Becker's post seems to be missing...

There is a certain degree of unreality in this discussion, since the political costs of allowing the Big Three auto makers to go under are so high--particularly for the Democratic party--that some sort of bailout seems nearly inevitable.

But assuming, for the sake of argument, that we still have some choice in the matter, is a bailout really the least expensive alternative? I accept your assumption that any bankruptcy proceeding would probably lead to lquidation, that liquidation would expand unemployment up and down the production chain, and that any further undermining of consumer spending comes at a particularly undesirable time. But can we not use the money that would otherwise prop up a failing industry to expand unemployment insurance and retraining programs?

I think the main problem with the bailout is another moral hazard problem. If the Big Three are bailed out, then why not any other company? If we're in a depression, and many more companies will see red on their books, then they are going to come to Washington to lobby for a bailout. They also have many employees at risk of getting laid off and suppliers at risk of getting disrupted. Detroit gets a bailout, why not them?

I'm scared about the sense of entitlement companies will erroneously have if Detroit gets a bailout.

[liquidation] probably would not be the efficient solution to the problems of the Detroit automakers. They are still producing millions of motor vehicles per year, and if they suddenly ceased production entirely there would be a big shortage even though demand is way down.

They aren't all going to liquidate simultaneously. After the first does, the other two will have much better prospects.

The solution is to let them fail as quickly as possible, so that one in fact does fail quickly.

Given that the dems will almost certainly bail out Detroit, I'd be interested in more discussion of what the best form of bailout will be.

It seems executive compensation is a tiny (but still important moral-hazard-wise) part of the problem.

So, what should we do? I don't know enough to really say, but some ideas would include:

Shift some health burden to the govt by wiping out the gold-plated health plans for those over 65 and have them use Medicare like the rest of us.

Force renegotiation of union contracts.

Supersede state laws that protect dealer networks and let the companies control what happens through the dealers.

Use preferred shares like the first bailout of AIG.

If they go into Ch 11, guarantee the warranties.

Fire the senior exec who got us into this mess.

I am going to have to disagree with Professor Posner, ha although this is coming from an undergraduate, so hey—we can all take it with a grain of salt.

As I was reading the post (which I do every week, and want to thank Prof. Posner and Becker for taking the time to write, for what it’s worth), I had in mind the final option that Posner rejects—that the government would provide the necessary debtor in possession loans; if they were to make a such a guarantee, there would be a unique set of advantages contra the other two options (bail out or refusal to bail out): it would lend itself to the firm’s being able to restructure their corporate governance (particularly their egregiously unsustainable worker pensions &c.), it would prevent moral hazard (although the debts are “bailed out,” the firm still files for bankruptcy), and it would provide the confidence needed (by either a de facto or de jure guarantee of their immediate debts) to allow the firms to pull through. Frankly, all of this is purely pragmatic on my end—the business model GM, Ford, and Chrysler have put forward has seemed to be on a crash course with this point for years, and I think they should by all rights be allowed to fail; that said, it’s simply not a practical solution at this point given the current state of our economy, as Prof. Posner correctly noted.

In the case of the auto-makers' bailout, it's a relief to have a national issue that is so straightforward: American cars tend to break down and fall apart therefore people are not buying them. If GM and Ford don't want to go out of business, they should start making decent cars. To bail them out would be to reward their terrible manufacturing standards.

One more time: Failure is an essential part of the success of the capitalistic system.

A bailout does not rectify the fact that Detroit has manufacturing capacity X and the market demands Y

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As for the idea of liqidating the "Auto Industry", this includes third and fourth tier business as well. Such as retailers, restaurants, child care, housing, mortgages, private loans , etc. As for the Auto Industry, one is looking at the loss of approx. 800,000 jobs, when one includes the tird and fourth tier business's one is at job losses of approx. 1.5 to 2 million. With this job loss comes a rolling snowball effect that spills over into the Public Sector in regards to taxes and the services that they provide, not too mention employment. So a failure to bail out the "Auto Industry" will only drive the Nation deeper into the Depression. Making it that much harder to recover. No bailout is an act of stupidity and gross irresponsibility.

