Bailout: 2008 Archives

As always, Professor Thomas Sowell sees things clearly and tells it like it is simply and plainly. Would that our government and government-to-be were as clear-eyed and sensible and would have learned the lessons of history.

The auto bailout that the Bush Administration and the Democrats are discussing is for the unions, not for the companies. The sooner the companies take the necessary steps to reform themselves through Bankruptcy's Chapter XI, the better the chance they will emerge as companies ready for the competiton. It worked for the airlines, it can work for the auto companies.

In the meantime, Dr. Sowell suggests we look at the larger picture of life, of which the auto rescue plan is just one example of denying what needs to be done. Reality is still there when the fantasy fades.

Postponing Reality At Detroit's Big Three By THOMAS SOWELL | Posted Wednesday, December 17, 2008 4:20 PM PT

Some of us were raised to believe that reality is inescapable. But that just shows how far behind the times we are. Today, reality is optional. At the very least, it can be postponed.

Kids in school are not learning? Not a problem. Just promote them on to the next grade anyway. Call it "compassion," so as not to hurt their "self-esteem."

Can't meet college admissions standards after they graduate from high school? Denounce those standards as just arbitrary barriers to favor the privileged, and demand that exceptions be made.

Can't do math or science after they are in college? Denounce those courses for their rigidity and insensitivity, and create softer courses that the students can pass to get their degrees.

Once they are out in the real world, people with diplomas and degrees — but with no real education — can hit a wall. But by then the day of reckoning has been postponed for 15 or more years. Of course, the reckoning itself can last the rest of their lives.

The current bailout extravaganza is applying the postponement of reality democratically — to the rich as well as the poor, to the irresponsible as well as to the responsible, to the inefficient as well as to the efficient. It is a triumph of the non-judgmental philosophy that we have heard so much about in high-toned circles.

We are told that the collapse of the Big Three automakers in Detroit would have repercussions across the country, causing mass layoffs among firms that supply the automobile makers with parts, and shutting down automobile dealerships from coast to coast.

A renowned economist of the past, J.A. Schumpeter, used to refer to progress under capitalism as "creative destruction" — the replacement of businesses that have outlived their usefulness with businesses that carry technological and organizational creativity forward, raising standards of living in the process.

Indeed, this is very much like what happened a hundred years ago, when that new technological wonder, the automobile, wreaked havoc on all the forms of transportation built up around horses.

For thousands of years, horses had been the way to go, whether in buggies or royal coaches, whether pulling trolleys in the cities or plows on the farms. People had bet their futures on something with a track record of reliable success going back many centuries.

Were all these people to be left high and dry? What about all the other people who supplied the things used with horses — oats, saddles, horseshoes and buggies? Wouldn't they all go falling like dominoes when horses were replaced by cars?

Unfortunately for all the good people who had in good faith gone into all the various lines of work revolving around horses, there was no compassionate government to step in with a bailout or a stimulus package. They had to face reality, right then and right there, without even a postponement.

Who would have thought that those who displaced them would find themselves in a similar situation 100 years later?

Actually the automobile industry is not nearly in as bad a situation now as the horse-based industries were then. There is no replacement for the automobile anywhere on the horizon. Nor has the public decided to do without cars indefinitely.

While Detroit's Big Three are laying off thousands of workers, Toyota is hiring thousands of workers right here in America, where a substantial share of all our Toyotas are manufactured.

Will this save Detroit or Michigan? No.

Detroit and Michigan have followed classic liberal policies of treating businesses as prey, rather than as assets. They have helped kill the goose that lays the golden eggs. So have the unions. So have managements that have gone along to get along.

Toyota, Honda and other foreign automakers are not heading for Detroit, even though there are lots of experienced automobile workers there. They are avoiding the rust belts and the policies that have made those places rust belts.

A bailout of Detroit's Big Three would be only the latest in the postponements of reality. As for automobile dealers, they can probably sell Toyotas just as easily as they sold Chevys. And Toyotas will require just as many tires per car, as well as other parts from automobile parts suppliers.

UPDATE: No reality. President Bush punted to the union-supporting Obama administration and the Democratic Congress, who will use taxpayer money to save the unions, not GM and Chrysler. Painful changes are needed and Chapter XI bankruptcy is the obvious ways to accomplish them. Unaffordable contracts are dragging the car companies down: Think of this: 90,000 build cars for the Big Three, but the Big Three are paying the health care and pension costs for one million retirees. Doesn't work.

So the Big Three auto executives will troop into Congress tomorrow armed with spiffy new plans they will never be able to implement. Should Congress pour yet more money down a bottomless pit?

A special approach to bankruptcy to take account of the needs of continuing financing diffiiculties and warranties along with a drastic overhaul of unsustainable costs could be the best way of saving the American car industry and as many jobs as possible at the Big Three and all the suppliers they work with.

A Real Bailout for Auto Makers

By JAY PALMER
November 29, 2008
Barron's

Detroit's only hope may be to let ailing auto makers file for prepackaged bankruptcy.

IS A BANKRUPTCY THE BEST OPTION FOR GENERAL MOTORS, Chrysler and Ford ? While their CEOs insist otherwise and the risks would be high, a growing chorus of outsiders says yes. "It's the only real option that would allow GM to take the steps necessary for its long-term survival," asserts John Casesa, managing partner of New York's Casesa Strategic Advisors.

Unless the companies solve their problems, they're hurtling toward an ignominious fate: liquidation.

