Why the Resistance to Bailing Out Detroit?

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Does anyone know the gory details of the consequences of not bailing out Wall Street and AIG? Anyone? Sure, lots of speculation, but did the Bush administration or Congress do anything more than say “trust us, it’s bad”? Certain members of Congress were briefed by administration officials and it was said the gasps sucked the air out of the private hearing room. OK, so let’s trust this administration on the consequences. Was it the AIG guy who came begging with a 3 page flyer on how he’d use his $85 billion?

Didn’t we see Wall Street licking its chops as the Bush administration removed regulations governing financial practices? Money begets greed for more money and so went the Wall Street bankers freed from annoying regulations. What Wall Street did to get itself into such a “bind” is despicable.

Nonetheless, the federal government shunted aside bankers’ irresponsibility, greed and indisputable mens rea (consciousness of guilt) and funded a $700 billion bailout. The debate on the bill and its initial defeat centered on political posturing and provisions for transparency and accountability. Despite taxpayer protections written into the bill, there is a gaping lack of accountability and transparency on how this money has been spent. Thus far, Treasury Secretary Paulson has been less than candid and/or informed on how he spent close to $350 billion dollars in the two months since the October bailout was approved.

Then it was Citi Group in trouble. Congress didn’t hesitate to bail out Citi Group. After all, it was no less to blame for its condition than the rest of Wall Street.

Then the Big 3 automakers came to Washington asking for approximately 5% of the Wall Street bailout money. Congress interrogated them with a framework of criteria wholly absent in deciding whether to bailout Wall Street. Congress is angry with the automakers for their failure to operate competitively and bolster the economy as they had always done in the past. No doubt – a legitimate beef. Flying in on 3 corporate jets for round 1 was incredibly poor judgment by the CEO’s. As a practical matter, though, it was a non-issue – no more than theatrics. Congress was generally pissed off and took it out on the automakers. Jon Stewart of "The Daily Show" suggested that Congress gave Wall Street a pass as it didn't understand the whole financial thing. On the other hand, Congress as well as most Americans clearly understand cars and the auto industry.

We know pretty well what the fallout would be from just GM failing. Numbers have been bandied about for weeks now. Estimates range from 1.5 million to 3 million jobs lost from a GM failure. If one fails, the others won’t be far behind. The math for a rough estimate is easy. November’s jobless report was exceeded 500,000, the largest since 1974. Annualized that’s 6 million jobs lost. I’m sure those more familiar with this stuff will say that annualizing November is somehow not valid. OK – even so, it’s an astronomical number of lost jobs. The holiday season sales figures are yet to be tallied and no one expects them to be good, except Wal-Mart which had a banner November.

Now add to that the jobs lost by the failure of even one automaker. We have seismic ripples. Can our economy absorb seismic ripples at this time? Many doubt it can.

There is talk about Chapter 11 reorganization. Ideally that may well be the best solution. Practically, though, it depends on the effect of the “in bankruptcy” label on the automakers. While the media has and will explain how Chapter 11 would work, it is likely that after shocking sales declines in October, automakers in Chapter 11 would likely suffer even further declines in sales. Overall, Big 3 car sales were down 31.9% with GM down a stunning 45%. Foreign automakers have also seen dramatic downturns due to the economy. Foreign auto companies, however, are being bailed out by foreign governments.

Keep in mind, please, that dramatic October sales declines were due to the faltering economy, not a sudden disillusionment with American auto technology. It was the Wall Street people who started the dominos falling to make the purchase of new vehicles an unnecessary luxury in far too many middle class households.

Some suggest a double standard by class – white vs. blue collar. I, for one, think better of our Congress than that. I’ll concede that there may be a faint undercurrent of class distinction, but nothing overt. May my instincts be right on this one!

The automakers may not have come up with as detailed a plan as Congress hoped to see. That does not affect the dire situation their financial situations present. The unions are cooperating and may need to cooperate a bit more. Let there be real transparency and oversight, with oversight reports determining the disbursement of bailout money. Congress should and likely will demand nothing less.

By the way, word has it that the first oversight report by the GAO on the Wall Street bailout was sparse. Not too much detail on how Treasure Secretary Paulson spent $350 billion.

Not to worry fellow Americans, a Congressional bailout of GM, Chrysler and Ford will mandate full transparency and detailed accountability.

Has the disbursement of $350+ billion to Wall Street, AIG and Citi Group bolstered consumer confidence? Not so much. To drive the economy from the bottom up, you must start with consumer confidence. Seeing a proactive government supporting the recovery and restructuring of GM, Ford & Chrysler will, by definition, bolster consumer confidence. Failure to save American automakers will certainly deal a severe blow to consumer confidence, increasing the already exponential domino effect from such a catastrophic failure in our manufacturing base.

So, back to the title of this article. Why the resistance to bailing out Detroit?

June 1, 2009 update: Today, General Motors filed for Chapter 11 bankruptcy. This follows the April 30, 2009 Chapter 11 filing by Chrysler. The Chrysler bankruptcy was the first by a major automaker since Studebaker filed in 1933.

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