Richard Florida
by Richard Florida
Thu Nov 13th 2008 at 3:08pm UTC

Where’s My Bailout …

Say it ain’t so… please ,someone. Bloomberg is reporting.

President-elect Barack Obama is pushing Congress this year to approve as much as $50 billion to save cash-starved U.S. automakers and appoint a czar or board to oversee the companies, a move that would require President George W. Bush’s support, people familiar with the matter said. Obama’s economic advisers are now convinced that if General Motors Corp. doesn’t get a financial lifeline soon, it will have to file for bankruptcy by the end of January. And if the companies don’t get almost $50 billion, Obama will be dealing with the issue again by next summer. Any czar or board would be patterned after the bailout of Chrysler in 1979 and New York City in 1975. Advisers such as former Federal Reserve Chairman Paul Volcker and former Treasury Secretary Lawrence Summers are said to be telling Obama that the cash is urgently needed now.

Congress would have to act in a lame-duck session that begins next week. Obama would need Bush’s backing to pass such a sweeping and costly measure in part because Democrats don’t have enough votes to force a floor vote or override a veto. Obama also would need strong support from auto-producing states such as Michigan, Ohio, Indiana, Illinois and Wisconsin to pass such a sweeping and costly measure. Yet to be determined is whether most of the money would be drawn from the $700 billion financial rescue package Congress passed last month or from newly allocated funds.

By injecting himself into the talks about how to save General Motors, Obama is making an exception to his decision to steer clear of policy-making until he takes office. The president-elect also wants the Federal Reserve to extend emergency loans to General Motors, Ford Motor Co. and Chrysler LLC, according to Obama aides who spoke on condition of anonymity. The failure of those companies would likely bring down parts-makers, dealerships and suppliers in addition to inflicting a deep psychological blow.

Is this really true? A multi-billion dollar bailout for the Big Three whose management has systematically squandered away a huge post-war economic and technological advantage, have misunderstood their markets, who have blamed workers every chance they get, and who failed to learn from their rivals and refuse to harness the creative capabilities of workers. An auto czar – huh? I thought Obama was elected by a combination of African-Americans and the creative class. How does this square with his electoral coalition or his vision of a better future? This will just forestall the inevitable. Why not just allow them to be taken over by Japanese car companies like Toyota and Honda who could truly restructure them? For the life of me and the good of the country, I hope this report is wrong.

27 Responses to “Where’s My Bailout …”

  1. Buzzcut Says:

    And so the buyer’s remorse begins.

    The unions have done more for Democrats over the years than the “creative class” has.

    And African-Americans are more well represented in the UAW (or former UAW members) than in the CC.

    Makes perfect sense to me.

  2. David J. Miller Says:

    Richard,

    Granholm was at his big meeting last friday. Clearly to make the case the an auto collapse will be more painful than the ‘financial’ collapse and clearly to pay constituents who have supported Obama.

    While we all seem to really have no clue what is happening with finance, we all know (as you point out)… what is wrong with detroit.

    For the life of me, I can;t understand why, if they need cash, they are not forced to sell their inventories at firesale prices… I’ll buy one of those new hummer 4-door pickups for 10K…. Just make me the offer… this will prop up their financing arms, help the repair business (ruin the used car market), and keep the demand for parts for repair propped up…

    SELL THE INVENTORIES AND GET TO WORK ON NEW CARS…. NO ONE HAS DEMANDED THEY SELL THEIR CURRENT INVENTORIES…THIS IS ONE PART OF THE DETROIT MESS I DON”T UNDERSTAND.. Clearly something to do with dealers, but GM/ETC. can just treat the massive discounts as manufacturer rebates…time to take the big bath.

  3. Publius Says:

    I think you are completely Richard, but let’s not blame Hershey’s for the fat kids:
    http://meganmcardle.theatlantic.com/archives/2008/11/why_cant_american_firms_make_s.php

    I would say the biggest blame for our gas guzzling lies with the spread created with out highway system, along with the much lower price of gas in the US (want to make a smartcar hip? cahrge 10$ per gallon).

