Automaker woes and bailout switcheroo
The $700 billion bailout isn't just about banks anymore, and automakers are begging for a cut. Kai Ryssdal recaps the week with David Leonhardt of The New York Times and Leigh Gallagher of Fortune magazine.
Treasury Secretary Henry Paulson takes questions from the press after announcing changes to the bailout plan Nov. 12, 2008. (Alex Wong/Getty Images)
More on The Economy, Wall Street, Auto Industry, Politics, America's Financial Crisis
TEXT OF INTERVIEW:
Kai Ryssdal: It's time to put the weekly wrap on a busy five days. It seems like everything changed from what the Treasury Department's going to do with the bailout money to whether or not Detroit is going to, or ought to, get any help. Here to help figure it all out are David Leonhardt, he's columnist for the New York Times. Leigh Gallagher's with Fortune magazine.
Hello again, guys.
Leigh Gallagher: Hi, Kai.
David Leonhardt: Hi, Kai.
Ryssdal: Let's start Leigh with you and this very public about-face that Henry Paulson made this week, when he came out and said, "You know what? On this bailout thing, I kinda changed my mind." Are you worried at all that the plan to save the global economy is in shaky hands?
Gallagher: Well, there's no doubt it was a huge 180. It started out, we're gonna sell widgets in Kansas. And the, wait a minute, now we're gonna sell sheep in Florida. I mean, it was just a complete reversal. I think everybody would be in agreement here that we're dealing with uncharted waters and there is no road map. But nonetheless, the whole original bailout was sold that not only does it have to be done this way, but it has to be done this way, right now. That just didn't turn out to be true.
Ryssdal: David, are you scared just a little bit?
Leonhardt: Absolutely. I mean, the main thing that really does not inspire confidence is that they didn't just not choose this plan originally, they were scornful of it. I mean, the Treasury Department and to some extent the Fed said, "That's a bad idea." And weeks later, it's exactly what they're doing.
And I think the Bush administration has done some things right in responding to this crisis, but I also think they've been behind the curve a lot. And I think it's good news that we're gonna have a new team coming in that might be able to establish a little more confidence in the markets.
Ryssdal: Leigh, let me ask you the consumer question. I mean, there are some technical aspects of this mess that seem to be getting better. The credit spreads are narrowing, and there some indication that money is being lent. What about you and me and consumers? How is life being reflected out on Main Street.
Gallagher: You know, you're right. The commercial paper rates have fallen a little bit. The Libor's fallen. But in terms of the consumer, things just really seem to be getting worse and worse and worse with every passing day. I mean, we're seeing retail sales fall off a cliff. We're seeing chains go bankrupt, like Circuit City this week. There's going to be more to come. We're looking at the first December to really have negative sales. People are really scared, people are losing their jobs and it just creates a spiral, really.
Ryssdal: David, let me pick up on that point about jobs. One of the industries lining up for bailout money is Detroit, of course. A lot of people say they should get it; a lot of people say they shouldn't. Where do you come down?
Leonhardt: Well, I hate this but I think that they probably need to get some amount of aid. And the reason I hate it is that it's really true that much of Detroit's problems are of its own making and of the making of its representatives in Congress who thinking they've been protecting Detroit have been helping to seal their fate. You know, you see people out there from GM out there now saying, "This isn't our fault. This is this broader crisis." But just take a look at last month's sales. GM's sales were down 45 percent, 45 percent. But the average was 32 percent. And so, what that tells you is that Detroit has really been doing something wrong, and if the feds, which is us, the taxpayers, are going to get involved, there need to be some really tough conditions put in. And they need to be conditions that acknowledge that these companies are going to get smaller. We just don't want tens of thousands people thrown out of work right now, which would be a human and an economic problem.
Ryssdal: Leigh, what do you say about that?
Gallagher: Well, I think David makes some really great points, but I do think that we're looking at the destruction of capital that's gone on in Detroit has been going on for decades. And to just sort of throw more money after that so they can kind of continue doing what they've been doing -- that's a really tough sell, especially when, you know, bankruptcy, it sounds like a terrible option, but there's a real argument for that being the best solution. It would give these companies time. It would allow them to deal with their dealer network and the other issues that they face. I'm not saying that's definitely the answer, but there may be a case for it.
Leonhardt: And I don't think, Kai, that's necessarily the wrong choice here. Bankruptcy might well be the best choice. The two things we want to avoid here are: one, throwing good money after bad, and two, suddenly having 20,000 auto workers out of work next month.
Ryssdal: All right, you guys, thanks a lot. Leigh Gallagher at Fortune magazine. David Leonhardt at the New York Times.
Leigh Gallagher: Thanks, Kai.
David Leonhardt: Thanks, Kai.
Comments
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From Marion, CT, 11/15/2008
It looks like the folks in DC are hell-bent to give the stimulus package another try seeing as the first one didn't have any real effect.
This time it's the car industry.
While the sanity of blowing cash around and running the national debt up even further is questionable; it seems inevitable - so this time let's target unemployment, create AMERICAN jobs and pump up the economy all at one time.
Consider the following:
Manufacturing costs of motor vehicles are 65% labor (i.e.: W-2 income), that's not all direct but due to suppliers. GM alone has over 1300 suppliers. (That's a lot of jobs!)
1 in 10 Americans makes all or part of their income due to the automobile industry.
Money turns over 5 times in a year.
Thus a vehicle with a manufacturing cost of 20K produces 13,500 in W-2 income which in turn becomes a total of 65K in 12 months due to the 5 turnovers.
