to every home
    -Prehab Houses Business as 2 or 3 competing GSE (to be spun-off eventually to the market) to create 2 and 3 bedroom affordable freestandable pre-fab houses and a system to to deliver and install them. Couple that with a bulldozing blighted neighborhoods initiative .
    -Upgrade or create high speed train tracks

    The above list is not exhaustive or well thought out. It was just what I thought of in the moment.

    I think the problem will be pickout the “good” projects. It might be better to just do1 or 2 big nationwide projects but to mostly do policy/regulatory things that increase entrepreneurial activities and let market outcomes pick winners and loosers.

  21. Another approach–instead of a loan that may or may not be paid back or used wisely, give grants to reduce their legacy costs to the same level as their competitor’s US factories. If they can stabilize and start growing again afterward, great. If not, the companies who sold them the equipment will be taken care of and their workers won’t be as badly in the ditch as otherwise.

  22. Michael:

    Are you thinking of a sort of US Auto Industry Rescue Corporation? (USAIRC)

    Would the idea be to transfer existing pension and health care obligations along with some industry funding (combinations of cash, long-term bonds, prefered stock, and warrants) with the rest being funded by taxpayers (perhaps as a one-time lump sum)?

    I am assuming the company would get out of the pension business for current and future retirees and just increase contributions to worker 401ks?

  23. Pretty much. Another possibility might be to give the money, and the responsibility, straight to the Union.

  24. GM and Chrysler should not have their legacy costs socialized.

    They decided to gather political favor by paying absurd amounts for labor. This harmed not only other employers and the rest of society, but also the whole political system. GM and Chrysler corporate socialism was expected, and really stupid ideas like Hillarycare and the employment-based health care system we have are the results of people looking to GM and Chrysler and seeing the future.

    Detroit did great damage to America. The idea that we must now pay for what it cost them to harm us like that is absurd.

  25. Maybe. On the other hand, a fall of any of those companies will put their workers and pensioners into the taxpayers’ lap anyway. Fair or not, taking care of that aspect of their legacy costs may be inevitable.

  26. Certainly there will be creditors in any bankruptcy.

    But regardless of how pensioners are handled, there is no reason to do so in a way that benefits the shareholders, unless it’s our intention to bail out the shareholders.

  27. I have longed believed that the NPV of underfunded/unfunded but promised benefits to workers from their employers like pensions and health care should appear as a liability line on the corporate balance sheet with a claim that comes in before bondholders.

    That simple accounting changing will have quite effect on the way these things are handled. I think most companies would switch to fund as you go along retirement accounts. As public policy, USAGOV should facilitate this by expanding the IRA by allowing unlimited contribution directly by employers in lie of a traditional pension. I have no time for details in this comment though.

    It also means, that in the case the company goes under, workers/retirees will have have a claim before bondholders, so taxpayers are less likely to be on the hook.

  28. On GM:

    http://www.transterrestrial.com/archives/005170.html

    Part of the parallel was that I worked summers for the company to help with college bills (getting the jobs through the influence of my dad, of course), and it helped motivate me to study harder so that I wouldn’t have to spend the rest of my life there. One of the things that these summer job experiences taught me was that in addition to the fact that they made lousy cars (even then, in my humble sports-car-loving opinion), they were dramatically mismanaged, and that ultimately (though I didn’t imagine that it would take so long) they had no future.

  29. Hybrid Car blog has a depressing take: [1]

    Democrats are kicking around the idea of another $25 billion for automakers as a “bridge financing” loan according to the DetroitNews. Such funding now appears inevitable as Congress will eventually offer the Big 3 some kind of bailout. Fortunately, it seems that money will come with strings, such as the money can’t be used for bonuses. Unfortunately, it doesn’t appear the new legislation will come with enough strings, such as a fuel economy requirement, for instance.

    Caps on executive bonuses are a red herring. If there’s no push for greater foreign hydrocarbon economy, this is bad news.

    [1] http://www.hybridcarblog.com/2008/11/another-25-billion-for-automakers-in.html

  30. In the spirit of the Christmas season, I suggest we just give Ford to Honda Motor Corporation – sort of like an unwanted orange in a sock.

    I would suggest giving GM to Toyota, but that would not sit right with the Chinese, so I’m going to recommend giving GM to KIA.

