Saturday, December 06, 2008

Mindless Dogma

Herb Stein and John Stossel appeared on Larry King Live Friday night and gave their prescriptions for the domestic auto industry. Stein was strongly in favor of a bailout, suggesting that the federal government "flood the system" with currency and worry about any inflation later.

Stossel, however, was his usual right-wing self, suggesting the automakers go into Chapter 11 bankruptcy, then "set a floor and build cool new cars." (I'm not kidding.)

Detroit has built cool new cars in the past. John, do you remember the 1997 GMEV1? The 1997 Plymouth Prowler? The 2001 Pontiac Aztek? The 2003 Hummer H2? The 2004 Chevy SSR? With the exception of the Aztek (possibly) and the Hummer H2 (certainly), of course you don't. They were all "cool new cars" and all failures. And that's not counting any "cool new cars" introduced before 1991. Or any designed and built by foreign automakers, as this exhibit indicates.

You want to "set a floor?" How is this? As Bill Saporito notes in the current issue of Time magazine,

Next year, workers at Ford plants will earn an average $53 an hour with benefits, the result of a breakthrough industry agreement worked out with the UAW in 2007. That's close to the $49 an hour that workers at the transplants average and far below the $71 an hour with benefits that was the old UAW wage, and that was cited by Alabama Senator Richard Shelby as a reason to oppose any bailout. And the cost differential on enginemaking between Detroit and the transplants will narrow to a couple of dollars by 2011.

Go to Chapter 11 bankruptcy, wherein the company gets to blow off its creditors? There was a time when conservatives like Stossel believed in accountability, but if you remember that time, you must be fairly old. And this blithe suggestion of Chapter 11 bankruptcy ignores the likelihood that it would quickly become a Chapter 7 bankruptcy with its liquidation of assets- and disappearance of the company. Former Bush Secretary of Energy Spencer Abraham explains:

Just as financial institutions depend on the confidence of those with whom they do business (as Bear Stearns and Lehman Brothers discovered), automakers depend on the confidence of car buyers. To purchase a car is to make a multiyear commitment: the buyer must have confidence that the manufacturer will survive to provide parts and service under warranty. With a declaration of bankruptcy, that confidence evaporates. Eighty percent of consumers would not even consider buying a car or truck from a bankrupt manufacturer, one recent survey indicates. So once a bankruptcy proceeding got started, the company’s revenue would plummet, leading it to hemorrhage cash to cover its high fixed costs.

That would thwart any attempt at reorganization, and the case would likely move inexorably toward liquidation under Chapter 7 of the federal bankruptcy code. Debtor-in-possession financing — which is what the bankrupt need in order to pay for the continued operation of their business — would not be available in the vast amounts required, given the plunge in revenue.

A bankruptcy filing by even one of the Big Three would probably set in motion a cascade of smaller bankruptcies by suppliers of car parts, as the money the company owed them (which would be classified as an unsecured claim) could not be paid until it exited bankruptcy. And this loss of suppliers would almost certainly overwhelm the other two carmakers. There would also be a severe contraction in the availability of trade credit from suppliers, which amounts to tens of billions of dollars.

Other than that, Stossel knows what he's talking about. Except on virtually any topic.

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