With Congress preoccupied with the massive, $700 billion bailout plan for the financial industry, General Motors, Ford, and Chrysler have finally secured Part One of their own federal rescue plan. A bill set to be passed by Congress and signed by President Bush as early as this weekend--separate from the controversial Wall Street bailout plan--includes $25 billion in loans for the beleaguered Detroit automakers and several of their suppliers. "It seemed like a lot when we first started pushing this," says Democratic Sen. Debbie Stabenow of Michigan, one of the bill's sponsors. "Suddenly, it seems so small."
But please don't call it a "bailout"--Detroit is too proud for that. Exact details will come later, but the loans would probably amount to at least $5 billion for each of the Detroit 3, plus smaller amounts for suppliers. That would allow them to borrow money at interest rates as low as 4 percent--a steep discount compared with the double-digit rates they're paying now. Over several years, the automakers could save hundreds of millions in financing costs. Plus, they'll have five years before they have to start repaying the loans.
It might seem like a stealth rescue, but the plan has been in the works for at least 18 months. Approval for the loans was first included in last year's Energy Independence Act. Earlier this year, the automakers sought a first installment of loans totaling about $6 billion. But the nationwide credit crunch severely crimped their ability to borrow, and besides, next to bailouts like $200 billion for Fannie Mae and Freddie Mac, a mere $6 billion started to seem unduly modest. So Detroit raised the ante to $25 billion, the most allowed under current law.
Shame on the Bush administration for considering this. And shame on Debbie Stabenow, though I know she's just pulling as much pork as possible for her constituents.
Yes, I favor intervention when it looks like there's a risk of a really severe recession. But there is no such rationale here, not even arguably. It's pure pork, with a soupcon of economic nationalism thrown in. If the Big Three can't make autos people want to buy, then they should liquidate and open up the market to those who can.
Ah, yes. A mere $25 billion! How small! How quaint!
When I think of how many people in this country could be helped enormously by comparatively tiny amounts of money-- $75, $100, $200-- to pay for things that they desperately need, and I think of all of this "bailing out" for huge corporations... I want to scream. I want to scream. And, no, that doesn't mean I don't think some action is necessary. But I don't have to like it, and I think we should all of us, regardless of ideology, be very, very unhappy that our country has come to this.
Hey, Megan, in light of the title of this thread and recent events I think I should be able to use "Repiglican" at will again. Whaddya say? Election Night, in particular, just won't be the same without it.
But you know, Freddie, there is a silver lining of sorts. Just think of how much worse everything would be if the libertarians/conservatives/right wingers hadn't gotten there way. Why, if we hadn't had those tax cuts tilted towards the rich, a massive rush to deregulate, (often accomplished with a wink and a nod to the regulating authority whose head was an installed Believer), and a massive increase in the national debt . . . Well.
Things could've been worse if this crew hadn't been at the helm is all I'm sayin'.
ScentOfViolets writes: "Why, if we hadn't had those tax cuts tilted towards the rich, a massive rush to deregulate, (often accomplished with a wink and a nod to the regulating authority whose head was an installed Believer), and a massive increase in the national debt . . . Well."
Just once, for old times sake, can a con post the old line about how the national debt isn't big as a percentage of the GNP? Pretty please?
By the way, Scent, is your username a Star Trek reference?
These loans were written into the energy bill in 2007 to help carmakers and suppliers retool for the new corporate average fuel economy (CAFE) standards, which were passed at a time when the industry was already slipping into a cyclical downturn. The total estimated cost for this retooling is $80 to $100 billion, so the amount of the loans is reasonable. There is no reason to think the loans -- and interest -- won't be paid back in full. All in all, a reasonable solution to a tough problem, and not even in the same league as the crisis in the financial sector.
You know, MLAJ, I don't think this phenomenon of libertarians[1] agreeing with progessives on economic issues is ever going to stop feeling weird...
[1] And by that I of course mean real libertarians, not like Megan "no intervention except to preserve 3 months of employment at my posh job" McArdle.
Actually, MLJ, it's a reference to a famous physics problem from the nineteenth century. The cool thing about it was that it used statistics and macro properties to deduce extremely fine detail on the atomic level. What a lot you can learn if only you use your head and think about the consequences!
Actually, Tom, I'm perfectly OK with those types of loans. As a general principal if not in a specific instance.
Tom Wilkinson, you shameless liar:
-Nissan, Toyota, and Honda seemed to have retooled for greater fuel efficiency without government assistance.
-GM seems to adhere to the higher fuel efficiency standards in every other country just fine.
