Why Detroit Is Not Too Big to Fail

Why Detroit Is Not Too Big to Fail by Michael Schuman:

Take, for example, the 1999 collapse of South Korea's gargantuan Daewoo Group in the wake of the Asian financial crisis .... The Korean economy didn't fall into the Pacific after Daewoo's tumble as many had feared. Korea's GDP grew 9.5% the year Daewoo failed, and 8.5% the next.

Japan learned a similar lesson during the economy's Lost Decade after a stocks-and-real-estate bubble burst in the early 1990s. In a pathetic attempt to avoid losses, Japanese banks kept pumping fresh funds into debt-ridden, unprofitable firms to keep them afloat .... It was only after Japan began solving its zombie problem, rather than perpetuating it, that the country's financial crisis was finally resolved.

The new Bailout

Henry Ford on the bailouts

Let them fail; let everybody fail! I made my fortune when I had nothing to start with, by myself and my own ideas. Let other people do the same thing. If I lose everything in the collapse of our financial structure, I will start in at the beginning and build it up again.

Henry Ford - February 11, 1934

Auto bail-out : readings

In Praise of the US Auto Industry by Peter Klein:

It’s an industry to be proud of. Its products are among the best in the world. Their names are Toyota, Honda, Nissan, BMW, Mercedes, Hyundai, Mazda, Mitsubishi, and Subaru.

The Chrysler Bailout by Ron Paul (1979):

Last year there were 200,000 bankruptcies in this country, according to U.S. News & World Report. Yet we have selected only the largest for our aid. This is discrimination of the crassest sort. We ignore the smaller victims of this government’s policies simply because they are small. Only the largest, those with the most clout, the most pull, get our attention. This aristocracy of pull is morally indefensible.

Yet Another GM Bailout by Briggs Armstrong
What's Good for GM?, Cato Podcast with David J. Ikenson
Should The U.S. Auto Industry Be Rescued? with Dave Mitchell
Bailouts: Where Will They End? by David Boaz
America’s Other Auto Industry, the Successful One (OpenMarket.org)

Politics as usual

Auto Bailout Compromise Reached by Key Senators (CNBC)

Which Senators Have Auto Plants in Their Districts? (CNBC)

Bailout Blues

The White Stripes - The Big Three Killed My Baby (Live)

Auto bail-out

"Would an Auto Bailout Lead to National Greatness?" by David Boaz:

.... protectionism couldn’t survive the analytical critique of Adam Smith in 1776, and yet it persists. So we can’t assume that members of Congress will .... drop the idea of handing a big pile of taxpayers’ money to corporate managers, stockholders, and unions who have dug themselves into a deep hole.

For those of us who opposed all the taxpayer bailouts, starting back with Bear Stearns–or with Chrysler in 1979–all these bad ideas may seem to run together .... the dangers of political allocation of resources, the benefits of bankruptcy and restructuring, the industry’s partially self-inflicted wounds, the desire of some Democrats for political power over corporate decisionmaking, the dangers of corporate capitalism.

A lemon of a bailout by Charles Krauthammer:

.... Where do you stop? Once you’ve gone beyond the financial sector, every struggling industry will make a claim on the federal treasury. What are the grounds for saying yes or no?

The criteria will inevitably be arbitrary and political. The money will flow preferentially to industries with lines to Capitol Hill and the White House. To the companies heavily concentrated in the districts of committee chairmen. To clout. ....

"Bailout to Nowhere" by David Brooks:

Granting immortality to Detroit’s Big Three does not enhance creative destruction. It retards it. It crosses a line, a bright line. It is not about saving a system; there will still be cars made and sold in America. It is about saving politically powerful corporations ....

It is all a reminder that the biggest threat to a healthy economy is not the socialists of campaign lore. It’s C.E.O.’s. It’s politically powerful crony capitalists who use their influence to create a stagnant corporate welfare state.

"The Impotence of the Economists, Part II" by Peter Klein:

The financial-market bailout is one thing. While most economists, rightly in my view, strongly opposed the Paulson plan, one can at least imagine intelligent arguments for it. The proposed auto-industry bailout is something else entirely. Does any economically literate person support it? Industry bailouts are textbook examples of the fallacy of composition, taught in every Econ 101 class. When I teach it I use exactly this kind of example (bailing out Chrysler in 1980, bailing out the airline and insurance industries after 9/11, etc.). Saving the X industry simply harms the Y and Z industries, while substituting the political process for the market in determining the allocation of resrouces. And yet, here we go.

"Just Say No to Detroit" says David Yermack:

Over the past decade, the capital destruction by GM has been breathtaking .... a net $182 billion of society's capital has been pumped into GM over the past decade -- a waste of about $1.5 billion per month of national savings. The story at Ford has not been as adverse but is still disheartening, as Ford has invested $155 billion and consumed $8 billion net of depreciation since 1998.

As a society, we have very little to show for this $465 billion. At the end of 1998, GM's market capitalization was $46 billion and Ford's was $71 billion. Today both firms have negligible value, with share prices in the low single digits. Both are facing imminent bankruptcy and delisting from the major stock exchanges .... one can only imagine how the $465 billion could have been used better -- for instance, GM and Ford could have closed their own facilities and acquired all of the shares of Honda, Toyota, Nissan and Volkswagen.