Thursday, November 13, 2008

The problem with bailouts

Bailouts are a bad idea. There are lots of reasons. 

Here's just one: When the government tries to prop up failing businesses it always come with strings, and those strings make it even harder for the company to succeed. 

Case in point: 

Thomas Friedman wrote in his New York Times column about what he thinks the government should demand in exchange for the bailout of General Motors. He says that GM must: 

"... demonstrate a plan for transforming every vehicle in its fleet to a hybrid-electric engine with flex-fuel capability, so its entire fleet can also run on next generation cellulosic ethanol."

This is such a bad idea. Who knows when and if hybrid/flex fuel/cellulosic ethanol is truly going the be the "next generation" model for automobiles? Friedman certainly doesn't know, nor does the federal government. 

Yet he wants this mandated as a condition of the bailout? What if they are wrong? Then GM will fail again, or more likely, taxpayers will just have to subsidize the production of these supposedly next generation cars forever.

Better to let it fail. The company is failing because of its medical and pension liabilities, not so much because its cars are bad. Let someone else put their own capital at risk buying the assets and making cars that aren't weighed down by a corporate cost structure that makes it uncompetitive.


OregonGuy said...

Common sense.

Perhaps this common sense thing could be revealed to our governor?


R. L. said...

"The company is failing because of its medical and pension liabilities, not so much because its cars are bad."

Yeah, it's all those coddled automotive workers and not the fact that GM's sales dropped %45 from this time last year. Nope, that would be a minor issue.

Anonymous said...

I read somewhere (don't know if this is credible,) that during the civil war the confederate constitution didn't allow laws to pass as a "package" they had to pass one by one.
I'm in the housing industry as an assistant to both mortgage bankers and Realtors. Since we just had to "close our eyes and open our mouth" with all these bailout plans, everyone in the housing industry is feeling ignorant and just yesterday the bailout plan changed course towards student loans, auto loans and credit card debt. Our trade associations are constantly advocating for one thing or another, I'm wary of "package" ideas. "Support the mortgage makeover bailout plan!" Support the "Credit for lousy borrowers plan" And it's hard to get to the bottom of the 'plans.'
The best part was when the media starting saying there had been an economic upturn the day after Obama was elected.

Anonymous said...

Hi Rob - Clarification needed concerning "not so much because its cars are bad." Does this mean you think Detroit's cars are bad but the problem is caused by medical/pension costs, or does it mean you think Detroit's cars are not bad?

MAX Redline said...

Oddly, the cars sell well in Europe. Why would that be? Smaller engines, better fuel efficiency, and fewer safety standards - which is why those cars can't be sold in the USA.

What's killing the US automakers? A combination of government and unions.

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