-Yes, there is good reason, damn good reason in fact, to believe the loans won't be paid back in full. First, the 28% yields that existing GM bonds are trading at. Second, the fact that no private investor on the planet would loan to GM at anything like the rates they're asking for. And third, because solvent companies don't object to allegations of oncoming bankruptcy by saying they're "not constructive". Wonderful weasel talk!
There is almost no chance these loans to the automakers will be repaid. All three companies are all but sure bankruptcies at some point in the next 5 years.
It's pure pork, with a soupcon of economic nationalism thrown in.
I indirectly question your patriotism and invite you to the black-eyed White House for "leadership" discussions this weekend.
We really have to come together for the good of the country behind Debbie's plan. She's a good person and has the interests of the country at heart. She works across the isle, too.
;-)
U.S. based companies (and some of the full-line imports -- like Toyota) built larger vehicles for one reason only. Americans, enjoying low oil prices and low fuel taxes, demanded them, and paid high prices for them. The rapid retooling required by the new CAFE standards and quickly rising fuel prices has hurt the domestics disproportionally, but that was due in part to the huge legacy costs from promising health care to retirees, a promise that, in retrospect, was morally honorable but financially unwise. In short, there is plenty of responsibility to go around -- for the industry, unions, consumers and policy makers.
Everyone builds smaller, more fuel efficient vehicles in Europe for a simple reason -- high fuel taxes. So you can hardly be a free-marketer and point to Europe as exemplary -- sorry.
If you think it is OK to allow the last manufacturing industry in the U.S. to disappear overseas without a fight, that is your choice. It hardly seems like good public policy. (After all, it now looks like financial services aren't going to be the savior we thought it was.) It is not a choice that Japan, China or Korea would make.
PS -- Sorry, but none of this is a lie. You can check for yourself in SEC filings and other documents on GM's investor site.
With all due respect, the Detroit 3 and their esteemed management and union reps should have considered this long ago. But, since they were interested in short term gains, they can go fuck themselves.
And I mean that in the nicest possible way.
The assumption seems to be that the press would have devoted much attention to the Big Three loan in the absence of the larger rescue package. I don't think there's any evidence to support this view. The press regularly displays total indifference to major pieces of congressional action, and shows much less critical interest when the congressional moves are those of the Democratic party. Just sayin'. QED.
Props to Tom Wilkinson for his insightful, often persuasive arguments, BTW, even if I may not always agree -- as a point of my own policy preferences.
Let the auto companies have their loans. . . at coupons of 850 bps over LIBOR and in exchange for 79.9% common equity warrants. Then see if they still want them.
FWIW, it'd be sufficient for me if they'd disappear from Michigan to the parts of the country where foreign firms have settled -- although the MI congressional delegation would likely do all in their power to hamper such moves by offering federal carrots and sticks.
The states should rightfully compete with one another to attract business and industry. And the Rust Belt seems incapable of thinking beyond the old Big Labor welfare state model.
I don't understand the part about "shame on the Bush administration" and Debbie Stabenow. Wouldn't it be, um, the Democratic-majority congress whose election Ms. McArdle advocated that is responsible for this measure? Wouldn't it be more grown-up of Ms. McArdle to admit this measure is not "shameful," but the inevitable consequence of actions that she advocated?
Tom Wilkinson: Good job on changing the topic there. I never said that (most of) what you just posted is a lie. I said that the stuff from your first post is a lie. And now, you're going to toss on some more lies. Let's fact-check.
1) It's a lie that automakers "need" below-market interest rates to build fuel efficient cars. I just named for you three that did.
2) It's a lie that teh ev1l consumerzorz MADE them focus on gas-guzzlers. I just named three major car companies that supplied the exact same markets and somehow managed to keep a long enough horizon to plan for the ultra-likely possibility that oil prices wouldn't stay at $10 forever.
3)It is a lie that a company whose bonds are trading at 2500+bp over treasuries isn't providing reason to believe it will be unable to repay new loans.
4)It is a lie that supporting free markets somehow contradicts the argument that certain companies that did worse than others, are poorly run.
5)It is a lie that the legacy costs were a surprise. They knew about the problems for at least thirty years. The only thing that changed was how lawmakers made them account for the obligations in official statements. How the hell is your ability to plan for the future, affected by the formalities the government expects you to use when filing your taxes? GM should have seen the problems long before the SEC/PBGC made them make their accounting statements reality-based.
6)It is a lie that GM has exhausted all easy means of handling legacy costs. GM's been paying a dividend for decades. A dividend that has been paid -- against all standards of order-of-payment -- as senior to the deferred compensation of labor that was provided fifty years ago.