    American car companies have been mismanaged, and deserve to contract, but let’s not blame them for actually doing one of the things they were supposed to, creating cars that americans wanted to buy.

  4. Wendy Says:

    What’s interesting in the above mentioned Meganmcardle post is that she notes that in Europe, GM as OPEL is actually a successful auto company making small cars that people want to buy. 4 of the top 10 selling cars inEurope are “American” but they are not models frequently seen in the US.

    In Europe, no one will subsidize them through trade barriers, political lobbies, or a suburban sprawl way of life through cheap-gas policy, so they are forced to make cars people want.

    And, I was shocked to learn that GM is actually capable of doing it!

    This should be a good argument against bailing them out. They’re capable of doing their own bail out.

  5. Buzzcut Says:

    To be fair, at one point the proposal from Ford was to use government money to retool their truck factories to produce those little cars they sell in Europe.

    Problem is, Europeans are small car conoseurs. They pay a premium for a quality, stylish small car.

    In the US… not so much. GM’s Saturn division actually imports an Opel, the Astra. Sales are terrible.

    There is hope for the automakers. Smaller diesels for their trucks are on the way next year. Diesels make a lot of sense in a Tahoe or Explorer.

  6. Manu Says:

    Went to the Paris auto show last month – GM, Chrysler and Ford were the Big Three duds. People flocked to the European luxury cars. The Japanese concept cars excite the mind. NO ONE cared about the American cars. They were chunky and ugly. They were a disgrace. Why bail out these auto makers? So that they can continue to churn out cars that hardly anyone outside of America wants to buy?

  7. hayden fisher Says:

    I could not agree more with Richard. Candidly, THEIR CARS SUCK!!!!! That’s why no one wants them. You couldn’t pay me to drive one. And, speaking of which, INCREDIBLY, these companies are in the toilet even though they’re ALREADY SUBSIDIZED–every police department, fire department, federal agency, etc. buy American cars and regularly replace them. And lots of rental car companies also buy them and rent them for 29.99 a day. AND THEY STILL CAN’T MAKE IT.

    …THEY NEED THEIR PLUGS PULLED, NOT CHANGED

    …Buzzcut has a point, the competing factions in the Democratic party between unions and the creative class could widen

    …I’m hoping Obama is posturing knowing full well that these companies could be in Ch. 11 by time he assumes office

  8. hayden fisher Says:

    And, Richard, this reminds of one of your favorite quotes from a couple years ago about Detroit management– theses guys shouldn’t be managing 7-11’s, let alone car companies…

    …I don’t see this bailout being pushed through however, too many people already realize that Detroit is dead and there’s no reason to keep it propped-up when we have ordinarily robust industries and businesses that need attention

    …and speaking of American cars, their brand identity is so DEAD that I couldn’t even name you one car any US auto manufacturer makes off the top of my head. I would assume the Corvette is still around, and maybe sad versions of the Camaro and Mustang, perhaps a Taurus, and that’s it…they make some decent trucks but Toyota makes better ones

    …does Ford still make the Explorer or did that line die when after the Firestone tire debacle (that anyone supporting a bailout should be reminded of, these problems didn’t exactly creep up yesterday)

  9. Michael Wells Says:

    The New York Times today has an opinion piece saying GM might be as well off going through bankruptcy as a bailout. It would give them a clean slate to start over again. Hopefully with new management.

    http://www.nytimes.com/2008/11/13/business/economy/13bankruptcy.html?_r=1&scp=4&sq=General%20motors&st=cse&oref=slogin

    And Thomas Friedman had a good take on the bailout:
    Bob Nardelli, the C.E.O. of Chrysler, and he was explaining why the auto industry, at that time, needed $25 billion in loan guarantees. It wasn’t a bailout, he said. It was a way to enable the car companies to retool for innovation. I could not help but shout back at the TV screen: “We have to subsidize Detroit so that it will innovate? What business were you people in other than innovation?” If we give you another $25 billion, will you also do accounting?
    http://www.nytimes.com/2008/11/12/opinion/12friedman.html

