The Sophistry of Bailouts

To Bailout or not to bailout? Apparently, that is the question. Unfortunately, unlike Hamlet's question, nobility has nothing to do with it. The reasoning behind bailing out financial institutions hold some merit, as monetary flow is essential for the functioning of the economy. An argument can at least be proffered that bailing out the financial institutions will benefit the economy in a fundamental way. But, bailing out the auto companies helps the auto companies and those who invested in them at the expense of everyone else, and everyone else benefits very little.

The arguments for bailing out the auto companies are the problem. The premise seems to be that the auto companies have made bad decisions on what products to produce and have been producing poor quality products. Neither assertion appears to be the case. American auto companies have been producing high-quality cars and trucks, and have apparently been producing the products that Americans desired, up until the bottom fell out of the stock market. The problem now is that most people are in no mood to buy a car or a truck, whether it is made by an American company or by a foreign company. The issue for the auto companies is a drop off in demand for new vehicles, across the board. The idea that senators or congressmen can instruct the automobile companies on what kinds of vehicles the American people want is laughable. Seeing the captains of industry begging for the government to bail out their sinking ships is a sure sign that the American philosophy of private industry is already lost at sea.

Why can't the auto companies sell cars and trucks right now? The American people have been sitting with jaws dropped watching their home values and 401k savings fall in value over the last year or two by about 40 percent. Most of the 401k drop has occurred in the last few months. They are greeted each evening with talk of how we are heading into another Great Depression. They see job losses and more job losses coming. When you can't measure the value of the assets you currently own as each day brings new losses, and you are unsure whether you will have a job in the next year or two, most responsible people do not look to take on a multi-year loan for a major purchase, like a car. Even if it runs on sunshine and rain water, and emits rainbows and dew drops as it putters along.

Which leads us to the reason why we should not bail out the auto companies. If you bail out the auto companies, yes, you will keep people in their jobs, but their jobs are to build cars that nobody is in the mood to buy. That makes the problem worse. The auto companies should be cutting the price of their automobiles and trucks so they can clear their inventory and raise the cash flow needed to cover their bills. Yes, the auto companies should sell their inventories at a loss, like all other companies do when demand falls. If auto companies drop the prices of their cars significantly, offer zero percent financing, purchase finance insurance if necessary to offer financing to lower credit risks, maybe even the frightened American consumer will see the bargain and start buying again. Perhaps, they will even trample a salesman or two to death along the way. And, those who invested in the auto companies will be the ones to take the loss, not the American public. Of course, the auto companies would much rather get a loan from the government and hope consumers are in a better mood before the money runs out. They would rather this so much as to endure the humiliation of taking lectures from no-nothing politicians who pretend they know something about making cars, and what the American consumer desires.

If you really must have a bail out of the auto companies, at least do something that helps people to buy cars, not something that helps the auto companies continue making cars. Why not offer a tax credit for buying a new car as a stimulus package? Or better yet, bail out the American consumer by offering a tax holiday, as one congressman proposed? I actually heard an analyst say that this would be a bad idea because people would be inclined to either save the money, or pay down their debt, rather than spend the money. As it happens, saving money would help the financial institutions, and paying down their debt would help improve consumer credit-worthiness, so they might be eligible to purchase a car. Paying the money to the auto companies so they can increase inventories of cars they cannot sell, or paying banks money so they can offer financing to borrowers who have already tapped out their credit limit, hardly seems like a better plan than letting taxpayers keep their own money, to save, invest, or spend as they like. Right now, the crisis seems to be in paying back loans, not in acquiring more loans. Saving and paying down debt sound like a much better results then building more cars that no one wants to buy and offering more loans that no one wants to take on.

And so, the sophistry continues. It is not about what is best for the economy, but what is best for the auto industry and the politicians. It has far more to do with the fact that politicians like to see private businessmen grovel, and private businessmen like to delay problems and hope they go away, rather than facing them. The politicians will likely give the businessmen the reprieve they desire, but unless someone does something to make people want to buy new cars, the businessmen will be back groveling for more help to make more cars that nobody wants to buy, even if they are more environmentally sound. Once you've been rewarded for groveling, it's really hard not to make a habit of it.