7) It is a lie that GM is the "last manufacturing" industry or will be missed. To the extent that America is suffering from deindustrialization, she is not helped by continuing to prop up corrupt, poorly run companies who have refuse to update their business models.
Yes, America needs industrial enterprises. She does not need these industrial enterprises. (As usual, you ignore the embarrassing foreign competition that has wonderfully profitable American factories.)
And shame on you, MarkG, for finding Tom Wilkinson "convincing".
If you think it is OK to allow the last manufacturing industry in the U.S. to disappear overseas without a fight
So you are arguing that all those Toyota and Honda plants in Kentucky etc. don't actually exist? Or are you saying that Kentucky isn't part of the REAL USA?
Furthermore, what about the argument that the total amount of manufacturing in the USA is currently at an all time high?
(http://www.cpusa.org/article/view/937/ the actual value graphs are about 2/3 down, rather than all the "relative value" graphs that make things look bad.)
"It seemed like a lot when we first started pushing this," says Democratic Sen. Debbie Stabenow of Michigan, one of the bill's sponsors. "Suddenly, it seems so small."
This passes for reasoning on spending in Congress. It's this kind of economic savvy that started this mess in the first place. I will now go light myself on fire.
"When I think of how many people in this country could be helped enormously by comparatively tiny amounts of money-- $75, $100, $200-- to pay for things that they desperately need, and I think of all of this "bailing out" for huge corporations... I want to scream."
Don't get your panties in a bunch, Freddie. This is no time to get hysterical. Every American with a job already got $600 in free money earlier this year -- even the majority of them who weren't net income tax payers anyway. Megan's right about not bailing out Detroit. It's not as if the auto industry will collapse if the big three collapse; instead, more competent companies will take over. There's probably too much capacity in the domestic auto industry now anyway.
AlanS writes: ""It seemed like a lot when we first started pushing this," says Democratic Sen. Debbie Stabenow of Michigan, one of the bill's sponsors. "Suddenly, it seems so small."
This passes for reasoning on spending in Congress. It's this kind of economic savvy that started this mess in the first place. I will now go light myself on fire. "
In fact she's just being honest and showing some insight. She realizes the loan package is large - she's just pointing out that the recent bailouts make it seem weirdly small by comparison. She's quite right.
The "700 billion" figure is horseshit, by the way. We'll be looking at $1 to $1 1/2 trillion before it's all done. This is the hole the Bushpig Era has dug for the nation.
All two-time Bush voters are cordially invited to hop in the hole and hold their breaths until this is over.
Megan,
If The Atlantic is looking for more revenue streams, I suggest a premium version of your blog that automatically filters out ML&J's posts. I'd pay $5 a month.
[i]Yes, I favor intervention when it looks like there's a risk of a really severe recession. [/i]
While I have a general disdain for the shortsightedness of the Big 3, anyone who's spent any time in Michigan knows that if the automakers start shuttering plants it heads towards severe recession pretty quickly.
AlanS to Megan: "If The Atlantic is looking for more revenue streams, I suggest a premium version of your blog that automatically filters out ML&J's posts. I'd pay $5 a month."
I wouldn't pay anything to filter out AlanS's posts, but then again I can't actually recall any of them other than the stunningly bland ones in this thread.
I'll just add AlanS to the long list of Cheney fans that have no use for my posts but are compelled to talk about them. I don't actually keep such a list, but he's on it, and it's probably the biggest achievement in his life so far.
To add to Tom's comment, the government is imposing regulations on Detroit automakers to build cars that are more fuel efficient whether Americans want them or not under the premise that it is good for the country. If the government is telling Detroit what to build, doesn't it take on some responsibility for making it happen? If we don't want to help Detroit, we should get out of telling them how to do business. Otherwise, we're, at least partially, responsible.
I wonder which country will be the first to challenge these loans in the World Trade Organisation as a trade distorting subsidy; and which US industries will eventually suffer from the retaliatory taxes on imports from the USA?
Uh-oh, looks like I'll have to add Molar Juice to the list of people who keep lists. I believe he'll slot in nicely under "Nixon, R."
It is easy to criticize poor performance with 20/20 hindsight. I think there is more to the timing of events than most here realize. Toyota was going into trucks and SUVs in a big way, and their truck based offerings have some of the worst fuel efficiency. Same goes for Nissan. Honda's truck offering is really a cross over, so they are pretty clean wrt the recent demand switch. I believe that is largely based upon their own judgment that they did not have a competitive edge wrt trucks, not because they were prescient wrt the coming demand change.
