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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Outdated companies don't fail when during periods of economic growth.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!

Aleksandr Antonenko

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

Jeffrey W. Bowyer

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?

(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.

Brian Davis

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.

UCD Neuroscientist

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.

St. Darwin Assisi's cat

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

Rob S

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.

Kay of Austi TX

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.

Kay of Austin TX

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.

Kay of Austin TX

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.

Kay of Austin TX

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.

dave rohlfing

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 !!

dave rohlfing

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.


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!

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