Posted by: mutantpoodle | December 5, 2008

Bailouts and Broomsticks


Cartoon by Steve Sack, Minneapolis Star-Tribune

I have been struck, over the past week, at what seems to be the visceral reaction of people to the notion of bailing out the auto industry.

Let me back up. I am not have have not been, for a long time, a fan of the management of the Big Three. In my first post evah on this blog, I suggest that people “think how Detroit would be doing if the Big 3 automakers had embraced fuel economy and emissions reductions 25 years ago.”

And I think I was right.

But now, the arguments about bailing out the Auto industry have gotten bollixed up in a mix of anger and resentment (private jets to DC, anybody?), union busting (I’m talking to you, Richard Shelby), and the prospect that the American auto industry can never recover.

Of those, only one really matters.

During the campaign, when fun stuff happened, like John McCain needing a staff memo to total up his houses, or the ownership of a (gasp!) Japanese car among the 13 cars that belong to him and/or Cindy, I noted that I didn’t really care how many cars or houses the McCains owned – were the shoe on the other foot, I’d still be voting for Obama. It’s easy to get sidetracked by trivia, and it seems to me that’s where we are today. So: what’s salient and what’s not?

Past idiocies by the big three? Relevant, with the proviso that if there’s some learning that has taken place,it’s mitigated, and if it is felt that the current executives don’t get it, then send them packing. However, only Rick Wagoner at GM is a lifer in Detroit; Alan Mulally at Ford came from Boeing and Robert Nardelli at Chrysler came from Home Depot. So it’s hard to lay a half-century’s worth of problems at their feet.

Egregious labor costs? Well, for a time. But the real impediment to American manufacturing competitiveness is twofold: first, there’s a huge retiree burden that is a private responsibility here but not in the countries of our main competitors, and second, the automakers here bear health care costs, which are also borne by governments in Germany and Japan. Current wage rates aren’t the core of the problem, and they’re not the bulk of the cost of a car anyway.

A few weeks ago, Jane Hamsher at Firedoglake talked to Wall Street automobile analyst Ron Glantz. His analysis was sobering. Some excerpts she recounted:

The overriding problem, however — and the one he thinks is insurmountable — is the legacy of bad product that the US auto makers have in this country.

Right now, it’s harder to sell American cars in America than it is to sell foreign brands. So if Toyota and Chevy make the exact same car, the American car has to be sold for $4000 less (factoring in both American buyer’s nervousness that the brand will go bankrupt, along with bad product legacy). Ron said that American automakers have now developed the same worker productivity that the Japanese automakers had by changing their culture, and can build just as good a car, but consumer trust isn’t there and nobody will buy them at the value they will give for a foreign brand….

Possibly the most interesting thing he said was that Americans are never going to buy low-mileage cars at a price that is going to be profitable to auto manufacturers unless there is a gas tax levied. So what he proposes is that an escalating gas tax be put in place for the future in order to give people time to prepare, such that they know gas will cost $4 a gallon at the end of this year, then $4.25, then $4.50, etc. Otherwise, both demand and profitability are going to lie with gas hogs whenever gas prices are low.

Glantz thinks GM should be allowed to die. And maybe he’s right.

But right now it seems that people are willing to kill the car companies because they can; because somehow the AIGs and investment banks that have swallowed more than 10 times what the automakers are asking for simply can’t be allowed to fail. People are pissed – rightly so – and it seems that the Big Three are convenient whipping boys.

So here are a few questions.

  • Why couldn’t Citi go through Chapter 11? Robert Reich, for one, thinks that might have made sense.
  • Why aren’t financial services workers being asked to take pay cuts? Lord knows they make more than a UAW line worker.
  • Why isn’t every CEO of an investment bank that’s had to dip its hand into the government till permanently banned from working on Wall Street? It’s clear these guys were either clueless or didn’t care – neither of which recommends them for future employment.
  • When will people start treating Robert Rubin as toxic? He sat on the Citi board and collected checks in exchange for what, exactly? My guess is to make sure they’d get bailed out if necessary.

As many of you know, I have an MBA, and went to business school with lots of guys and gals who went straight to Wall Street and cashed in. I liked some of those classmates, didn’t care so much for others, but all of them went into an industry whose goal is to manufacture money. If you could create value (and bank fees) through mergers, then merge! If no one was left to merge, then spin off! If that didn’t work, get behind a leveraged buyout! All this happened without creating one thing of value for the American public; without putting one ounce of food on anyone’s plate; without improving anyone’s standard of living, except the bankers who got the fees and the corporate principals who got rich in the process. To the contrary – the financial pressures created by these deals hastened the concentration of wealth at the top, as companies cut workers to pay for these deals. These are the guys we are bailing out.

And, to an extent, I accept that. Or, to put it differently, I accept that the U.S. Government has allowed these institutions to evolve to the point where their failure would have catastrophic effects on all of us. That’s something that needs to be addressed, and soon – but it doesn’t change where we are today.

Which brings me back to the Detroit CEOs, and the ever-dwindling number of people who toil beneath them to make whatever products they think – right or wrong- will sell.

The Big Three could all fail – but their imminent failure is not due to poor decisions in the past, or to corporate or managerial arrogance, or overpaid workers on the assembly line.

If they fail, it will be due to an economic crisis triggered by the greed and short-sightedness of people on Wall Street. Absent that, they’d be hurting, and there would be layoffs, but they’d be able to limp along.

They took the rickety boat they built out on a river, and Wall Street blew up the dam upstream. If the dam had held, after all, they’d probably survive. So do we help them out of the rapids?

I think we should. But if we don’t, God help us if it’s because people are mad at greedy union workers. That would be the capstone of stupidity and short-sightedness in an era overflowing with it.

UPDATE: Apparently, there’s a deal: the Big Three get a few shekels, Paulson gets more money, and then it becomes the new guy’s problem. Assuming, of course, that Senate Republicans don’t gum up the works.


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