Opinion

The Great Debate

Transfusions don’t stop the bleeding

March 23, 2009

lou-lataif

– Louis E. Lataif is dean of the Boston University School of Management and a former Ford executive. The views expressed are his own. —

The federal government now wants to shore up ailing auto suppliers with a $5 billion bailout, despite a rising chorus of criticism against more government bailouts. The public is beginning to see bailouts as “transfusions,” rather than a closing of the wound, and is losing patience with them. The “wound” is falling housing values and toxic mortgage-backed securities which have paralyzed financial markets – not the auto industry.

The hastily approved $787 billion “stimulus package,” including aggressive spending programs unrelated to declining home values or the constricted capital markets, is tantamount to administering repeated, expensive blood transfusions rather than stopping the bleeding. Of course, if the blood flow at the wound eventually coagulates (one day the economy will rebound) then the transfusions can be claimed to have worked. But the delayed cure would have come at a crippling cost to the next generations of taxpayers.

Concerning help for “Detroit,” there may be no manufacturing industry more fundamental to the U.S. economy than the auto industry, accounting as it does for more than 10 percent of American jobs. Detroit is not without fault, but it has been dealt a lethal blow by the consumer credit crunch which it did not create. At a nine million-plus vehicle annual selling rate (three million below the scrappage rate), no auto company, American or foreign, can survive. But bailouts, a few billion dollars at a time, first to the auto manufacturers and now to suppliers, are both a political and business nightmare.

If the federal government is willing to spend trillions to “right the economy,” then it should reasonably serve as lender of last resort for critical industries. It should grant interest-bearing bridge loans to the ailing auto manufacturers — probably $150 billion for 18 months. The pent-up auto demand in 2010-2013 would be enormous. The companies could then be required to repay the loans with interest, making the taxpayers whole.

If these companies are “bridged” until auto demand recovers, their supply base will survive without separate bailouts. To let auto manufacturers fail, in this environment, will create untold collateral damage; the already weakened supply base, so intertwined among all the manufacturers, could shut down the entire industry. An auto bankruptcy would seriously deepen and lengthen the recession for us all.

But bailing out the industry a month or two at a time and a sector at a time is slow torture and an ineffective alternative to proper, interest-bearing bridge loans. If, in a normal economy, one or more auto companies can’t make it, so be it. But in this most abnormal economy, it would be a shame to lose the U.S. auto industry to poor, unrelated decisions made in the financial markets.

We can hope that the depressed stock markets and waning consumer confidence will re-focus Washington’s attention on collapsed housing values and constrained credit markets. We should avoid dangerously expensive transfusions unrelated to the root problem; instead we should close the wound. The normal market will then right itself. It always does.

Comments
10 comments so far | RSS Comments RSS

Amputation also closes a wound!
We need to keep in mind, that on a worldwide scale, it is only two american auto manufacturers that would need these infusions in this “most abnormal economy”. Non American – and even one American Auto manufacturer do not need support. For this reason, I do not see this a sectoral problem, but a (long standing) management problem of two American automotive manufacturers.
Once demand rebounds, the survivors will pick up the supply with zero (volume) impact on the automotive suppliers. Isn’t this capitalism and normal market economy the American way? What is happening to Americans? Where do they want to hide?

Posted by non-freebie | Report as abusive
 

A sales decline of 45 percent in the auto industry is a sectoral problem. Declines of greater and lesser degree abound throughout the world economy. If one posits greed and criminal activity to be normal in high finance, then this world economic collapse was precipitous.

Any assertion that the U.S. remains a capitalist society and the free market will eventually right the ship is at best a naive position. The largest banks are under the federal umbrella of Tarp and the FDIC. Day to day already operations are being managed by the federal government. Treasury Secretary Geitner has asked the Congress for sweeping powers to allow government receivership, abrogate or enforce contracts and even close insurance and financial corporations not already under TARP or FDIC. Such authority would be placed in the hands of the Treasury. Such a precedent can be found in the history of Mussolini’s Italy and Nazi Germany prior to WW II.