  10. Joe Powers Says:

    A couple of the comments have noticed the tension between the unions and the CC in Democratic coalition, but so far, everyone has missed the really big story on this subject: Waxman vs. Dingell for chairman of the House Energy and Commerce Committee. The internal politicking over who gets to set the oversight and legislative agenda of this incredibly powerful cmte is were the CC vs industrial action is. So far, the sides seem closely balanced. Waxman appears to have thought this move out and claims to have the votes, however, Dingell appears to be succeeding in framing the debate as disconected airheads vs. jobs. If Waxman can reframe it as jobs of tomorrow vs. dead end industries with poor future prospects, I think he’d win. Waxman could be over the long haul more significant than the Obama win.

    Second, there will be some form of bailout. No Republican has ever won the presidency without Ohio, and no one on the current GOP depth chart has the juice or time to alter the coalition the GOP could assemble to get a win. Likewise, as Ohio, Michigan, and Indiana recently came through for the Dems, they are a constituency that they cannot afford to ignore.

    It would therefore behoove everyone to argue for the kind of bailout people like Van Jones, Joe Rohm, Tom Friedman and Barack Obama argue for, instead of a crony capitalism style bailout. To that end, let me be the first to demand that any automaker bailout include something for the good folks at Aptera and Tesla Motors.

  11. Jack Says:

    Agree. It’s all about the product.
    One of the salient features of successful automakers today is their exportability. From technology, design to value, the Big Three cannot compete with European, Japanese and even Korean cars. Their products don’t sell. That’s the reality. It’s plain stupid to keep pumping billions of dollars into businesses that manufacture products that most people in the world avoid.

  12. Joe Powers Says:

    Three of the top ten cars sold in Europe are made by GM, such as the Opel/Saturn Astra. The Euro Focus (which in the states is a Volvo or Mazda) is also on the Euro top 10. The product is fine. The problem is the legacy cost structure of the North American business. Opinions vary on how well GM was transitioning out from them with the last contract, as some blame the credit crisis. The freeze in loans and downturn in business lending has reduced demand.

  13. hayden fisher Says:

    Joe, I disagree, their products are crap, and I apologize for the boorish language; but we need to call a spade a spade. Maybe what they sell abroad is better. That begs the question of why they don’t sell those products here.

    Let them go under, Ch. 11 will do them good. If the legacy structure is the problem, Ch. 11 is the answer. Why is that other car companies come here and build plants that employ American workers that do manufacture great cars? Don’t blame the workers, blame the moron management teams!!

    Anecdotally, look at the GM flagship headquarters. That’s one of the ugliest buildings I’ve ever seen!!! How can we expect anyone who thinks that’s tasteful to design cars people want to buy!

    Please….let them go under!!!!!!!!!!!!

  14. hayden fisher Says:

    …and I do feel sorry for all of those workers who built great American cars during the 60’s who might now see their retirements wiped-out because their management teams failed them so badly since!

    …and let’s remember what came out of the Chrylster ‘bailout’– the K car and the mini-van…do we dare to see the ‘fruits’ of another ’successful’ bailout of the US auto industry!!!

  15. Bert Sperling Says:

    #3 – Publius Says:
    “I think you are completely Richard…”
    Apparently Dr. Florida’s personal brand has risen to the point where his name is now used as an adverb. :)

    But Detroit is down, way down, right now. Wouldn’t bankruptcies of the Big Three make it even harder for the city to dig itself out of its current situation?

    It seems analogous to ‘helping’ an adult child. When does the assistance depress motivation and innovation, and when does it provide that final boost to help achieve a self-sustaining orbit?

    b.

  16. hayden fisher Says:

    It’s becoming ever more apparent that we need a 21st century new deal that will focus on delivering government-provided loans to companies and individuals that you can truly produce new products, services and industries. The deck must be re-shuffled. Detroit can be re-born until it’s allowed to die. Out of the ashes will rise new companies we could have never imagined. Companies like Apple, Fed-ex, USA Today and others of the past that non could have predicted would rise; or even CNN and ESPN. The ‘experts’ never would have believed there would be a market for personal computers or, later, a computer company that completely revolutionized the business of music. Nor a company that made its business delivering mail overnight; or a company that produced a national newspaper or 24 hour news and sports channels. Somewhere out there new entrepreneurs have new ideas and business models waiting to spring to life after being capitalized. The banks will never support them and the private capital market is in hibernation. Government must become an aggressive venture capitalist looking to breathe the first breaths of life into these future business leaders; not keep the walking-dead alive via further futile life support. Let these companies die so that they can be cleared away to make room for the new.