    Chrysler – goes to Tata Motors.

    Now, to whom goes Harley Davidson? Hmm, Vespa?

  31. An early salvo in the war of in the fight to spend any auto-related money on subsidizing fuel efficient vehicles, rather than saving Detroit jobs: [1]

    So, if we could put millions of small hybrid cars, such as the Toyota Prius and the Honda Insight – and whom ever else builds them – on the road per year with the help of tax incentives, why not do it? Why not send a message that fuel efficiency will be rewarded for many years? Ultimately, won’t ending foreign oil dependency pay for itself?

    Isn’t making a serious dent in foreign oil dependency worth just as much money as saving jobs – jobs that have been built upon inefficiency?

    Hat-tip to Hybrid Car blog [2]

    [1] http://www.soultek.com/clean_energy/hybrid_cars/fuel_economy_versus_auto_jobs_whats_more_important.htm
    [2] http://www.hybridcarblog.com/2008/11/fuel-economy-versus-auto-jobs-whats.html

  32. Imagine one solution that would revitalize Detroit and the larger economy, create
    thousands of new jobs, largely eliminate the need for foreign oil, drastically reduce
    green house gases, and greatly improve the U.S. transportation infrastructure. This
    sounds too good to be true, but all that’s lacking is political willpower. We have
    the ability to solve many of our problems in one fell swoop, what we need is the
    political leadership to make it happen.

    How can such progress be achieved? It can by realized by constructing networks of
    Personal Rapid Transit (PRT) systems in major cities in the U.S. PRT is a public
    transportation concept that offers on-demand, non-stop transportation, using small,
    independent vehicles on a network of specially-built guideways (source Wikipedia).

    The guideways would be built throughout a city, and are sufficiently small to have
    stations within office buildings. A passenger would walk to a PRT station and enter
    a waiting vehicle. The passenger would select the destination (much like using a
    GPS in current autos) and sit down for a relaxing trip. The vehicle would be automatically
    driven and routed to the passenger’s destination. The electric vehicles use no oil,
    have no pollution. PRT systems have been studied in the U.S. and throughout the
    world for decades. A pilot project (ULTra) is currently under construction at London
    Heathrow Airport and will be operational in 2009. Two other PRT systems have been
    planned: one in Masdar City, Abu Dhabi, UAE with a completion date of 2011; another
    in Daventry, Northamptonshire, UK with a completion date of 2012.

    Instead of bailing out Detroit with millions of dollars to produce products that
    fail to be competitive, Detroit would be retooled to build vehicles for PRT systems.
    They would be building vehicles for the future. The construction of the guideways
    throughout the U.S. would create thousands of new jobs. The operation and maintenance
    of the PRT systems would likewise create many new jobs. Electric power for the PRT
    systems would be provided by new wind, solar, nuclear, or clean-coal power plants
    – more jobs. The dependence on foreign oil would be drastically reduced as millions
    of cars would be removed from the roadways. The savings in foreign oil expenditures
    would be billions of dollars per year. Pollution would also be greatly reduced by
    removing the cars. Of course the transportation infrastructure would be significantly
    upgraded.

    All that’s needed is for a major political leader to enthusiastically champion the
    building of PRT. Imagine defining a mission statement as JFK did for the moon landing.
    A statement such as “Our goal is to transport most employees in a clean, safe, personal
    vehicle to and from work in half the current traveling time and at one-tenth the
    current cost, and to do so by our country’s 250 birthday.”

  33. The Personal Rapid Transit (PRT) idea is interesting, and would make a fine long-term solution.

    Work on PRT should continue, but should not stop us from doing what we need to dramatically reduce our — and our allies’ — consumption of foreign hydrocarbons. Gap countries like Iran, Venezuela, and Russia are destabilizing to the extent they can afford to be [1].

    With regard to the short-term question of the 2nd Detroit Bailout of 2008, the UAW refuses to make any concessions [2]. GM should not be saved anyway, but the stone-age (or at least, 1950s) corporatism of the auto unions is something America will be better without.

    [1] http://www.economist.com/world/international/displaystory.cfm?story_id=12480942
    [2] http://www.google.com/hostednews/ap/article/ALeqM5hdFVMQK3UdeVOL-hBHkvhHHyb39wD94FI2MG0

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