Enough already with the bailouts
Everyone from the auto industry to American Express has been taking advantage of the bailout rescue package. But commentator Robert Reich says Chapter 11 bankruptcy would keep companies going at no cost to the taxpayer.
Robert Reich (Robert Reich)
More on Commentaries, America's Financial Crisis
TEXT OF COMMENTARY
Scott Jagow: House Speaker Nancy Pelosi has joined the chorus, calling for a bailout of the auto industry. And this week, the Treasury gave insurance company AIG more money. The government allowed American Express to become a bank just so it can get a piece of the rescue package. Enough already, says commentator Robert Reich.
Robert Reich: When a big company that gets into trouble is more valuable living than dead, there's a well-established legal process for reorganizing it -- called Chapter 11 of the bankruptcy code. Under it, creditors take some losses, shareholders even bigger ones, some managers' heads roll. Companies clean up their books and get a fresh start. And taxpayers don't pay a penny.
So why, exactly, is the Treasury substituting government bailouts for Chapter 11? Even assuming Wall Street's major banks and insurance giant AIG are so important to the economy they can't be allowed to fail, they don't have to be bailed out. They could be reorganized under bankruptcy protection. Their creditors, shareholders, and executives would take bigger hits than they're now taking, now that taxpayers are bailing them out, but they took the risk. We didn't.
It would be different if Main Street was getting something out of all this. But credit still isn't flowing to small businesses or distressed homeowners, and unemployment is skyrocketing.
There's more at stake for Main Street when it comes to American automakers now on the edge of bankruptcy, because 2.5 million households depend directly or indirectly on them for their paychecks. But the best way to protect all these people is not necessarily to pay off the automakers' creditors, shareholders, and executives, with no strings attached. When the government bailed out Chrysler in the early 1980's, a third of its employees were laid off. In order to keep autoworkers employed and also move Detroit to more fuel-efficient cars, all stakeholders will have to sacrifice.
What a tragedy it would be if the government spends so much on these bailouts there isn't enough money left for the next administration to help average people get affordable health insurance, send their kids to good schools, and find good jobs -- including jobs rebuilding the nation's crumbling infrastructure and finding alternative sources of energy.
You see, it's not the big guys who need rescuing. It's the small. And right now, the government has its priorities upside down.
Jagow: Robert Reich is an economic advisor to Barack Obama and he's the author of the book "Supercapitalism."
Comments
Comment | Refresh
From Tucson, AZ, 12/03/2008
Great article, and comments are excellent. In reading the papers today and the justifications that the Auto Industry are "sacrificing" so they can partake in the bailout are absurd. CEO's offering to earn $1 annual salaries...get real is that really a sacrifice to save their company. As Scott said above: "It hasn't been about the "little guy" for decades. It's all about the money." Here's hoping that our new President will help turn this statement around. Here's to good days ahead!
From Middletown, CA, 11/19/2008
Great commentary and suggestions! Now, how do we get the gov't to listen and implement them?
LK
From TX, 11/13/2008
I typically disagree with Mr. Reich's positions, but he hit this nail on the head: Stockholders (and, to a lesser extent, bondholders) gain rewards from the businesses they own precisely because they're assuming the risk that the business might not do well or might fail entirely. In this case, shareholders should have done a better job of supervising the companies' actions, such as by insisting that they produce high-quality, high-mileage vehicles.
In fact, bankruptcy protection the answer for much of Main Street as well--except that Congress and the president recently made it much, much harder for individuals to get their debts removed. We should roll back the ill-advised bankruptcy reform to restore the last-resort safety valve of chapters 13 and 7.
From Bucks county, PA, 11/12/2008
If we are to help the Auto companies , maybe the uaw & employees should be required also. Temporary employee concessions should be the starting point.
Also instead of giving the big 3 billions , Maybe a new car federal purchase rebate would work better.
If the Gov't issued a substantial new car rebate at time of delivery then maybe consumers would be swayed into that new car they need. Dealers would move inventory , States would recieve taxes and money would be moving.
From MI, 11/12/2008
Clearly, we must take whatever actions that can be taken, to prevent our country from descending into a full-blown depression. Perhaps, in addition to the options of bankruptcy or taxpayer-funded bailouts we need some 'third way' of providing an economic shock absorber that could do the job better. For instance, in the case of the auto companies, perhaps we could let them re-organize under bankruptcy, but provide consumers with incentives for buying American vehicles, such as rebates, tax credits, and/or extended warranties (so people will still buy from a chapter 11 auto maker). In addition, something like bigger tax write-offs for suppliers who lose money in the short term, or even direct subsidies to them, could help to cushion them from some of the loses. This all would be in keeping with the 'tickle up, not down' mantra, that economists, such a Mr. Reich, advocates. This could also be extended to other critical segments of the economy. Of course, this would have to be done very carefully (providing some more employment for economists), so as not to prop-up companies that SHOULD be allowed to fail and so as not to become equivalent to pure protectionism, or making it less dangerous for other companies to fail. Also, this would only work if it was done over a short period of time (i.e. so as to really serve as a shock-absorber and not a giant 'corporate golden-parachute'). Such a, temporary, 'bankruptcy-bailout', would allow large companies that have been around for decades, to be given a second chance at survival, with the odds of their survival, greatly, increased. Yes, it would not be completely fair to other, smaller, companies, but it might be better for taxpayers than either a direct 'blank-check' bailout or regular bankruptcy with low probability of success (i.e Delphi).
From Plantation, FL, 11/12/2008
Your points are well taken and I very much agree with your comments. I am also glad that you are one of the advisors to President-Elect Obama.