  17. Michael Wells Says:

    I haven’t owned an American car for over 20 years, but when I get one as a rental I’m astonished at how poorly designed they are. The headrests push my head forward, the doors are flimsy, etc.

    The Big 3 have made such a mess of their business in the US that “saving” them from bankruptcy might not be a service to anybody except maybe their inept management. Even casual observers have seen this train wreck coming for a decade or more. The management has responded by fighting the fuel efficiency rules and other changes that could have saved them. I don’t think companies that lobbied for SUV’s to be treated as work/farm vehicles for fuel efficiency purposes, then marketed them to the suburbs, deserve another chance.

    As with the housing bailout, this is looking to save the top of the food chain, when the real need is at the bottom — in housing, homeowners and here, workers. The Bushies are trying to shovel as much of the $700 billion into their friends pockets as they can, this is just another example.

  18. Hope Says:

    Anyone ever hear the phrase, “When the national economy catches a cold, Detroit gets the flu”? Things are beyond bad here. Before the financial crisis things were bad, now its incredibly worse.

    If the moronic Big 3 aren’t given some kind of bailout, you may as well say final rites for the city. Its not just the actual auto workers that will be in dire straits but all the other businesses dependent on the car companies themselves and/or their workers.

    This is not to say managerial incompetence and greed should be rewarded. Why not have very strict provisions on giving a bailout. Meaning, you don’t get the money, unless you fine and replace management, bonuses and whatever niceties that current top brass gets are taken away, vehicle inventory has to be sold off at rock bottom prices, salary cuts for all employees that make over 70k, all new vehicles to be assembled and sold have to be diesel, bio-diesel, hybrid, or electric with a trade-in program for people to turn in their gas-only cars/trucks for an alt fuel one. and then a total restructure of the companies within the next 6 months or gradual dismantling of the companies over the next couple years. Maybe other companies like Fisker can do something with the pieces and the people. Fisker and Tesla already have some former GM/Chrysler engineers. Oh yeah, about Tesla getting a piece of the bailout, they were approved for the 40million they asked for.

    Why not use the bailout as a way to change things without having an entire region collapse?

  19. Joe Powers Says:

    A Chapter 11 bankrupcy does not seem like it is capable of solving the problem of maintaining a US auto manufacturing industry. GM spun off a bunch of component manufacturing to Delphi some years ago, and Delphi went into Chapter 11 in about 2005, I think. They are still there today. Since GM is still their largest customer, they have avoided Chp 7 as long as GM was a going concern. Once GM enters Ch 11, Delphi will probably enter Chp 7, and so might many other suppliers. With uncertainty of inputs, and demand uncertain since who will trust the warranty of a bankrupt company, GM will have no viable plan for exiting Chp 11. As soon as enough of the creditors and the bankrupcy judge says that, they go to liquidation as well. All the various suppliers liquidating will have major problems for the viable car companies that also do business with the suppliers. Could even Honda or Toyota afford to vertically integrate, like back in the Model T days of Ford?

    I tend to think the answer is no, because Ford was able to be vertical from raw mats to finished Model Ts because they were new and because of their volume (the did end up selling 22-23 million of the things). Also, this wasn’t even desirable, as they waited too long to innovate and GM moved ahead with more models.

    As a result, I think a bankrupcy will end up merely reducing the problem of global overcapacity in autos. I also think that if you don’t have a manufacturing base in the US, the US design shops will also likely close or move, to be nearer the builders.

    Lastly, I think a big shakeout of suppliers may damage the startups, enough so that truly innovative products like the Aptera and the various Tesla products go the way of the VCR, lots of solar tech and numerous other things that were invented, but are not made, in the US.