It's like being on a sinking ship and someone in the Club Room says, "Don't use the lifeboats, because it's a "moral hazard" because if we do use them, then people won't learn to swim.

I think that Posner is ignoring the political realities. Dems have a natural constituency, so they will press for a bail out. As we have seen with the TARP, once the government cookie jar is opened, no one has restraint. Only bankruptcy can bring the necessary discipline that needs to come to the auto business.

Barron's had a great article on the amount of private capital that has been wasted on this industry over the past several years. No need for the government to get in the mud too.

This is another case where moral hazard and political uncertainty play a role. If a bailout weren't a consideration, GM probably would have already filed for bankruptcy. If this had happened a few months ago, GM would have billions of dollars in its war chest (at 12/31/07, they had $26 billion in cash; even now they have $16 billion), and the need for DIP financing would be much less pressing.

Instead, the incentive is to maintain current operations, even though they are bleeding cash, while lobbying Washington for a bailout.

I feel like I'm missing something regarding liquidation. If GM, F go into bankruptcy and decides to liquidate, who buys the assets and what will they do with them? Posner talks about the shortage of cars, so it seems he assumes whoever buys the assets won't be producing cars. Will they use those assets in an amusement park or to harvest corn? If those assets do in fact have value and are purchased, I would think they are being used to produce cars, in which case there is no major shortage of cars and those who provide parts to those cars still employ people. For example, when those assets are sold, it's highly likely that Honda or Toyota will buy some (or all, but I doubt that) of those assets and begin producing cars. To produce cars, employees need to be hired.

So to me, any estimates of reduced employment throughout the auto industry are probably grossly overstated. Am I not seeing something?

I think the government do not offer bailout for auto manufactures in order to curb a bankrupcy. I need to reorganize auto industry. It is better chance to enhance thier price competiton because they solve the most severe problems that has influenced their profit for more than thirty years. Of course, auto industry is one of the most industries in America. Many people depend on them. However, I think if they pass the chance to improve their structure of cost, they face more problems. Some economists predict that about five car makers occupy almost all market share in the future. To be one of the five car makers, gorvennment should try to reorganize auto companies that are facing run out of cash.

I think the government do not offer bailout for auto manufactures in order to curb a bankrupcy. I need to reorganize auto industry. It is better chance to enhance thier price competiton because they solve the most severe problems that has influenced their profit for more than thirty years. Of course, auto industry is one of the most industries in America. Many people depend on them. However, I think if they pass the chance to improve their structure of cost, they face more problems. Some economists predict that about five car makers occupy almost all market share in the future. To be one of the five car makers, gorvennment should try to reorganize auto companies that are facing run out of cash.

I think the government do not offer bailout for auto manufactures in order to curb a bankrupcy. I need to reorganize auto industry. It is better chance to enhance thier price competiton because they solve the most severe problems that has influenced their profit for more than thirty years. Of course, auto industry is one of the most industries in America. Many people depend on them. However, I think if they pass the chance to improve their structure of cost, they face more problems. Some economists predict that about five car makers occupy almost all market share in the future. To be one of the five car makers, gorvennment should try to reorganize auto companies that are facing run out of cash.

I think the government do not offer bailout for auto manufactures in order to curb a bankrupcy. I need to reorganize auto industry. It is better chance to enhance thier price competiton because they solve the most severe problems that has influenced their profit for more than thirty years. Of course, auto industry is one of the most industries in America. Many people depend on them. However, I think if they pass the chance to improve their structure of cost, they face more problems. Some economists predict that about five car makers occupy almost all market share in the future. To be one of the five car makers, gorvennment should try to reorganize auto companies that are facing run out of cash.

To say that the U.S. auto industry is doomed by being unable to compete ignores the outstanding products that have recently rolled out of the Detroit: the Chevy Malibu, the Cadillac CTS, the Ford Flex, the Epsilon family of GM crossovers, the innovative new Chrysler minivan. The problem is not that American companies are unable to creat competitive products: Ford Europe is a dominant force across the entire continent for which it is named.

Saying that a company needs a temporary subsidy or loan so that it can become competitive is one of the oldest, most hacked arguments against free-market processes. I am not denying the potential for widespread creative destruction, but I feel that without that such a challenging time would forge a leaner, meaner, reinvented, rejuvenated domestic auto industry.