Karl Marx stated that when a capitalist society moves towards fascism, this is a symptom of capitalism in decline. 20th century world history suggests his observations may be correct. The threat of war looms when governments take over industries in response to severe economic crisis’. Unlimited control of a states wealth and industry by a few men in power is always dangerous.

When ever a government seeks to expand it’s power, that government always argues that it such power is necessary to safeguard the wealth, security and future of it’s citizens. In reality veiled duplicity prevails. Such power puts the fate of a society in the hands of very few privileged and isolated individuals. Their decision making process will be neither transparent or open to debate.

Posted by Anubis | Report as abusive
 

Write your congressman! The Detroit Big 3 (Who are fronts for the oil companies), the banks (Who conduit the oil company money) and AIG (who keeps the oil companies protected) were handed “money in a sack” within a few days with no questions asked, no application and no review process but the alternative energy people, ie: wind, solar and electric cars; must pay massive fees, file thousands of pages of paper and wait years to see if they MIGHT get some money. It seems as if there is an intentional program going on to delay alternative energy. Already, multiple solar companies that were waiting for that money have been forced to go out of business by the delay and most of the electric car companies are going to die soon too.

Posted by Kuyla Ford | Report as abusive
 

The problem is that by commiting funds to the auto sector we limit the resources available for other initiatives representing future industries. People also tend to think in static terms, as if the market will return to “normal” after the recovery. No, those companies that are aggressively restructing will come out of this far stronger than those postponing the inevitable. We are in the middle of a reallocation of market share. As soon as GM and Chrysler asked for bailout money, they lost public confidence in their vehicles. It was a very unenlightened move. The best thing we can do to help them survive is to force them to adapt on their own. But maybe we can offer the workers support if they want to go to college and learn something.

Posted by Don | Report as abusive
 

Advice from an academic. Great. His “School of Management” (whatever that is) has been churning-out the scoundrels who got us into this mess. Forgive me if I don’t put much stock in his opinion about anything related to the current economic crisis.

Posted by Daniel | Report as abusive
 

Anubis, March 24, 11:18 a.m. above, whose comments warn of Fascism is appreciated. Who is to say that the former administration, knowing that regulation of financial markets, particularly those related to housing, would have “cut off” tax revenue that the “bubble” was generating. To cut off tax revenue would have alarmed the public and generated less support for the “war time President’s” forays. Also, knowing the tax hole he was digging played perfectly for the radical conservatives who would, and just see the jubilance of Rep. Bohner, like to bankrupt the country so they can impose their belief that the only constitutional basis for federal taxation is to support the military – providing for common defense and …promoting general welfare entirely on the backs of each individual state. This “financial pardon” for the financial industry suddenly appeared when the election of McCain dimmed. The financial industry has an interest in perpetuating itself so all this money thrown at it could have been kept in the coffers. Bush FEAR was successful once more. Another “cried Wolf Bush” success for the radical right.

Posted by Thomas E. Shafovaloff | Report as abusive
 

Unless the North American auto industry cuts its production by 50% it will NOT survive.

 

What Detroit needs right now is not more money, but re-structuring. They need to cut down all the fat and reduce production volume to match demand. A big loan will only encourage more waste. Also the GM/Crysler saga has been exaggerated. If they both go, it will not be the end of the world or the auto industry.

 

I agree that domestic auto manufacturing is critical to the United States economy. If GM and Chrysler were to go under, the results would be devastating. All domestic manufacturing would come to a standstill for at least 6 months with all the auto supplier collapses. Foreign automakers who presently also build cars domestically, would increase imports. The foreign automakers may end up closing all their US plants and go back to importing everything. Why build here, it’s to expensive? But we need those jobs and that industry.

Posted by Chuck | Report as abusive
 

I would like to know why the auto industry gets treated so differently that the financial. To the best of my knowledge, it is only AIG that we have forced management changes upon. I’d like to have gotten rid of most of the palyers on wall street. But, I guess they give more in Lobby money.

Posted by db | Report as abusive
 

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