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11.01.2008 0

The Living Dead

  • On: 11/17/2008 10:27:16
  • In: Economy
  • By Robert Romano

    “For the auto industry to completely collapse would be a disaster in this kind of environment. So it’s my belief that we need to provide assistance to the auto industry. But I think that it can’t be a blank check.”President-elect Barack Obama, 60 Minutes, November 16th, 2008.

    To hear Barack Obama tell it, the U.S. auto industry is too big to fail. Really, it’s the living dead. And it’s not worth saving.

    With a lame duck Congress still in town, Congress is set to vote on a $25 billion bailout of U.S. automakers on Wednesday. The plan, which Mr. Obama supports, would provide loan guarantees to Chrysler, Ford, and GM. It would ostensibly allow the auto industry to limp along like a zombie seeking its next meal.

    For how long is anyone’s guess. Our guess is it would buy the industry a few months, if that. It will look like AIG, who first needed an $85 billion loan, then another $38 billion a month later, until finally these were consolidated up to $150 billion last week under the Treasury’s Troubled Asset Relief Program, and by the Federal Reserve adjusting the terms of outstanding loans.

    Under the latest deal, the Treasury wound up purchasing the preferred shares of the insurance giant’s stock. In the end, the company has wound up practically being nationalized just to stay afloat in its bloated form, with no guarantee that it won’t continue to fail, necessitating yet more taxpayer aid.

    Is this the direction Congress wants take the auto industry? Only time will tell, but look for members favoring the bailout to argue that it is only a “temporary” loan, as if the automakers will not be coming back for more down the road. Make no doubt: They will, and watch out for lawmakers to looking to lay on the lie.

    Although Mr. Obama said he wants to make sure “that assistance is conditioned on labor, management, suppliers, lenders, all the stakeholders coming together with a plan [that answers the question] ‘What does a sustainable U.S. auto industry look like?’”, he fell short of calling upon the labor contracts, salaries, and benefits of the UAW to be renegotiated.

    The whole reason the industry is failing is because of the obscene union contracts and legacy costs that inflate the cost of the vehicles, making them uncompetitive compared to foreign competition. Just simply doing business outside of Michigan could make the cars more affordable for consumers. Certainly scaling back is in order. All of the above can be addressed with a bankruptcy, and those arguing against bankruptcy are simply shills for Big Labor.

    To answer the question, a sustainable auto industry will be one that is not so hampered by the cost of labor. It will be one that does not overproduce. It will be one that is profitable.

    And it will be one that is not dependent upon federal welfare to stay afloat.

    In this case, failure is an option. Bankruptcy would allow the automakers to can management and work out terms with labor that will not bury the new companies, or if that fails, to find new labor. It would also allow companies to be purchased by private investors. They could be recapitalized without any government aid. New, modern factories could be built, and the U.S. auto industry could enter the 21st century, instead of perpetuating obsolescence.

    On the other hand, Congress voting to give extended loans to the automakers would in essence be a vote for the status quo. The same status quo that has over the past many decades produced a hobbled industry that now cannot sustain itself, and only now has a ceaseless appetite for taxpayer treasure.

    Failure will produce a far better outcome than feeding the living dead. Like a zombie, the auto industry—in its current incarnation—will not be satiated by its first meal. It will come back for more, and eventually, the U.S. will wind up with an auto industry that is nationalized, instead of modernized.

    Robert Romano is the Editor of ALG News Bureau.

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