Dan makes an often overlooked point. Starting in the 1970s dealers have used state legislatures and even Congress to dictate down to the smallest detail the formerly contractual relationship between themselves and vehicle manufacturers, a state of affairs splendid for dealers but terrible for the consumer and ultimately for the companies and the economy. Foreign-owned manufacturers have to endure the same stultifying regulatory regime in the U.S., but for the reasons noted by Becker about their general competitiveness are better able, for now, to endure it. There should be no consideration of a bailout without preemption of state dealer-protection laws and rollback of the federal special-interest legislation (e.g. the Motor Vehicle Franchise Contract Arbitration Fairness Act).

Seems to me that the big three are all different versions of the same FORD (Fix Or Repair Daily; Found On Road Dead). Chapter 11 first, then bail out the survivors. Let the UAW go fly a kite.

Given the fact that current and past management have failed to respond to market needs, i.e. producing cheap fuel efficient cars which are reliable, why should equity and bond holders be rescued? They had their chance to sell the stock and bond. I would sugguest to let them all together go bankrupt and propose the debt holder a debt-to-equity swap. If the government keeps these dying giants artificially alive, nothing will really change. If bond-holders will eventually control the companies, at least there is some hope that they will be managed to produce the necessary cash flows to keep them alive and to force them to produce what the market can afford.

Bankrupcy Reorg would be more preferred in my mind. I would like to see the following: Cut the executive payouts (bonuses and stock options mostly - as defined historically). I would suggest that the Unions give up the fight against pay cuts and healthcare cuts including other benefits, adopt these changes within reason and as a measure of good faith on the part of the companies and thier union and non-union employees, let the the employees own a pience of the company. Next drastically cut the price of the car they are trying to sell ($3000 to $5000) to give the American People and the international markets a chance to help the company clear inventory.

As the undergrad points out, almost everyone agrees that Chapter 11 restructuring and govt DIP loans would be vastly preferable to a simple bailout. Yet, given the political reality and psychological impact, it won't happen.

So why don't we use some of this bailout money to educate or re-train the younger workers? We accomplish all objectives at once: creative destruction in the industry, productive reallocation of labor and a blunted pyschological shock since we are actually helping people move on. Plus, no more need for future bailouts. People are worried but if you let them know they will have assistance, it doesn't have to be so bad.

The market has alreday cleared dozens of Auto Man'f. from the table. Such as:

Hupmobile, Desoto, Packard, Studebaker, Pierce Arrow, Tucker, Crosley, etc. etc.

As for the "Big Three", Chrysler ain't anymore, So there's really only the "Big Two" and that includes Toyota (whose profits all go overseas contibuting to the trade deficit) Which is how many trillions/year?

For those who seem to think that these companies only produce autos, think again. These companies are heavily involved in many more strategic industries which are vital to the wellbeing and security of the Nation and it's populous. To let them go down the tubes is to cut our own throats. But, from what I see here, must don't care about that, so long as their ideological perspective is preserved intact.

So who are the real economic traitors? Certainly not the Unions, or the Management, or the Government.

Can we only let the "creative destruction" that is capitalism occur during boom time?

Outdated companies don't fail when during periods of economic growth. Are we done allowing our economy to evolve?

Not allowing failure prevents evolution which keeps us from enjoying the unknown innovations of tomorrow.

'But the automakers should be kept out of the bankruptcy court until the depression bottoms out and the economy begins to grow again... The government should insist on being compensated by receipt of preferred stock in the companies...'

In the case of an eventual bankruptcy filing, i suppose the preferred stock will get a lower priority even compared to pre-bankruptcy debts. How then is the bail-out investment guaranteed/protected?

Chris, Let's let the old Ship sink with the loss of everthing and all on board. Then we can build a new ship. "Creative Destruction" - Brillant!

