James Pethokoukis

Politics and policy from inside Washington

Can Free Marketeers Embrace Obama’s GM?

Jun 1, 2009 16:27 UTC
Certainly most of the free market/conservative/libertarian types I chat with are in a tizzy about the General Motors bankruptcy — or, to put it more accurately, the 60 percent government ownership of GM once it emerges from its quickie bankruptcy. Government Motors. But is there a free market case for the Obama auto bailout? Here is what I was able to gin up:

1) GM is a victim of circumstances. At least a little bit. For all its problems, GM would not be in such a financial fix if not for the once-in-a-century collapse of the credit markets and resulting deep recession. Of course, Toyota and Honda and Ford also have to deal with the terrible economic climate. But the tight credit markets made that much more difficult for private investors to come in and turn around the company had it been allowed to sink into bankruptcy back in late 2008.

2) A straight bankruptcy might have even been costlier to Uncle Sam and taxpayers. This was the argument of White House auto adviser Brian Deese when he argued against the liquidation of Chrysler. As reported by the NYT: “Mr. Deese was not the only one favoring the Fiat deal, but his lengthy memorandum on how liquidation would increase Medicaid costs, unemployment insurance and municipal bankruptcies ended the debate. “

A similar analysis comes from IHS Global Insight in a research note:

Six months ago, the George W. Bush administration was winding down, the government had no significant support for the automotive industry, and most politicians were advocating no assistance at all for GM and Chrysler, preferring to let the bankruptcy process happen. An uncontrolled bankruptcy at GM would have cost over US$100 billion, pensions would have been transferred to the government’s Pension Benefit Guaranty Corp., and the likelihood of a reorganisation without any financial support from the still-frozen financial markets would have quickly been replaced with talk of liquidation.

3) Bankruptcy would have made the terrible U.S. economy far worse. By some estimate, a GM liquidation would have added a full percentage point to the unemployment rate, if not more. This reason has swayed conservative jurist/blogger Richard Posner:
If I am right that the domestic producers should not be allowed to collapse at a time of profound and, it appears, worsening economic distress.  … The realistic goal of an auto-industry bailout is not to reform, revitalize, or restructure the domestic industry; it is merely to postpone its bankruptcy for a year or two, until the end of the depression is at least in sight and consumer confidence is restored to the point at which the bankruptcy of the domestic manufacturers can be taken in stride.
Me: Now I doubt my pal Larry Kudlow would buy any of this:
Instead of putting the failed car enterprise into bankruptcy six months ago — where Carl Icahn or Wilbur Ross could have bought it — the Bush administration chose Bailout Nation. Under Team Obama, that bailout has morphed into full-scale government ownership. Twenty-billion dollars of TARP money is already invested in GM, with another $50 billion on the way. And that number could easily double unless GM car sales miraculously climb back to 14 million this year. That’s highly unlikely, with car sales presently hovering around 9 million a year. … But it’s the bigger picture that has me most concerned. What does Government Motors say about the direction of the United States? Historically, we don’t own car companies –or banks or insurance firms. But we do now. Tick them off on your fingers: GM, Citi, AIG. Oh, and let’s not forget Fannie and Freddie, those, big quasi-government, taxpayer-owned housing agencies. California is broke and likely headed to bankruptcy. Will we the taxpayers own that, too?

Morgan Stanley: No V-shaped recovery

May 22, 2009 18:45 UTC

Economist Richard Berner lays out the case why the recovery won’t be a pretty sight:

First, financial conditions will stay relatively restrictive. Losses are still rising at lenders, limiting risk appetite and balance sheet capacity, and thus restraining the availability and boosting the cost of credit.  A slow cleaning up of lenders’ balance sheets will keep lending capacity low and the cost of using it comparatively high, and increased regulatory oversight will reinforce that restraint.  We think that such lingering restraint will affect all credit-sensitive areas of the economy, including housing, consumer durables, capital spending and working capital for businesses large and small.  As evidence, the National Federation of Independent Businesses just reported that, in April, credit was harder to obtain by small businesses than at any time in the past 29 years.  And while loan-to-value ratios at auto finance companies rose slightly in April – to 89% from 86% in January-February – required downpayments were still more than double what lenders wanted last year.

Moreover, the lags between the change in financial conditions and the economy will prevent rapid progress.  To be sure, as Morgan Stanley interest rate strategist Laurence Mutkin argues, when more capital comes into the financial system, and securitization revives, competition will erode the high rates lenders are able to charge for the use of their balance sheets today.   In our view, however, that time may be far off, and both the scars from the crisis and the regulatory response to it probably will keep those costs permanently higher than pre-crisis norms.

Second, the imbalance between supply and demand in housing is still significant and likely will remain a drag on home prices and housing activity into 2010.
The single-family vacancy rate in existing homes is double the 1.2% historical average through 2004.  Given the persistently tight financing backdrop, vacancies might undershoot that old 1.2% norm for a while to bring down the supply/demand imbalance quickly, especially as foreclosures rise again.  Consequently, prospective buyers need to start occupying roughly 750,000 single-family vacant homes before the housing market and home prices stabilize.  In turn, this implies that new and existing home sales must rise by roughly 20-25% from the current pace.  Likewise, in commercial real estate, vacancy rates and cap rates are rising and rents are falling.

Third, consumers have only begun the process of deleveraging and repairing their balance sheets and saving positions, and we believe that the personal saving rate, currently at 4%, will rise to 7-10% in the next few years. This process will mean slower growth in US demand.  Some argue that pent-up demand for vehicles and durables is strong following the recent retrenchment in sales.  We disagree.  It’s true that to maintain the stock of vehicles on the road (245 million light vehicles) given normal scrappage would require about 13 million vehicles sold annually.  But with financing constrained, we think that consumers can endure 3-4 years of sales below those levels, since we spent the last 13 above them, especially with 15% more light vehicles on the road than licensed drivers.

Finally, the breadth of the recession limits the cushion from any stronger sectors. For example, while growth appears to be improving in Asia, the global recession will limit US exports.  Unlike the experience since the crisis began nearly two years ago, in which net exports contributed more than a full percentage point on average to real US growth, we expect that the cyclical contribution to US growth from overseas activity will be flat to down over the next 18 months.