It’s Fix the Tax Code Friday!
For most of the week, the headlines have involved the crisis in the automotive industry with eyes on the “Big Three”: Ford, General Motors (GM) and Chrysler. Execs from the Big Three jetted to DC to beg lawmakers for loans worth billions of dollars, warning that the failure to deliver the loans could spell disaster for the industry and related commerce.
Congress refused to vote on the bailout, citing a lack of a restructuring plan from any of the three motor giants. Congressional leader Harry Reid has given the Big Three a deadline of December 2 to come back to Congress with a workable plan.
One version of a bailout would use $25 billion in funds from the Energy Department structured as a loan. The funds were previously earmarked for development of fuel-efficient vehicles. Repayments by the industry would serve to replenish the fund.
Another version of an auto industry bailout would take funds already promised to the banking industry as part of that $700 billion bailout.
Either version would rely on the immediate use of taxpayer funds, which is causing consternation in Congress. Funding for the next fiscal year is already tight which means that services may be cut and taxes may be raised in an effort to “right the ship” and settle the budget. With a majority of Americans unhappy with Congress right now, lawmakers don’t want to dig themselves an even bigger hole. But not acting at all could have a similar effect since so much of the American economy is related to the automotive industry.
So today’s Fix the Tax Code question is:
Should the government bailout the auto industry using taxpayer dollars? And if so, which version of the package sounds best – or do you have another idea altogether?
No. The essence of America is the freedom to succeed – and the freedom to fail. Ford, Chrysler and GM have been receiving money from the government trough for WAY TOO LONG. There is a reason I drive a Honda. It’s the same reason the US automakers are on life support.
Paul B. Kennedy
kennedy-law.biz
There is a good story I found about the car makers bailout at:
http://www.thebailoutblog.com
It’s a tough decision with 3 millin jobs on the line vs. bad business decisions.
I am torn. I am from Detroit, my family still lives there. My cousin works for GM, in marketing for a popular model. My father is a dentist – most of his patients work for the auto industry. It is so much more than simply people on the line. Almost every kind of business can be linked to the auto industry – restaurants, flower shops, doctors, lawyers, dentists, clothing stores, catering companies, and so many more. We are talking about the meltdown of an entire economy, not just one industry. I am not defending their products, although I own a Jeep Cherokee and it is still going strong after 10 years. I understand many U.S. cars are not very good. I also understand the first comment’s position, as my husband shares it with me often.
I guess since I have watched the Detroit suburbs go from a place most people want to live to a place people can’t get out of because they can’t sell their homes, I know the heartbreak of the death of the auto companies. (GM has been laying people off for a long time.)
Because this is personal for me, I think we should offer them Barney Frank’s plan – some money now, but they have to meet certain measures before getting any more.
The majority of posts in the blogosphere that I’ve seen have been against a bailout of the Big Three. The arguments against it usually based on two beliefs. First, U.S. automakers are inefficient and uncompetitive. The marketplace should be allowed to do its magic and eliminate such dinosaurs. Second, it’s not the job of the government (or ultimately the taxpayers) to save failing private enterprises from themselves. To do so would both waste government resources and set an unhealthy precedent.
I disagree on both counts. Maybe the Big Three should perhaps be allowed to die sometime. Now, however, is the worst possible time, with the economy in the process of sliding into recession or worse. Hundreds of thousands of employees and retirees depend directly on the Big Three for their livelihoods. Add in the employees of their suppliers, their dealers, and so on, and you probably have millions of people who will be thrown onto the unemployment rolls. To allow this to happen now of all times is insane! Besides, the systematic dismantling of our country’s manufacturing capacity in favor of out-of-control globalization is one of the major factors that got us into this mess.
As to how to do the bailout: I like the idea of taking funds promised to the banking industry. I have my doubts about the “credit crisis.” I’m still getting tons of credit card offers in the mail, and interest rates for investments are at rock bottom. Doesn’t look like a credit shortage to me. But I could be wrong.
In any event, what is needed right now, with serious deflation looming, are inflationary measures. Super-low-interest loans, preferably longer term, would be perfect. T-bill rates are in the cellar. Why not have the Federal Reserve buy up a few hundred billion in new T-bills or T-notes from the Treasury in open market operations? The Treasury can then make that money available to the automakers in the form of very low interest loans.
This, BTW, would be a good solution to the real estate crisis as well. Why not “bail out” strapped homeowners? Set up a government agency (like the Resolution Trust Corp. of the ’90s). Have it offer 30 year mortgages at 3% or 2% to those who are “under water” in equity. A homeowner, or even small real estate investor, who got “caught” in the bubble would be allowed to use such a mortgage to pay off his or her existing one at 6% or more.
The bank (or other mortgage holder) gets paid off 100 cents on the dollar for the mortgage it’s holding. The homeowner’s monthly payment at 2% is about 1/3 of the payments at 6% on a 30-year mortgage. This means that even though the principal amount is still overinflated, the mortgage becomes affordable because the monthly payments have been slashed. The “toxic” mortgages are paid off and eliminated. Foreclosures are avoided, and people can stay in their homes. The credit crunch, such as it is, is alleviated because the shaky mortgages that have been poisoning the asset side of so many institutions’ balance sheets are gone. And the government does ultimately get its money back. Yes, it’s inflationary. But that’s exactly what we need right now! To say nothing of the restoration of confidence that will result when the guys with the white hats (and large checkbooks) indeed come riding in to save the day.