Hello Professor, first of all I want to apologize for my low level english and to manifest my most sincere admiration for your work, which I follow since many years ago. I know this question might be vague or maybe too ingenuous, but it is something that worries me and I could bet it worries many normal workers and entrepreneurs around the globe. I would like to know which are your perspectives for the duration of this crisis, at least in the impact form, how much time could it take until the new situation gets settled and we can see some stability? I know this question involves maybe some "future teller" conditions, but all I would like to know is a rational estimation. Thank you very much Professor Becker, it is always a pleasure to rea your blog, here from Latvia.

Aleksandr Antonenko

Ford buys shares in Mazda; Ford sells shares in Mazda.

BMW bought British automaker Rover; BMW sold British automaker Rover.

Daimler-Benz bought Chrysler; Daimler-Benz sold Chrysler.

Wake up, people. Hello! Hello! Do you see a pattern here?

WHY WOULD SUPPOSEDLY INTELLIGENT EXECUTIVES MAKE SUCH DUMB ACQUISITIONS ONLY TO SELL THEM A FEW YEARS LATER?
(Answer: Because they were just following orders)

Hedge Fund manager Bill Ackman on Charlie Rose's show suggested a pre-package bankrupcy.
This solution seems to allow the firm firm to re-negociate contracts, while limiting the psychological impact Posner is refering to.

Is it realistic to do a pre-packaged bankrupcy for such a large and complexe case?

I believe that the labor unions have a strangle hold on our automakers, and it is largely their fault that the big 3 are in the mess they are in. Because of the unions, autoworkers' benefits are too fat to be competitive, and the cars they make are not tuned to the market. Now the unions want us - the very people who quit buying their crappy cars - to bail them out to the tune of $Billions. Labor unions have lost their relevance in the 21st century and until we break that cycle of free market abuse, I cannot support a bailout. The consessions they have made so far are only a drop in the bucket to what they need to do. I say close the unions down, take all the assets of the unions and give them to the automakers, and then let the free market take its course.

Posner is wrong on the alleged risk to DIP lenders re GM, unless I am wrong in assuming that the value of GM's assets (if liquidated) far exceeds the amount of necessary DIP financing. DIP lenders can acquire a superpriority lien on GM's assets and thus be covered even if the automaker were liquidated. Hence, I believe private lenders would step forward and, failing that, government DIP financing would not saddle taxpayers with further losses.

A prepack could work, if the financing is available and the unions amenable, for the latter's failure to budge would forestall such a plan. Private or gvmt-sponsored DIP financing would allow GM as DIP to reject contracts with franchisers, reject/renegotiate CBAs with unions (as in the United case), sell brands, and sell certain operations to more efficient capitalists -- leaving a company which can compete with foreign car companies with manufacturing in the US (and employ some large number though less than before). The Chinese and Indian markets will be available in due course to healthy automakers, but not to inefficient state-owned enterprises.

Suppliers would have claims for losses against GM as DIP, and would experience diminished business, but those which survive can invest in manufacturing future supplies for a no-longer-moribund GM, or for its now more powerful surviving rivals. Employment losses would be far from total among automakers and their suppliers.

Erratum: "though" not "for" re the latter's failure to budge.

Industry problems? Blame the Unions! Stock market problems? Blame the Unions! Banking failures? Blame the Unions! Management problems? Blame the Unions! Business Cycle problems? Blame the Unions! Deregulation problems? Blame the Unions! Blame the Unions for everthing instead of the real causes!

Ingenious! All our problems are solved.

Any healthy bank that wanted to participate in Ch 11 DIP financing would be free, I suppose, to do so. But the last thing we want to see happen is for sick Wall St (or Main St) banks that are already sucking down bailout cash to volunteer DIP credit for the Detroit 3 just so they'll have an excuse to ask U.S. taxpayers for a bigger bank bailout.

Did anyone else catch the Senate committee's hearing today? My take: votes aren't there to do an additional $25 Bil loan (bailout) outside bankruptcy but they can be put together to do DIP financing for any or all of the 3. A lot of the questions from Senators (largely drafted by staffers) were the same kinds you hear from a seasoned bankruptcy judge when a Ch 11 debtor and its lenders go in to seek approval of DIP financing terms. Globally, how do you intend to use the $$$ and how will you control your costs any better than in what got you here? I can't see any realistic prepack for GM or, probably, Chrysler. There's too much to unwind at GMAC, which Chrysler owns 51%, GM 49%. Ford maybe, except Ron Gettelfinger gave no indication that the UAW will voluntarily make any more economic concessions.

