Wednesday, September 24, 2008

Auto "Bailout" or Bad Deal

Remember back in 1979 when Chrysler received a momentous bailout from the US Government to the tune of $1.2BN. Never before had anything so daring been proposed by automaker or government and such a deal put Lee Iacocca on the history map in the auto industry.

Today the U.S. House approved a $25BN loan to the U.S. auto industry clearing the way for the Senate Vote tomorrow and then sending it on to a receptive President for signature.

1-2-3..... WHOA!

The Big 3 US automakers claim that the recent stringent fuel economy regulations have put them in a "tough place" because they are forced to retool their businesses in order to make good on these regulations. A loan such as this would make it more easy for them to retool and to do it at the expense of the U.S. taxpayer.

Let's call a spade a spade. THIS IS WRONG. For years, the US automakers have under-invested in the necessary new physical plant to adapt their product. In truth, regulators have not made it any easier on them, but US auto regulators are not as draconian as those in other industries where reinvention happens apace. Basically, investors, executives, suppliers, and employees of these auto companies have benefited from this deferred capital expenditure (albeit at an uneven rate), and now the US tax payer is picking up the slack. And for what? A low interest loan rate. This pick-up is worth more to me, I would prefer an equity stake in one of the automakers for making this type of capital available. After all, there are other auto companies large and small from other countries which have been able to keep up with the pace of change.

This is BUSINESS: Risk your capital, and you stand to gain. Don't risk your capital, and you should NOT stand to gain.

This is NOT CHARITY: Loans such as this are transferring taxpayer wealth into the hands of a select group of investors and stakeholders.

The auto makers and their representative lawmakers claim that this loan will save jobs and pain in Michigan. That is certainly one way to stave off a smaller amount of pain, but the only real way to stem the blood-loss is to reinvent the Companies.

I have many friends in the auto industry in Detroit and I personally feel for them and their families. It has been wrenching and awful. But stacked against their pain is the functioning of our free-market business structure and the fairness of our taxation usage. Not caring for those systems will have much more grave effects. This bailout is 25 TIMES the size of the last!!

When it comes down to it, we ought to legislate to promote reinvention and entrepreneurship in companies rather than to prop up inefficient systems. If we do not do this, we will pay for it later and regret the waste we contributed to along the way.


Unknown said...

I agree, If the competition is down and out there should be no mercy. Im pretty sure there are several other businesses who wouldnt have minded big brother's loan to help out near the end. Less Competition is a good thing for Local Motors. Keep it strong yall!!

eddie007 said...
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