(This isn't magic, it's simply how the economy works.)
Our domestic car makers are saddled with legacy costs, most of which will reduce dramatically in 2010 due to contract changes. They need to survive to get there.
Our own over-zealous government with a virtual alphabet soup of regulatory agencies has been no help either.
Foreign competitors have worked off-shore collectively to meet various US gov't. imposed emission and safety standards, thus dramatically reducing those R&D costs. American car companies are prohibited from that by our FTC.
Make no mistake; it’s no surprise that once again government has been a major part of the problem.
Here's the solution.
Instead of either shipping cases of cash off to car makers; or sending us all another check:
Send out a voucher for say $1,000 good on a motor vehicle for the percentage of the vehicle that's domestic. (Civic = 70% Ford Explorer=80%)
Let those not interested in a new car sell or give away their vouchers (Ebay would be loaded with them in no time flat) and those that are so inclined can use as many as they can get their hands on up to the full MSRP of the vehicle.
This would bail out the car industry without giving them a dime directly
Further it would reduce the overall age of the nation’s cars which would in turn;
increase overall fuel economy & decrease pollution.
Strengthen the dollar!
Since vehicles with a higher domestic content would be moving better this would reduce our imports, strengthening our dollar which would in turn further reduce what we pay for anything imported ...like gas!
Jobs
Instead of simply bailing out a few big companies, this would cause such a run that it would create employment throughout the industry affecting over 1300 suppliers and their workers.
That would give the economy good swift kick right where it needs one!
Pays for itself!
Since money turns over 5 times, and the vouchers are only good for the domestic content of the vehicle, every dime would be spent in the United States creating taxable income.
What is the income tax on 65,000 anyway?
(Remember? 20K manufacturing cost = $13,500 W-2 income x 5 = $65,000)
Another Stimulus Package?
I'm sure you'll agree that this makes more sense than simply sending out checks; many of which will be used to buy new flat screen TV's usually made in Malaysia or some such place.
11/14/2008
Which economies will fare best during this economic downturn -- China and Germany? What is their main output -- goods made by the process of manufacturing.
Which economies are likely to suffer the most -- US & Britain? What's their main output -- services, like trying to be bankers to the world.
So why were we so quick to pour money into Wall Street and so reluctant to help manufacturing, which would benefit our economy the most? Perhaps because Mr. Paulson and Mr. Bernanke are a little biased, having come from the Wall Street firms, which they are now so eager to help. So what about "Joe" the auto assembler, steel worker, glass worker, fabric producer, rubber worker, electronic components manufacturer, etc.? Their output goes to make our autos. If we help the auto industry out, we help out a lot of these other workers. Hopefully, they will reciprocate and buy American made goods, and get our economy going, rather than more cheap stuff from the Far East.
From Mesa, AZ, 11/14/2008
I now believe that bankruptcy is clearly the best way to bail-out the big-three. Once the big-three go into bankruptcy, they will be able to shed the hundreds of billions of dollars they owe in underfunded retirement benefits. Unfortunately, the Pension Gaurentee Corp. (Uncle Sam) will need to pick up the 3-5 hunred billion the big-three can't pay. Once they have shed this dead weight, they can deal with the unions, and will finally be able to get on a level playing field with the auto's made by Toyota and Honda in plants in the U.S.. It would be a real shame for the taxpayers to pump hundreds of billions into the big-three for the next few years, only to see them go bankrupt, and then get stuck with an even bigger bill for thier under funded pensions.
From Hingham, MA, 11/14/2008
"The 15% Solution" to auto crsis
I have a simple approach to the auto crisis -- The federal government should give any one who buys a fuel efficient car from the Big 3 a 15% rebate back on the selling price. This program could have a 1 year time limit.
The total of the rebate dollars might then constitute a loan the auto makers would have to pay back.
If effective, this solution would immediately jump start US auto makers by giving them a huge advantage over the competition while they work on the remaining legacy issues. Auto makers would stay employed and no money would go directly to the car makers.
The feds might also think about underwriting an extended warranty program for this one year period. Again, the total dollars to do so, could constitute a loan to the auto makers
The Idea may be flawed and I am not sure if the numbers above would work, but the conceptual approach might we worth exploring.
Joseph H Hare
23 Del Prete Drive
Hingham, MA 02043
617 755 0898
11/14/2008
I oppose the emergency aid to the automakers proposed by Speaker Pelosi and President-Elect Obama.
For many years now, the automotive industry has focused on developing SUVs and other gas-guzzling vehicles, ignoring the need to develop more fuel-efficient vehicles that would secure these companies in an economy of scarce fuel and high petroleum prices. I believe that taxpayer money should not ease the consequences of an industry’s poor business decisions.
Americans have known that petroleum would become more and more scarce. Why didn’t the automotive industry prepare for this situation? And why should taxpayers soften the consequences of this lack of preparation?
While I am certainly concerned about the loss of American jobs in and around the automotive sector, I am not equally concerned about potential losses to automotive industry investors. Investors take risks when investing in companies.
Also, because the emergency aid extended to the financial sector has not had the intended effect of loosening up the credit markets, I am concerned that money given to the automotive industry will not be used to secure American jobs and to develop fuel-efficient vehicles. What guarantees do taxpayers have that our money will be used for the stated purposes?
Furthermore, Obama assured the American people that he would safeguard taxpayer interests, not corporate ones. I am concerned that aid to the automotive industry (like the aid to the financial markets) will ultimately further corporate interests.
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