My wife has the finance degrees and the luxury of never having had to use them in the real world. So I asked her, "If we've got these 3 behemoth auto manufacturers with all these many years of experience right here in Detroit, U.S.A., how come NOT A ONE of them is healthy?" I mean, you'd expect at least one to be in a position to survive some rainy days. Her answer: current economic conditions in the U.S. constitute a state of affairs nobody's assumptions about business cycles ever contemplated. In the Great Depression days, in much of the country at least, people could fall back on agriculture and feed themselves. If cash was short, labor and barter weren't dirty words. But nowadays everything's credit and "monetization." Few Americans recognize a cotton seed from a soybean seed, much less have the knowledge or the tools to turn one into fabric, the other into food or feed. We've enslaved ourselves to monetized city life.

Nostalgia aside, the Detroit 3 as we've known them have finally hit the wall. But there's a decent prospect one, maybe two, could be rehabbed & successfully reorganized via Ch 11 without wrecking what's left of the rest of the economy.

> The U.S.-owned auto industry may be doomed; it may simply be unable to compete with foreign manufacturers...

Under current circumstances, perhaps. What has not been mentioned is the fact that any "bailout" would really be a bailout of the UAW as much as the auto-makers.

Unless you believe that somehow Germans and Japanese just have it in their blood that they can make much more affordable/desirable cars than Americans can?

And why do I see this underlying assumption that if the biggies file for b'cy, then suddenly those factories will be leveled for trailer parks?

I don't THINK so-- they will continue to produce cars. Under another name, under another union, (or not), under different management... but they will produce cars.

Thanks, but no thanks. Unless everyone here agrees to give a fat bailout *TO MOI*, (I only need a HALF billion), then let's allow the market to work the way God/Gaia intended.

Virtually all major manufacturing except automobiles has exited the U.S. Is it not inevitable that automobile manufacturing will eventually move offshore if not susidized? Is there something special about automobile manufacturing that makes it critical to keep it alive here in the U.S.? And, why are automobiles more important than steel, televisions and consumer electronics, microwave ovens, washing machines, memory chips (DRAM), computer boards, tools, etc.? Shouldn't we have subsidized these industries? I have trouble believing that restructuring the automobile companies will allow them to survive in the long term.

Gentlemen, thank you for timely, informative, insightful, educational posts.

I think this will be the first test of whether Obama caves to lobbyists and special interests. The UAW and its members gave considerable amounts to his campaign and they expect to be repaid. Even if GM could considerably improve its margins and sales, it would not be able to meet its pension, wage and dealer obligations. The only long term solution is restructuring. The UAW would like the bailout because it is in effect a bailout of the unsustainable pension and wage obligations.

I really think that handing the failing auto companies to the UAW solves the problems in the funniest way possible. Clear the debts, and let the auto workers build competitive companies if they can, let them decide what they want to do.

NO WAY TO BAIL OUTS TO US AUTO COMPANIES!!! They need to file Chapter 11 and Reorganize! We can't reward poor management. And the gall for all three Auto Companies Executives to fly in on private jets to ask for a bail out. They don't just get it . . . they don't care for anything but the millions they make in paychecks, retirements and packages.

NO WAY TO BAIL OUTS TO US AUTO COMPANIES!!! They need to file Chapter 11 and Reorganize! We can't reward poor management. And the gall for all three Auto Companies Executives to fly in on private jets to ask for a bail out. They don't just get it . . . they don't care for anything but the millions they make in paychecks, retirements and packages.

NO WAY TO BAIL OUTS TO US AUTO COMPANIES!!! They need to file Chapter 11 and Reorganize! We can't reward poor management. And the gall for all three Auto Companies Executives to fly in on private jets to ask for a bail out. They don't just get it . . . they don't care for anything but the millions they make in paychecks, retirements and packages.

NO WAY TO BAIL OUTS TO US AUTO COMPANIES!!! They need to file Chapter 11 and Reorganize! We can't reward poor management. And the gall for all three Auto Companies Executives to fly in on private jets to ask for a bail out. They don't just get it . . . they don't care for anything but the millions they make in paychecks, retirements and packages.