From Aurora, NC, 11/12/2008
I agree with the position expressed by Robert Reich this morning: Chapter 11, if done correctly, is capable of offering a company the possibility to continue operation while rectifying egregious behavior. Case in point: Circuit City. We'll see how that goes, but one MAJOR item needing correction is the $8 million salary of its CEO. Maybe $80,000 for a salary? I have 3 graduate level degrees and even working as a manufacturing engineer for 2 major airplane companies I barely made half that a year...NO ONE NEEDS THAT KIND OF MONEY!!!
From MI, 11/12/2008
I agree (again) with Mr. Reich on this, particularly the part about executives having to pay the consequences for their actions. Executives, such as Bob Lutz (of GM) does not deserve to be bailed out and guaranteed his enormous paycheck, bonuses and golden-parachute. To this day, he remains a climate change skeptic and someone who loves gas guzzling high-performance vehicles. He was dragged, kicking and screaming, to hybrid and electric vehicles and his favorite "hobby" is flying one of his two private fighter jets (burning THOUSANDS of gallons of fuel, with impunity, every time he decides to have some 'fun'). NO taxpayer money for guys like this - please!
From Chicago, IL, 11/12/2008
I agree with you regarding what the bail out entails. Actually, the Energy Department has been given authority from congress to administer $25 billion in low-interest loans to help Detroit retool their auto plants and meet new fuel-efficient standards. However, recently the government approved $5 billion of this loan to help Cerberus fund GM’s takeover of Chrysler. Yet, this $5 billion is only half of what is needed to initiate layoffs, close plants and cover integration expenses of the two companies. So yes, the plan to layoff workers is already part of the game plan with the bailout money. A merger between GM and Chrysler for example would already cost our economy 40,000 jobs.
The MAJOR point you miss here is that with bailing out these auto companies, it enhances the auto companies brand image. Would you want to buy a car whose company is in bankruptcy? How reliable is a warranty on an automobile in this case?
The big 3 really screwed up their business plan because they kept making big SUVs at the same time that most americans were buying big houses and taking out big mortgages they couldn't afford. Back then auto companies argued that there just wasn't a market enough to justify the kinds of investments required for more fuel efficient cars.
I agree that the people running these companies should be punished in some ways rather than rewarded again with a bailout. Yet, the larger story is how large these companies have become, and how arrogant they are to their own failures.
Still...the question is what is best for our country..?? I think we need to bail them out but also restructure management, and maybe reallocate their employees so that they become part of the green economy. Bankruptcy is the equivalent to letting them fail which is not a good thing for America's economic future. I actually believe that government should play a role in the automobile industry perhaps before it gets like this. Just as I also believe we should and do play role in our airline manufacturing as well as our banking systems. This is the edge that the big Asian governments have over the US. They see these industries as part of a greater strategy, rather than just another free enterprise like music or cosmetics. I guess the hard question is where do we draw the line, and what industries are critical for our success as a nation.
From Caledonia, WI, 11/12/2008
I listen to your commentary every morning when I can on NPR and usually agree. In this situation I can't agree with you more. AIG’s behavior hasn't changed one iota for instance.
The real reason for my writing is that I believe we need a "trickle up" approach and so far I haven't had a response from a single legislator. I sent the proposal yesterday to Obama's change.gov as part of what I think the nation's priorities should be.
My proposal was to give people who paid taxes last year and whose incomes were less than the Social Security cap (double for joint filers) incentives which would also infuse banks THEY TRUST with cash: Eligibility could be determined by banks once an online database is established by the IRS, something that should take a couple days – not months. The banks would automatically, after approval and identity verification, use the automated clearing house to transfer funds from the Treasury to consumers and banks.
1. An immediate $1000 incentive per taxpayer. Some people NEED this money to pay debts, others will spend. We’ll still get a bump out of it.
2. $2000 for a CD that will mature in 2 years, proceeds tax free, can’t be used as an asset when applying for credit. It will immediately infuse banks with cash.
3. $2000 for a CD that has a maturity in 5 to 10 years for a longer term infusion and to get people saving. Proceeds once again tax free.
The benefits would trickle up fairly quickly instead of NOT trickling down. I’d like to know what you think.
From Little Rock, AR, 11/12/2008
Robert Reich proposes a viable solution to the U.S. financial crisis. American business should follow the laws that currently apply to the situation and not expect special bailouts that only serve to sanction irresponsible fiscal behavior.
From Langhorne, PA, 11/12/2008
Robert Reich always bashes stockholders of companies. He has a cushy government job so he is paid,(by taxpayers) no matter what happens. Millions of MIDDLE CLASS workers have money in 401k plans. Every time you lose a comapany not only are jobs lost but Main Street workers lose. Mr. Reich in the future drop the bashing and think about thee REAL MIDDLE CLASS.
From Princeton, NJ, 11/12/2008
In this case Reich is correct. We need to let the auto companies fail & go Ch 11. They are not, and have not been competitive for 40 years, and we are merely subsidizing UAW workers who are overpaid for what they do. Of course, the UAW pumps millions into the Democratic party, so you just know how this is going to end.
From Mechanicsburg, PA, 11/12/2008
I believe we bailed out the banks and will bail out the auto industry for two reasons. First, we are a nation of "enablers." Few people are ever held accountable for their own actions. Secondly, money talks. Bigger losses for the banks and auto companies means less money in the coffer for campaigning. It hasn't been about the "little guy" for decades. It's all about the money.
Post a Comment: Please be civil, brief and relevant.
Email addresses are never displayed, but they are required to confirm your comments. All comments are moderated. Marketplace reserves the right to edit any comments on this site and to read them on the air if they are extra-interesting. Please read the Comment Guidelines before posting.
You must be 13 or over to submit information to American Public Media. The information entered into this form will not be used to send unsolicited email and will not be sold to a third party. For more information see Terms and Conditions and Privacy Policy.