Historically, new car manufacturers have entered the market from the bottom. Having been truly mainstream for only a couple of decades, they have not had time to fully enter all markets. Their judgment to go after the luxury segment before trucks turned out well, but it was probably based on their expected competitive advantage (luxury cars are more similar to small cars than trucks are).
My point is not that Japanese car companies are evil, but rather that the big three is closer competitively than people are giving them credit for on this thread. Many of the union-related structural disadvantages will disappear in 2010, at which point I believe GM will compare well to Honda & Toyota head-to-head. Further, both F and GM have recently made big strides in the quality and desirability of their cars.
Part of the justification for the loans rests with CAFE, which is not a good way to get lower fuel consumption. A gradually increasing fuel tax from the mid 1990s addding say 25c/year would have been much better. See Greg Mankiw on the Pigou club and externalities for a good breakdown as to why this is so:
http://gregmankiw.blogspot.com/2008/09/reading-for-pigou-club_17.html#links
I think many people believe that creative destruction of capitalism can get out of hand, and that a bit of nudging to smooth out sharp transitions can be a good thing.
The cost of the loan will not be $25B as noted above because some of it will be paid back. Even if Person is right and the whole domestic auto industry collapses before 5yrs, increased tax revenues paid by the extended life of the industry (both corporate and private) due to the help from the loans should partially offset their cost.
I think we should (like the Asians) consider the benefit of having a thriving domestic industry. There is some marginal increased benefit for the big three over foreign makers with plants here. The American manufactured parts content is still much higher in domestic makes. Also consumers benefit from the high capacity of the industry with better prices. So I think it can make sense to invest modestly in a near-competitive domestic industry if it helps them to become independently competitive long term.
What is the real opportunity cost for government spending? I think we could find fatter targets for waste. What about prison construction and operation to house the world's largest prison population -- typically large segments of poor young male minorities many of whom are held on relatively small charges or based upon dubious circumstances?
I think both Tom Wilkinson and Person made good points from their respective POVs -- although I find that I respect arguments from those who are considerate and judicious with negative terms such as "lies" more.
I also find myself in the quite unusual position of agreeing with MLJ and disagreeing with Fred. I thought MLJ contributed constructively to the thread and found AlanS's snarky comment to be a bit quick on the draw -- perhaps he and MLJ have gone at it in the past?
Scent of violets - i googled that as a physics problem and nothing came up about it. I know einstein solved the question of brownian motion by using statistical methods to deduce the size of the atom. If you have some details or a pointer i'd be interested
Matt, perhaps I was a bit more dogged in my search. I found a previous SOV post on Megan's blog from May:
"Tom, scent of violets refers to a nineteenth century physics problem that was solved with the use of statistics. Say you uncork a bottle of perfume in the corner of one room. Some time later, a person on the other side of the room will be able to smell it. Why? The answer involved atomic theory, random walks, etc, and by plugging in plausible values for the size of atoms, how many there are in a given volume, and how fast they move, they were able to predict from first principles just how soon the scent of violets would be detectable across a room of a given size. Better, their predictions were extremely accurate, and working backwards, they were able to tighten their estimates of certain numbers that were later independently verified as being correct. An astonishing feat of predicting microscopic properties from macroscopic phenomena, especially given that at that time, many scientists were skeptical that atoms even existed.
Posted by ScentOfViolets | May 22, 2008 9:56 AM"
Scent of Violets, this sounds like an early crack at describing diffusion. Do you know who the physicists/mathematicians were who first solved the problem?
Right. I got this in my undergrad thermo class, actually. This is Boltzmann stuff(kinetic theory of gases, Boltzmann Distribution, etc), for the historically minded. Check the wiki and go from there. My bad, btw, they give reference to the Maxwell-Boltzmann distribution. If you scroll down the page, you can see some derivations for root mean speed, the modal speed, etc. Note the dependencies in the equations.
Maxwell, and Boltzmann as well were considered to be somewhat freakish by the establishment of their time, btw. They gasp! used advanced mathematical methods to solve physics problems. Mathematical methods and techniques frequently beyond the ken of the old guard, alas, and for which they were both accordingly mocked and ridiculed.
aMouse squeaks: "Uh-oh, looks like I'll have to add Molar Juice to the list of people who keep lists. I believe he'll slot in nicely under "Nixon, R.""
Since I specifically said I don't keep lists, you're theoretically added to a list of people who can't read.
File yourself under "Palin, S."