I am trying to grasp the logic of putting 700 Billion Dollars out for the mortgage and insurance industries to survive but not provide a dime for the Auto Industry ??? Everything that I've read indicates the negative impact will be far worse if we don't help !! How many jobs have to be lost ? How many additional mortgage defaults ? How many health care premiums won't get paid !! How many groceries stay on the shelf ? How many other goods and services will fall by the wayside ?? Most of the money comes from the hard working people of America and we are about to stick it to us one more time !! The very rich will just be not as rich , the rest of us will take the bigger hit !! The "let the chips fall where they may" mentality is hardly doing the average american any favors. If that's is the way our leaders want to take it than let's take the 750 billion dollars of "bail out" money off the table too !! Let's see just how many jobs and people we can wreck at once !! Next election we'll see how many of our elected leaders get their positions renewed !!

As far as who's flying around in what, why don't we poll all our elected officials and add up how much of our tax dollars go to "comfort" travel !!I've flown coach all my life !! Can they say the same ?? Squandering money isn't exclusive to corporate america !! Some of the most ridiculous waste to date is in our own government !!.. At every level !! Let's keep our eye on the bigger picture , the thought of bread line and living on the street isn't a thought i care to dwell on and, as dramatic as that statement is , it can happen to a lot more people than we think !!

Kay, No harmonization of interests; Industrial, Agricultural, Commercial, Governmental? Ready for the unemployment rate to jump to 9-10 percent? That's what is going to happen if Chapter 11 becomes the only viable solution. I hear Dell is on the ropes as well and thinking of shuttering it's Austin operations and the UT is thinking of cutting 30% of it's staff. What about Motorola down there? I hear they're cratering as well and contemplating shutdowns and massive layoffs.

Know any good ranches in the area that need Hands? Oh! that's right, the ranches aren't needed any longer. Argentinian Beef is the wave of the future.

On DIP: GE Cap exited this line last month, because it was no longer able to syndicate DIP loans. Even if large amounts of capital were still available for DIP, an automaker would be high risk, because the assets are primarily plant and equipment that would be difficult for lenders to sell if the reorganization failed. So the government would be the only source for DIP, but the politicians would benefit more from using equivalent funds for a bailout. Perhaps, as Prof Posner suggests, the economy would benefit more in its current perilous state from a bailout than from a Ch 11, but it will be a political rather than an economic calculation determining the form of government aid.

Auto executives and their supporters in Congress said another $25 billion in emergency loans is needed to prevent one or more of their companies from going under before year's end. That would mean $50 billion in total federal aid.
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oliviaharis
Internet Marketing

To the overely intelligent- maybe you should do a little research on the reliability of domestic automobiles. The chances of a Chevrolet Impala break down is one hundreth of one percent more likely than a Toyota Camry at a sticker price of almost $10,000 less.
I can appreciate everyone being upset at the way the big 3 have mis-managed funds. For over a century the domestic auto manufacturers have been the back bone of the U.S. economy.Paying trillions of dollars in taxes and are responsible for millions of jobs. The government of the great country of the United States has allowed Japan to move in and take over the largest industry we have and accept no blame. What do they do instead? They belittle the CEO's as if they were children because they flew into Washington in their personal jets. TRILLIONS OF DOLLARS in tax payer money!!!!! They are the only reason WE CAN AFFORD TO HAVE those over privledged politicians sitting there to judge them.
I love BIG GOVERNMENT support!

Bailing out the Detroit automakers WILL NOT save jobs in the US economy it will, at best, simply shift jobs around. Every single dollar that the government spends bailing out Detroit MUST be offset by $1 of higher taxes or decreased spending somewhere else in the economy (or at some other time) This in turn will decrease economic activity (and jobs) in other sectors of the economy. The question then becomes: "Where do we want these jobs to be?" My vote would be to keep the jobs at the companies that produce goods and services that customers place a value on which is greater than the costs of providing the goods and services. If the American people truly believed that Ford, GM and Chrysler were of such importance to the fabric of America they would willingly pay an adequate premium to cover their costs.

