The slippery slope is getting particularly slippery in Washington, D.C., especially with an election around the corner. Congress is considering a bailout of the automotive industry, with $25B of government loans up for grabs. Thanks to (unavoidable?) bailouts of Fannie Mae, Freddie Mac, and AIG, Detroit's Big 3 are feeling particularly confident in their ability to secure the loans . Both John McCain and Barack Obama have come out in support of this policy, despite McCain's (and George W. Bush's) previous opposition to a bailout. This support certainly makes sense if you are trying to win Michigan or Ohio (with 18 and 21 electoral college votes, respectively), but does it make sense economically? Perhaps not.
First, there is the sheer cost: the $25B have to come from somewhere, and the government is already straining with a large deficit. Second, there is reputational risk to consider. Is the U.S. as firmly commited to free markets as it urges other countries to be?
An appropriate rebuttal asks why Wall Street (Bear, Fannie, Freddie, AIG, et al) deserves bailouts while Detroit does not? One good reason is that the large financial institutions are being bailed out due to their effect on the rest of the economy. The effect of a Fannie/Freddie/AIG bankruptcy would have far more wide-ranging effects than the failure of a U.S. automaker.
Not only are automakers less intertwined with the rest of the economy, but Detroit is also looking for a better deal than Wall Street. Detroit wants loans without warrants attached, as they were in the Fannie/Freddie and AIG bailouts. And in return, Detroit promises to begin building more competitive products. More importantly than building better cars, Detroit promises to have disproportionate influence on the election in Michigan and Ohio... and it seems that fact is likely to be the deciding factor.
Let's hope the government gets an appropriate deal for taxpayers in the process, one that includes warrants, and, possibly, new commitments to CAFE standards.
First, there is the sheer cost: the $25B have to come from somewhere, and the government is already straining with a large deficit. Second, there is reputational risk to consider. Is the U.S. as firmly commited to free markets as it urges other countries to be?
An appropriate rebuttal asks why Wall Street (Bear, Fannie, Freddie, AIG, et al) deserves bailouts while Detroit does not? One good reason is that the large financial institutions are being bailed out due to their effect on the rest of the economy. The effect of a Fannie/Freddie/AIG bankruptcy would have far more wide-ranging effects than the failure of a U.S. automaker.
Not only are automakers less intertwined with the rest of the economy, but Detroit is also looking for a better deal than Wall Street. Detroit wants loans without warrants attached, as they were in the Fannie/Freddie and AIG bailouts. And in return, Detroit promises to begin building more competitive products. More importantly than building better cars, Detroit promises to have disproportionate influence on the election in Michigan and Ohio... and it seems that fact is likely to be the deciding factor.
Let's hope the government gets an appropriate deal for taxpayers in the process, one that includes warrants, and, possibly, new commitments to CAFE standards.
Posts
No comments:
Post a Comment