  20. Joe Powers Says:

    Hope, you ask “why not use the bailout as a way to change things without having an entire region collapse?”

    I’d like to know myself, and not just ’cause I’d like to see the sort of innovative, environmental jobs go to the US. I would also like to see more attention given to the politics of a bailout. I truly think that the GOP noise and threat of a filibuster is for show. All Harry Reid needs to do is threaten to hold the Senate in session until January 3 and actually force them to make good on their threats, and reason will prevail. If congress passes some action, a veto seems unlikely since Bush hasn’t vetoed much, an override is always possible, and the GOP cannot win national elections without at least some part of the old Northwest, since the recent outcomes in Virginia and North Carolina may be the start of a demographic trend–the true Rise of the Creative Class.

    As near as I can tell, I think it comes down to a failure to imagine possible unintended consequences.

    It seems to me that some think that getting rid of GM et. al. will leave room for US startups to grow into big auto companies, but I beleive the more likely exit strategy for the startups is to sell out to, or be merged into, an existing large auto company.

  21. Zoe B Says:

    In my lifetime, my entire extended family has owned 2 (used!) American cars, out of about 30 total. We like compact hatchbacks or station wagons, tops in gas mileage, reliability and longevity. For us a car is a tool for getting from point A to point B, not an extension of the ego or a home-away-from-home. We like to maintain a car well, and keep it until it can’t pass inspection any more. My parents had a 17-year-old Honda Civic with over 270,000 miles, still safe for city use, until some drunk kid drove into it last spring.

    Detroit wants to sell you as many cars as possible. They load cars up with flashy toys that break, and engineer them not to last much longer than a 5-year lease. They push ‘muscle’, not mileage. Detroit decided long ago that they didn’t want my family’s business.

    I find this sad, because my grandfather was an engineer for GM. He walked across Europe to get the boat to America, because he wanted to go to the (then) best engineering school in the world: the University of Michigan. Whose preeminence was due in part to synergy with the car industry in nearby Detroit. A part of my family’s heritage is dying.

    But I’m not sentimental enough to ‘buy American’ and accept Detroit’s contempt for my end of the market.

  22. hayden fisher Says:

    Joe, if Ch. 11 won’t work, then liquidate them in Ch. 7. Maybe a new US automaker will emerge from the ashes. Maybe not. Either option is better than keeping the broken bucket of bolts that is the US auto industry moving along the same path.

  23. David J. Miller Says:

    Two other random thoughts:

    1) bring in some korean or japanese car firms, give them loans to take over/merge with GM & Ford and strong parts makers. Hope to g-d Detroit learns from them. If this takes bankruptcy so be it. They cannot/should not be allowed to continue to exist as they are. Sorry Michigan (I am a U of M grad).

    2) In the summer/fall of 2004 I spent at least one day a week at the Ford dealer in SF. I was trying to get a Ford Escape Hybrid. Ford had beat toyota to the punch and was putting out the first suv/4X4 hybrid. My work ethic/diligence paid off and I got the first hybrid/escape from S&C ford. I paid full sticker. I have the car still and the mileage it gets is pretty solid. As for the rest of the car — from seats and doors to dash and folding mechanisms for the back seats — is a piece of junk. I am going to keep the car till it no longer functions, but I will not buy another ford, hybrid or otherwise.

  24. David J. Miller Says:

    Chrysler exec bonuses….

    http://www.usatoday.com/money/autos/2008-11-14-chrysler_N.htm

  25. Roni Says:

    Bailout 2008, a poem by David Jeffrey from Canada

    Like a bloodied warrior,
    laying broken and torn.

    Like a dying soldier, hopeless and forlorn.

    But the blood, it be green,
    the color of money.

    And the soldier is an economy,
    and it is anything but funny.

    Broken are it’s people and shattered are their dreams.

    Thanks to the ultra rich and their full proof schemes.

    It is a tragedy with more pain to come.

    Finance will be Hell, and their wills will be done.

  26. Kim Says:

    this poem is awesome. Sad but true in these screwed up times

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