Big 3 Auto: Should they be rescued?

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Before answering the question of whether taxpayers should rescue the auto industry, we have to know what the situation is, and what the pros and cons are for a rescue or allowing one or more of the Big 3 to bankrupt. Hearings yesterday and today before Congress provide a good deal of information on the topic, and almost no hope of an immediate rescue to come this week.

Here is the situation according to the executives of the Big 3 as reported in the NY Times.

"Without immediate bridge financing support, Chrysler's liquidity could fall below the level necessary to sustain operations," said Robert L. Nardelli, the chairman of Chrysler.

His comments were echoed by G.M.'s chairman, Rick Wagoner, who warned that the rippling impact of the auto industry's cash woes could put three million American jobs at risk.

He said that a failure by G.M., Ford or Chrysler would rapidly bring the entire domestic industry down. "The societal costs would be catastrophic -- three million jobs lost within the first year, U.S. personal income reduced by $150 billion and a government tax loss of more than $156 billion over three years," Mr. Wagoner said.

Alan R. Mulally, Ford's chief executive, added, "If any one of the domestic companies should fail, we believe there is a strong chance that the entire industry would face severe disruption."

Most in the Congress do not want to see the ripple effects on an already declining economy that bankruptcy of one or more of the auto makers would create. However, many lawmakers fail to see or hear from these executives convincing evidence that 1) the 25 billion they are asking for would be sufficient to save all three companies, and 2) that these companies would reverse their previous antagonistic position toward Congress in fighting it on better fuel mileage and dramatic conversions from oil based to energy to alternative based auto fuels.

The Big 3 auto companies have not endeared themselves to Democrats by fighting and lobbying against more fuel efficient cars in the past. And, they have not endeared themselves to Republicans by virtue of their concessions to the unions which make their costs of operation less competitive with foreign manufacturers.

Still, the qualifying remarks by the Congressional critics of the Big 3, indicate that a rescue will be forthcoming. However, not immediately, and not necessarily in the form the Big 3 are asking for. Lawmakers appear intent on devising a set of conditions for management of these companies to better insure that they not come back for another rescue handout, and truly compete for the future market share of smaller, more energy efficient, and cleaner running vehicles of the future.

As Barbara Murkowski said on the floor of Congress this morning, 1 out of 10 employees in America would be negatively affected by the failure of the American auto industry. If they fall into bankruptcy, given the very tight credit markets and ample facilities of competitors, the chances of a competing auto maker bidding to take over, or merge and acquire one of the failed Big 3, are small indeed. Instead, competitors would expand their own operations to take up market share.

Some Republicans have been calling for allowing them to file bankruptcy and allow the courts to reorganize their business model, give them protection from creditors, and the time to get their financial operations back on sound footing. Which is what is likely to happen if Congress does not allocate 'bridge loans' to the automakers to tie them over this credit crunch period in which private loans are not available.

However, such bankruptcy proceedings would be slower in coming, and likely provide insufficient resources to permit the auto makers to spend what they need to complete their retooling and redesigns to compete with smaller more efficient competitor vehicles. In addition, retirees and pension recipients would likely lose income as a result of bankruptcy court reorganization, impacting the general economy negatively through even greater reductions in consumer demand, and hitting taxpayers with billions in pension plan insurance obligations. And lastly, research indicates that if any of the Big 3 goes bankrupt, consumer demand for their vehicles would drop off a cliff by as much as 80%, threatening even reorganization efforts through bankruptcy proceedings.

Congress appears poised to assist the Big 3, but it won't be this week or even likely in this session.

"I am prepared to consider economic aid to the automakers, but providing regular order is followed," said Senator Arlen Specter, Republican of Pennsylvania. "And by that I mean, we have a bill we know the specifics of, to have a chance to study it, to have hearings, to have a floor debate, to have amendments."

It appears the consensus is, that the Big 3 should get taxpayer assistance to stay afloat. However, that assistance will have to be accompanied by conditions which lawmakers can take back to taxpayer constituents and say, we have put in place assurances that the taxpayers will get their money back from the Big 3 in time. With deficits and debt growing (4.24 trillion in 1 year), it is clear the days of free handouts and subsidies are over. Lawmakers will still hand out taxpayer dollars to corporations and business, but, not without strings attached that will help insure the taxpayers are repaid with interest.

This may reflect some of the change voters voted for on November 4 of this year.

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This page contains a single entry by David R. Remer published on November 19, 2008 6:50 PM.

Anti-Incumbent Voters, Alive, Well, and Growing. was the previous entry in this blog.

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