One question I have - Are the big three going to Mexico and Canada asking for money too - isn't this where a lot of the cars are made? So should the US taxpayer be subsidizing their plants in other countries? I don't think so!

Most Americans do pay a premium to cover their costs. We purchase their vehicles rather than an import. Maybe we should put an additional tax on imports so people like Paul can contribute also.

The American automobile industry has slowly been restructuring itself for years. Unfortunately, while they have built some better cars, their executives and unions still demand higher wages than the competing companies that have begun to assemble "foreign" cars in the southern US - often with substantial incentives from the states where the new factories are located.

We can learn from the success of Toyota, Honda and Kias that are assembled in the US.

Had the presidents of the big 3 and their respective union presidents come to Washington on a commercial economy flight and said to Congress something like "we will reduce or maximum executive pay to $350,000 per year and our labor costs to $45k/year during the years we are receiving US bailout money." the result would have been quite different than the result we are likely to see.

Had they further said, "we will reduce the number of different cars we will build by cross branding" and "we will reduce our dealer network costs by closing less effective dealerships," the results would have been even better.

Some, but not all, the big 3 problems are caused by the current economic troubles. To that extent, the Government should help the companies stay viable to preserve the jobs until the economy recovers. But, that is only a small part of the problem.

The real problem is the excessive management layers and costs; the excessive labor costs; and the excessive legacy costs. The car companies, not the Government, must fix these. the details don't have to be completed, but the executives and unions must agree to significant cuts to save their jobs -- immediately -- and these cuts must start while Congress does the details of the bailout.

Liquidating the executive jets could start immediately as a symbolic first step.

More than once in the comments I have read people have assumed that because the Democrats have a majority a bailout is a given. The truth is that in the Senate 60 votes are actually needed to overcome procedural hurdles and the Democrats do not have that many members. And that's why no deal was reached this week. Maybe one will be reached in December, but the Republicans can block it if they want to. And that's assuming the Democrats even allow it to come to a vote.

At what point did our government become our economic sugar daddy and for what purpose. We send big piles of money to Washinton so that the incompetents can decide who gets the money and for what and when. If that is not enough, they borrow money to keep themselves in office at the public trough and hobnob with each other to feel powerful and important.

Disgusting!!!

At what point did our government become our economic sugar daddy and for what purpose. We send big piles of money to Washinton so that the incompetents can decide who gets the money and for what and when. If that is not enough, they borrow money to keep themselves in office at the public trough and hobnob with each other to feel powerful and important.

Disgusting!!!

The logic that ".. although at present the companies are probably losing money on virtually every vehicle they sell, at a lower level of production the price at which they sold their vehicles would exceed marginal cost" confuses me. Is he saying the price would go up simply because they're no longer building excess inventory? Or that marginal cost would go down despite the loss of economies of scale? The real answer is to let the stronger, surviving competitors pick up that demand. That's how capitalism works.

The auto industry can become enormously successful, creating hundreds of thousands of new jobs by leapfrogging the competition technologically. That can be done by developing and switching to the turbine engine. This is discussed in www.economic-plan.com.

I also think that Ch. 11 and gov't DIP loans is the preferable strategy. The labor contracts and the management failures make me very pessimistic about the Big 3's ability to thrive even when the economy recovers. Zombie firms lurching along under staggering debt are not a long-term solution.

But, a bailout seems inevitable at this point. The big surprise for me was how poorly the CEOs performed in front of Congress. They truly don't understand the importance of symbolism and appearance. Who told these guys that refusing to concede any mistakes or take any responsibility was the correct way to curry favor with an angry legislature?

What people don't understand is that A BAILOUT IS IMPOSSIBLE WITHOUT BANKRUPTCY.

Look, the problems are multiple. These companies are paying the second highest corporate tax rate among major manufacturing countries.
http://en.wikipedia.org/wiki/Tax_rates_around_the_world

That is the soak the corporation mentality the dems have been feeding people for years. The fact is, corporations don't PAY taxes, they simply collect them.

Besides the high corporate tax rates, these companies have legacy costs from retirees - artificially inflated by decades of NLRB bias toward the UAW.

