The Auto Bailout

The financial bailout made me uneasy because so few conditions appeared to be attached to the money; the auto bailout is making me uneasy because so many seem to be attached. This sounds contradictory. But let me try and explain myself...

Paulson's priority with the financial bailout was to act swiftly and decisively, in the hope that the implicit security provided by promises of state protection would encourage banks to start lending to each other again, and that all the toxic debt could be pulled together and removed from the system like some sort of malignant pustule. This, it was argued, would allow the United States (and the world) to avoid the kind of prolonged depression that Japan suffered in the 1990s. Moral hazard - the fear that such bailouts were sending a message rewarding failure - was put to one side, as the emergency was considered too big for such matters to apply. The question of reforming the system was also put to one side, on the basis that "right now we need to put the fire out, and can worry about what started the fire later."

At the time, I argued that we should support the bailout, but attach conditions immediately. Once the crisis is over, the impetus for meaningful reform of the financial sector, to control the way in which bankers took risks with the international system, would vanish, too. We'd see a return to the bad old ways of yore. Nothing since then, not least the astonishing attempts by unapologetic magnates to hand themselves incredible bonuses, has caused me to think differently. Since the passage of the bill, absolutely nothing has even been suggested about reforming the financial sector. Meanwhile, the complete lack of control over the $700bn handed over has led Paulson to abandon the original plan to isolate and remove the toxic debts, which remain on the balance sheet, in place of other emergency measures. The excessively risky practices, off-balance sheet debts and so on remain in operation, just as they did after Enron. The LIBOR rate remains sky-high. And instead of creating an image of decisive action from the Treasury, the seemingly random and erratic pattern of response has instead given the impression of an unprepared, panicky team who have no real idea what's wrong with the patient or how to fix it.

The auto bailout should be seen in part as the consequence of this original panicky thinking, a classic example of contagious moral hazard. Once the state accepted the principle that sector-critical institutions would receive unprecedented support without conditions, it was hardly surprising that the auto CEOs would jump into their Lear jets for D.C. and start demanding that the government pay out. What other sectors will follow the car builders, I wonder?

But that's actually the least of the problems involved with bailing out the Big Three, and in truth, given the vital importance of the financial bailout it was probably inevitable. What is much more problematic for the long term is that the kind of money about to be pumped into Michigan is rewarding one of the least efficient and least internationally competitive industrial sectors of the American economy, instead of investing precious tax receipts in making new jobs for the next century. Newsflash: no-one buys American cars outside the Americas ... why is that?

Aware that they're rewarding failure, congress has instead opted to meddle in matters of corporate management. This makes sense inasmuch as it's the only way of mandating reform if you don't let the market do its job through bankruptcy. But it makes no sense in the bigger picture, because in the long run congresspeople have neither the time nor the expertise to make the right decisions about the future of the auto sector. Auto bailouts in the UK and elsewhere in the past reveal the same thing, time and time and time again: years down the line, the failed companies remain failures, and more money is inevitably called for. We've been down this road before, and nobody - and certainly not the worker on the production line - wins.

The UAW and others argue that the bailout matters more in the auto sector, because 'real people' are involved, unlike the bankers who suffered in the financial sector, who will have to retreat to their islands in the sun and corporate tax havens to recover. Of course, we're all sympathetic to this argument. Nobody gives two hoots about the richest people in the world, especially when they're people who got us into this mess in the first place. Frankly, we should start taking the money back from the financiers, if you ask me.

But there's two important points to make here. One: the financial bailout was never about helping the bankers. It was about reopening the supply of credit to businesses across the country who were in the process of going bust because they couldn't get short term access to debt. These were 'real people' too, even if they weren't all part of a union that could buy national press headlines. Two: helping the 'real people' about to be put out of work in Detroit isn't necessarily achieved best by rewarding the businessmen who've failed to keep them in competitive jobs for more than thirty years. Why not target the money directly at the workers who are about to lose out, instead, or give it to businesses that are growing and want to take on new workers and retrain old auto workers? Training programmes, job creation schemes, subsidies for the purchase of fuel efficient cars, subsidies for unemployed people experiencing foreclosures on their houses: spending the state's money in these ways goes straight to the 'people' without having to pass it through the pockets of failed businessmen (who'll no doubt keep a hefty chunk for themselves). In short, spend $50bn if you need to, but do it in ways that allow the failed businesses to reform or die, and instead act to minimise the cost to the innocent workers who in good faith worked for them and yet are paying the price for other peoples' failures...

So that's why the auto bailout worries me. It's a lot of money, and I doubt that in the long run it's going to work. And it surprises me that the home of ruthless capitalism, the United States, seems so unwilling to apply its own basic principles to its treasured, yet almost dead, automobile industry.

Here's my theory: most Congresspeople know how an engine works, so they think that they know how the auto sector should work. As a result, they think they can do a better job of it, tinker around with the nuts and bolts, and end up perpetuating a failing economic model, like an Oldsmobile on its last legs that, for sentimental reasons, the owner isn't willing to put out of its misery. Meanwhile, most of them haven't a clue what a collateralised debt obligation is, so they just hand over the money to the bankers and let them get on with the business of buying themselves brand new Porsches.

Am I the only person to whom this doesn't make sense?

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