Systemic risk can render drastic action necessary. But what about the prospects for the long term? Will they truly look up? David Leonhardt writes:
The Chrysler bailout may have saved the company, but it did nothing, after all, to stop Detroit’s long, sad decline.
Barry Ritholtz – who runs an equity research firm in New York and
writes The Big Picture, one of the best-read economics blogs – is going
to publish a book soon making the case that the bailout actually helped
cause the decline. The book is called, “Bailout Nation.” In it, Mr.
Ritholtz sketches out an intriguing alternative history of Chrysler and
Detroit.If Chrysler had collapsed, he argues, vulture investors
might have swooped in and reconstituted the company as a smaller
automaker less tied to the failed strategies of Detroit’s Big Three and
their unions.…Speaking of which, Detroit’s Big Three have come back to Capitol Hill
lately, lobbying for billions of dollars in handouts. This time, their
executives insist, they’ll use the money to solve their problems.
The Big Picture
http://bigpicture.typepad.com/
Am I wrong, or is this a bad analogy? The Chrysler bailout hardly posed systemic risk; it was merely a handout.
I’m not sure present bailouts are good, but I can certainly imagine an informed and impartial observer coming down in favor. And I can at least imagine them working out for the better (or less worse, anyway).
I hope that the Dow doesn’t skid 12 today. That would really stink.
Joseph Stiglitz has a 6-part plan to make sure that none of this happens again.
What do the Marginal Revolutionaries think?
http://www.cnn.com/2008/POLITICS/09/17/stiglitz.crisis/index.html
Am I wrong, or is this a bad analogy? The Chrysler bailout hardly posed systemic risk; it was merely a handout.
That’s like saying: “when I bought a lottery ticket, that didn’t waste money, it made me rich.”
Yes, in hindsight, Chrysler made good on the loan, so it didn’t cost anything, but simply gave them the difference between what that loan would have cost them on the private bond market, and the terms they got. However, since the government was pledging to pay lots of money in the (likely at the time) event Chrysler couldn’t pay, that new federal liability could have hurt the federal government’s credit rating, making it have to pay more to borrow, and otherwise cascade through the financial system, thereby posing — wait for it — systemic risk!
We are reasoning by false analogy here.
AIG is only ‘bailed out’ in the sense the US government is now free to manage it and sell the operating businesses, The same is true of Fannie and Freddie– eventually they will be turned over to the private sector.
The goal with Chrysler was presumably to preserve jobs and an American car company. The goal with AIG was to prevent a massive default which would ripple across business and the entire banking system.
Economists have long recognised that the settlement of securities is special in terms of the role in the economy.
“AIG is only ‘bailed out’ in the sense the US government is now free to manage it and sell the operating businesses, The same is true of Fannie and Freddie– eventually they will be turned over to the private sector.”
Oh great. Privatize the gains, socialize the losses, then privatize the gains again. That had BETTER not happen.
Maybe the government should have a standard IPO for the rescued companies or a dutch auction like google did when it went public.
Santayana’s Prophesy : “Those who cannot remember the past are condemned to repeat it.”
Muller’s Corollary: “Those who cannot remember the past won’t even know if they’re repeating it.”
The Chrysler bailout may have saved the company, but it did nothing, after all, to stop Detroit’s long, sad decline.
But, we’re talking three decades between the bailout and now. During that time, it wasn’t one long slow decline — there were bust years and also boom years when the Detroit automakers were flush with cash and went on buying sprees (Saab, Volvo, Jaguar but also GM bought EDS and even Chrysler bought Gulfstream in the 1980s). Ten years ago, Chrysler was as large as Daimler (and more profitable) at the time of the, ahem, ‘merger of equals’.
Which was why Detroit never was willing to have knock-down, drag-out fight with the UAW it would have taken to be cost-competitive with the transplants. Especially because it would have had to have been one of the companies sacrificing itself for the sake of the group (remember, each contract cycle, there’s only a single ‘strike target’ — the most successful of the three at the given time, the one with the most to lose). And the UAW, never perceiving where things were heading, never would have given in. What was necessary was simply not doable 10 or 15 or 20 years ago. The wolf had to be at the door — the brink of bankruptcy was the only way.
If the stockmarket expires will we find skid marks on its underwear?
Comments on this entry are closed.