THESE are the things that have made Detroit non competitive. Until/unless Congress REDUCES the corporate tax, and controls the unions that trade their votes and Congressional donations for unwarranted advantages in the marketplace, Detroit is ALWAYS going to be uncompetitive.

The problems seem to be:

1) Auto company liquidations would be disasterous for the U.S. economy; so the nation needs for the companies to be restructured in Chapter 11.

2) No private companies are in a position to provide the funding -- and certainly they can't provide the funding for all 3 automakers. (Cerebus isn't feeling too hot about their investment in Chrysler; and nobody wants to make the same mistake now.) This is made even worse by the potential govt bailout: Even if a private source wanted to invest in one of the automakers, the prospect of a govt bailout for the competition makes it unlikely.

3) The auto companies can't survive in the long-term without a tremendous cram-down for existing obligations of all kinds -- debt, stockholder, current labor, and retirerees. This could happen under normal Chapter 11 -- but there's no private funding. (See #2).

4) So the best bet is a govt bailout. BUT, with democrats controlling both the WH and Congress, the government is in a terrible position to achieve the labor/retiree cramdown that successful reorganization requires. Because it's going to be awfully hard for democrats to tell union workers and retirees that they have to accept the significant cuts that would be required for this to work.

On the other hand, if the new Obama team can pull it off, then hats off to them!

Judge Posner's purely pragmatic perspective really comes out in this post. Philosophical pragmatism a la William James (and others on this point who are not so obviously pragmatists including David Hume, Ludwig Wittgenstein, and Jean Paul Sartre) assumes that reality is unstable and unpredictable. There are no natural laws or rational structures to the physical universe or to human affairs. We are driven to an agnosticism about the future on this view since nothing is knowable past this present moment. Thus, we see William James accepting Darwinism, which is a biological version of the atomism of Democritus and Lucretius where everything at its most basic level is purely random in opposition to the teleology of the Stoics, Plato, and Aristotle (incidentally the Intelligent Design objection to Darwinism is rooted in this controversy, not in defending Christianity per se).

The fact of the matter is that we do know economic laws that govern human affairs. We do know that if the central bank holds down interest rates below the market for loanable funds for long, then a bubble will develop and the bubble will burst at some point. Then the economy, especially sectors heavily affected by the inflated money supply, will suffer when the correction comes. That is what is currently going on in the housing market. As Professor Becker pointed out in his essay, GM was heavily involved in finance. Of course, many cars sold by any auto maker are financed and so will be affected by the credit crunch. But the companies which were in otherwise good shape are likely to survive. But this liquidation process is a necessary adjustment to correct for the past sins of the Federal Reserve. If we do not let the liquidation process occur (in this case through Chapter 11 Bankruptcy), then the problems in the American auto industry will simply be perpetuated.

If this were some sort of short-term quirk in the market that caught an otherwise productive set of firms off guard, then I could see bailing them out this one time. But Chrysler has been here before. GM and Ford have had consistent problems for decades. I do appreciate the argument about the suppliers. But it is not as if GM, Ford, and Chrysler will cease to exist. They will still need suppliers in order to produce the cars that they can manufacture efficiently. Those that are not needed will go under. That is simply part of the dynamics of a free market economy. To perpetuate firms and their products that are no longer needed is a waste of resources that could go to produce goods or services elsewhere. As for the car warranties, again the companies will continue to exist so they can honor their warranties. There could be some sort of guarantee made to honor warranties in case of Chapter 7 bankruptcy.

It is imperative to allow the Big Three to file for Chapter 11 bankruptcy. We do know that in the long run, the market will sort out the most efficient and responsible firms. We are not floating on a sea of uncertainty. We understand the principles that shape a market such as moral hazard, misallocation of resources, inflation, poor quality and service being punished in the marketplace. In the long run, these companies can revitalize themselves by focusing on what they can do reasonably well and discarding assets and obligations that are holding them back from actually meeting their customers' needs. This process can take place throughout the economy as firms that are not as healthy die off freeing their assets to move to more productive uses. Again, recessions (depressions) are not bad. They are the corrective process that preserves the system that serves us all well in the long run. And we are not all dead in the long run at the same time.