Ed at AAFR – excellent thoughts. Really is a shame that the doofuses (sp?) we have elected can’t think as clearly.
There is one argument out there I simply do not understand. Bad Management is the cause of all this Big Three problem. How about union demands? Or how about this – Some folks in management made some bad decisions so now a million or so folks are going to be out of work. Yeah that will teach those bad decison makers a lesson all right. And why is is alright to bail out banks whose management obviously made some bad decisions and not industry? Do banks or investment companies contribute to our GNP? Well most of what we write here is moot anyway but it is good to know that there are folks out there that still have the capability to think – it really is a shame that none of them are in the political arena.
Skip McQuaid
An additional comment due to some news release I just read this morning -President-Elect Obama has announced his plan to create 2.5 million jobs by 2011. It would appear to me that losing the estimated 3 million jobs immediately by the Big 3 going under and gaining 2.5 million jobs by 2011 is a slight case of someone is confused somewhere…..But who knows, it might be me.
Skip McQuaid
Hi everyone
I would like to address some hidden issues that dont seen to make it into the media.
1) Supply and demand. Simple as that. Do you really think that the demand for cars will stop just because “the big three” die? The demand will remain as it is today and it will shift from this one to that one, etc… If GM died, all GM car buyers would have to choose a different brand. Perhaps a Ford. That could increase Ford sales. That could help with maybe larger orders for leather (or carpet, or paint, or plastics, etc…) for the Ford cars, where the orders for GM are gone. And if one of the three fall off the face of the earth, it could only help the other two, who, if competitive , would increase sales and labor force to meet the demand. If they are not competitive then guess what?
2) One of the things that american people dont really hear about is what happens to the company if they file BK. (Tax girl you should expand on this one) Remember just a couple of years ago when the airlines filed? The bigest outrage was them dumping the retirements of all those people onto the tax payers! We get screwed either way. The insurance company that insures payments of these accounts is already “under water” and sinking fast. The U.S. government is not just going to look the other way.
3) I really hope that the new administration is able to see down the road enough to understand the outlook for Americans in the next 30 years. It will be a challenge but thats for another discussion. All in all I have to say that it is going to be necessary for the government to get MORE involved with fairness in business practices, in accounting practices, in regulation of trading, in standardizing and leveling the playing field. Otherwise we may be headed for the next civil disturbance for lack of a better term.
This is a hard call. Allowing one, two or three of the Big 3 to fail, or go to bankruptcy is free market, a basic stance of our economy and way of life in the US. Companies are allowed to succeed, and to fail as well. The Treasury has been raided in the last eight years by poor leadership, and greed!! The poor excuses to go to war in Iraq and now our re-building efforts have been used to exploit another large portion of the US Treasury.
And it falls on the working man and families to carry the burden of failed management decisions and greed.
One offering made on NPR yesterday, was an organized bankruptcy. It would take the ploitics out of the decision, and allow a much better decision involving the companies, the retirees, the employees and their benefits. Suppliers and dealers would all share in the effort, but the effort would be better than a congressional mandate where politics would play to the wealthy and those currently in power, both management and labor.
It is clear, it is not a good time for the Big 3 to fail, but it shows the weakness of their position, both economically and politically. Congress, thankfully, did not throw open the doors to the Treasury and tell the auto execs to help themselves.
rwp
I’ve been fence-sitting for some time on this one. I still remember sitting across from a Lube and Fuels guy from Chrysler who was bragging about the fact that Chrysler was making flex-fuel vehicles purely for the CAFE offset they brought — even though he was the first to admit that E-85 infrastructure was not present in most of the country and that the vast majority of these cars would run on gasoline. The smugness of that attitude irritated me. But his other point was that Chrysler was making trucks and minivans because those were the cars people wanted to buy. The Big 3 were ambushed in the 70’s by the oil embargo; and, forgetting history, they’ve allowed themselves to be ambushed again. But then, so have American car buyers whose demand for these larger vehicles helped fuel the current problems the Big 3 are facing.
That said, I have to agree with Ed. Now is not the time to just cut them loose. All I can say is, whether they re-organize under Chapter 11 or take a loan from you and I, their feet had better be held to the fire to re-tool their lines and conduct research and development toward more fuel efficient models (specifically EXCLUDING flex-fuel vehicles). If the money was used solely for that purpose, I’d be open to an interest-bearing loan.
That’s about as far off the fence as I can jump at this point.
I don’t think the government should just hand them the money and say continue on. This seems to be the attitude of the big 3 chiefs. The workers are long overdue for concessions also.
Any solution for the Big-3 should involve removing the stranglehold that the unions have on them. Maybe unions were needed at some time in the past but they are a cancer in America now with their extortionist entitlement policies. I vote for Bankruptcy.
There is a misperception that American cars are not quality products and that the domestic auto industry has not done research and development for fuel efficient and alternative energy vehicles. That has not been the case for at least the last decade.
And you have to wonder why the government isn’t asking financial institution CEOs to plead their case in Washington or to work for $1 a year and is just handing over the money, which has not resolved the credit crisis problem to date.
And remember that the government is also responsible for the credit crisis that is preventing the auto companies from obtaining loans and consumers from obtaining loans to purchase vehicles. It was the government, through financial industry deregulation (approved by Congress and signed by Clinton in 2000)as well as their approval through Fannie Mae and Freddie Mac of subprime mortgage lending, that has created the credit crisis that in turn has caused the auto industry to be in such dire straits right now.