Financier and former governor Mitt Romney spent much of his early life in Michigan's auto industry while his father was rescuing American Motors from collapse. He has put his definite ideas on the New York Times' op-ed page. Throw the bums out, bring costs down so American cars can compete and show some vision. A taxpayer bailout would be a waste and just delay the inevitable.

November 19, 2008 Wall Street Journal

Let Detroit Go Bankrupt
By MITT ROMNEY
Boston

IF General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye. It won’t go overnight, but its demise will be virtually guaranteed.

Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.

I love cars, American cars. I was born in Detroit, the son of an auto chief executive. In 1954, my dad, George Romney, was tapped to run American Motors when its president suddenly died. The company itself was on life support — banks were threatening to deal it a death blow. The stock collapsed. I watched Dad work to turn the company around — and years later at business school, they were still talking about it. From the lessons of that turnaround, and from my own experiences, I have several prescriptions for Detroit’s automakers.

First, their huge disadvantage in costs relative to foreign brands must be eliminated. That means new labor agreements to align pay and benefits to match those of workers at competitors like BMW, Honda, Nissan and Toyota. Furthermore, retiree benefits must be reduced so that the total burden per auto for domestic makers is not higher than that of foreign producers.

That extra burden is estimated to be more than $2,000 per car. Think what that means: Ford, for example, needs to cut $2,000 worth of features and quality out of its Taurus to compete with Toyota’s Avalon. Of course the Avalon feels like a better product — it has $2,000 more put into it. Considering this disadvantage, Detroit has done a remarkable job of designing and engineering its cars. But if this cost penalty persists, any bailout will only delay the inevitable.

Second, management as is must go. New faces should be recruited from unrelated industries — from companies widely respected for excellence in marketing, innovation, creativity and labor relations.

The new management must work with labor leaders to see that the enmity between labor and management comes to an end. This division is a holdover from the early years of the last century, when unions brought workers job security and better wages and benefits. But as Walter Reuther, the former head of the United Automobile Workers, said to my father, “Getting more and more pay for less and less work is a dead-end street.”

You don’t have to look far for industries with unions that went down that road. Companies in the 21st century cannot perpetuate the destructive labor relations of the 20th. This will mean a new direction for the U.A.W., profit sharing or stock grants to all employees and a change in Big Three management culture.

The need for collaboration will mean accepting sanity in salaries and perks. At American Motors, my dad cut his pay and that of his executive team, he bought stock in the company, and he went out to factories to talk to workers directly. Get rid of the planes, the executive dining rooms — all the symbols that breed resentment among the hundreds of thousands who will also be sacrificing to keep the companies afloat.

Investments must be made for the future. No more focus on quarterly earnings or the kind of short-term stock appreciation that means quick riches for executives with options. Manage with an eye on cash flow, balance sheets and long-term appreciation. Invest in truly competitive products and innovative technologies — especially fuel-saving designs — that may not arrive for years. Starving research and development is like eating the seed corn.

Just as important to the future of American carmakers is the sales force. When sales are down, you don’t want to lose the only people who can get them to grow. So don’t fire the best dealers, and don’t crush them with new financial or performance demands they can’t meet.

It is not wrong to ask for government help, but the automakers should come up with a win-win proposition. I believe the federal government should invest substantially more in basic research — on new energy sources, fuel-economy technology, materials science and the like — that will ultimately benefit the automotive industry, along with many others. I believe Washington should raise energy research spending to $20 billion a year, from the $4 billion that is spent today. The research could be done at universities, at research labs and even through public-private collaboration. The federal government should also rectify the imbedded tax penalties that favor foreign carmakers.

But don’t ask Washington to give shareholders and bondholders a free pass — they bet on management and they lost.

The American auto industry is vital to our national interest as an employer and as a hub for manufacturing. A managed bankruptcy may be the only path to the fundamental restructuring the industry needs. It would permit the companies to shed excess labor, pension and real estate costs. The federal government should provide guarantees for post-bankruptcy financing and assure car buyers that their warranties are not at risk.

In a managed bankruptcy, the federal government would propel newly competitive and viable automakers, rather than seal their fate with a bailout check.

Mitt Romney, the former governor of Massachusetts, was a candidate for this year’s Republican presidential nomination.

As the bailout rolls on, a real difference in philosophy is emerging in the case of the auto industry. Democrats want to use bailout money to "save" the industry. The White House and Congressional Republicans oppose that, saying that reviving credit for all is what the bailout was intended for and money should be limited to that sector.

Democrats, eager for a European-style socialist economy, or worse, want to keep the U.S. auto companies afloat pretty much as they are. Those who know how bloated and unsustainable the costs of the industry are say that bankruptcy is a far better solution, as it has been for other industries and companies, including large ones such as the airlines. In bankruptcy, companies keep operating but work together with their creditors and all other involved parties and the court to fashion a solution for sensible survival. All parties generally have to give up something to make it work, including, in this case, the powerful auto unions that the Democrats are trying to continue as business as usual. It is labor costs that are sinking the U.S. auto companies, as Charles Krauthammer points out. Toyota's worker cost is $48 per hour; GM's.$73.

Also, if bailout money is used outside the credit industry, where do you stop? There is no longer any "bright line," it's who has the muscle, the clout and the connections to get on the gravy train to socialism. Let bankruptcy work and make the auto industry competitive. Asian carmakers are turning out millions of vehicles in America profitably. So can the Big Three.