Trying To Look On the (Automotive Bailout) Bright Side

In the modern world, we tend to focus on the negative a bit more, perhaps, than we should.  Of course, in some areas it’s hard to find much of a silver lining.

Consider the results of the federal government bailout of GM and Chrysler.  Car sales have been off, and GM stock continues to slide downward to new lows.  As a result, the stock the federal government holds in GM continues to decline in value.  Last week the latest Treasury Department report on to Congress on the potential losses on the auto bailouts was released, and it estimates another $3.3 billion increase in likely losses — taking the projected loss on the investment from $21.7 billion to $25.05 billion.

The stated purpose of the bailout was to save jobs and prevent the ripple effect on suppliers that could have occurred if GM and Chrysler had failed.  Defenders of the bailout say a million jobs were saved as a result and that the move kept us from plunging into a serious economic depression.  Opponents of the action say that the jobs wouldn’t have been lost if a standard bankruptcy proceeding had occurred and that such a proceeding would have allowed stronger companies to emerge, without any need for a federal bailout.  We’ll never know, of course, because the standard bankruptcy route wasn’t tried and billions of dollars of federal funds were spent to prop up GM and Chrysler.

But we do know one thing:  it could have been worse.  Rather than investing our tax dollars in GM, the federal government could have bought Facebook shares instead.  Since that company’s ill-fated initial public offering only a few months ago, Facebook shares have gone from a high of $45 per share to a new low of $19.05 at Friday’s close — which is a drop of almost 60 percent.

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1 thought on “Trying To Look On the (Automotive Bailout) Bright Side

  1. I think you really do have to consider the effect a standard bankruptcy would have had on suppliers and other manufacturers. Without the infusion of capital provided by the bailout, not only may GM and Chrysler have had to close or drastically shed assets, but suppliers would have likewise been unable to collect money owed and lost significant business. Closings of suppliers could have been devastating to other manufacturers, and would at a minimum have caused major shutdowns in production. No one likes a government bailout. It costs taxpayers money, and exacerbates business managers’ incentive to take unreasonable risks in the hunt for short term gains, because there are no consequences to failure. On the other hand, given the free fall that economy was in at the time, a strong argument can be made that the bailout was least of two evils. History tells us that a complete laissez faire attitude toward the economy leads to horrendous boom and bust cycles in addition to corruption. There is a role for government to play, as distasteful as that can be.

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