Tuesday, November 11, 2008

Highway robbery

If you're wondering why the stock market is back near 5 year lows, I think it has something to do with the eagerness of Democrats, including Obama, to hand over more billions to the car companies. It certainly frightens me. Bush is no paragon of free-market virtue, but he is apparently the only one standing in the way of this non-sense. Once he's gone, we're looking at two years to life of binging at taxpayer expense. I expected as much from Pelosi and Reid, but I wanted to give Obama the benefit of the doubt. Truly disheartening. Politics continues unabated.

Here's what the Wall Street Journal has to say about it, and they're quite a bit more tempered than I:

Which brings us back to what the government should do. If public dollars are the only way to keep General Motors afloat, as the company contends, a complete restructuring under a government overseer or oversight board has to be the price.

That is essentially the role played by the federal Air Transportation Stabilization Board in doling out taxpayer dollars to the airlines in the wake of 9/11. The board consisted of senior government officials with a staff recruited largely from the private sector. It was no figurehead. When one airline brought in a lengthy, convoluted restructuring plan, a board official ordered it to come back with something simpler and sustainable. The Stabilization Board did its job -- selling government-guaranteed airline loans and warrants to private investors, monitoring airline bankruptcies to protect the interests of taxpayers -- and even returned money to the government.

As for Ford and Chrysler, if they want similar public assistance they should pay the same price. Wiping out existing shareholders would end the Ford family's control of Ford Motor. But keeping the family in the driver's seat wouldn't be an appropriate use of tax dollars. Nor is bailing out the principals of Cerberus, who include CEO Stephen Feinberg, Chairman John Snow, the former Treasury secretary, and global investing chief Dan Quayle, former vice president.

Government loan guarantees, with stringent strings attached and new management at the helm, helped save Chrysler in 1980. But it's now 2008, 35 years since the first oil shock put Japanese cars on the map in America. "Since the mid-Seventies," one Detroit manager recently told me, "I have sat through umpteen meetings describing how we had to beat the Japanese to survive. Thirty-five years later we are still trying to figure it out."

Which is why pouring taxpayer billions into the same old dysfunctional morass isn't the answer.

Also see this and this.


hb said...

What's the political angle you're talking about, specifically?

Because, sure, Michigan Dems don't want GM to fail. But I don't think that's because they'll lose their seats (although who the hell knows what would happen politically if GM did fail) but because they think it's bad policy to allow that to happen. Likewise, possibly, Obama, if he truly thinks we have to bail out GM et alia: he thinks it's good policy, not just doing John Dingell a favor.

That said, I agree with that quotation that a bailout must return a profit (or at least our principal). But I'm even more tempted by the radical notion of another GMU economist friend: buy the auto companies (at $3.26 not too bad) and shut them down. Retrain the workers, use those facilities for green energy research or production, and get America (or our "American" auto factories in Canada and Mexico) out of the car business.

hb said...

Okay, on reflection, that was dumb: of course there's politics involved.

But it's not the only issue.

Will McBride said...

Protecting any company through regulation or subsidies is politics nearly at its worst. Of course the worst would be what Hitler, Stalin, and Mao did.

As for the Dems motivation, I am very cynical. It is a money game, politics, and all the rhetoric in the world will not convince me otherwise. Here, the Dems are supported by the UAW in the form of millions of dollars of campaign contributions and donations to the DNC. The unions paid $10 million to help pay the bills at the DNC convention. This is a quid pro quo plain and simple. The unions are at the heart of the demise of the car companies (see the carpe diem link in the post) and the Dems want to perpetuate this injustice. Of course they don't see it as injustice, rather justice from a Marxist point of view. That's where the rhetoric and the motivation gets nicely bundled together.

jeremy h. said...

I don't see the connection to the stock market being at 5-year lows (actually if the S&P 500 dips below 800, that would make a 12-year low, even in nominal terms). Aren't subsidies to large corporations going to prop up stock prices?

Will McBride said...

My logic is simple: Any dollar spent by government is on average less efficient than if it were spent in the private sector, i.e. government is more wasteful than the market, on average. I think most investors buy into some similar logic. They see this bailout helping the car companies but on balance hurting the economy in the long run. Further, it portends a potentially destabilizing period of government excess. I haven't looked at gold today but I bet it's up.

Will McBride said...

Oh, I'm wrong on gold, it's down too. I have no idea, that's why I'm a student.

My best guess there is that gold is going down with all commodities as the world is expecting a long period of slow to negative growth. But I guess the market does not expect instability.

jeremy h. said...

I'll try to clarify. I agree with you that, on average, government is less efficient than the private sector. But the S&P 500 (or the Dow or whatever) is not equivalent to the "private sector." It is composed of large, domestic corporations. Subsidies to this category of businesses are certainly distortionary for the economy as a whole, but not necessarily for the stock market.

In fact, this can be viewed as a redistribution from small firms (in which I include the smallest "firm," employees) to large firms. It is also protection for domestic firms from foreign competition.

So I once again submit that the stock market is falling for reasons other than that the government is giving money to the companies that compose the stock market.

Will McBride said...

I guess we're debating over the extent of the bailouts. As big as they are, they do not even cover or benefit the majority of the Dow, much less the S&P 500.

Chrylser was bailed out in 1980. Look how it's helped them.

jeremy h. said...

I'm still unclear of the theory for why the bailouts hurt large corporations, even if they don't get any goodies (this time around). If it's viewed as a credible commitment to bail out big firms, then it shouldn't be hurting them.

Sure, Chrysler isn't doing well now. But what happened to their stock immediately following the 1980 bailout (compared to the market or a counterfactual)? I'll check Datastream next time I'm on campus.