Letting GM Fail

Crossposted at Right Minds

Back in October, I, along with much of the rest of the conservative movement, supported the federal bailout bill. The reasoning behind it, which seemed strong at the time, was the lending market was so terrified of further bankruptcy that some government intervention was needed to stabilize the situation. It sounded logical, and most pundits—though relatively few Americans—agreed with it.

It’s a bit late to wonder what might have been, but it seems that the bailout bill might have been a mistake. I suppose that the fact the Henry Paulson picked $700 billion dollars as the cost of the bill simply because it seemed about right should have been a tip-off that the bailout wasn’t going to be a very well-run operation. And the fact that much of the nation’s (and given our place in the global economy, the world’s) financial problems were partly due to Paulson’s frightening pronouncements and mismanagement (Fannie’s and Freddie’s bankruptcies didn’t just sneak up on us; Paulson knew for some time that both corporations were in trouble) should have been another. The bailout was supposed to prevent a disastrous credit crunch. Given the state of the economy, it seems to have failed.

The bailout of the banking sector hasn’t exactly been a rousing success. But Washington is now talking about bailing out one or more of the Big Three automakers. Congress already supports some form of bailout, and President-elect Barack Obama seems to as well. Bailing out Wall Street may have been a mistake. Bailing out Detroit would be a disaster.

Wall Street is not always rational. Irrational panic over the fate of Fannie and Freddie could have sent the financial (as in lending) sector of the economy into a tailspin. Credit isn’t a physical possession—and any organization dealing in it (as in a bank, or a mortgage insurance corporation) can be adversely affected by events wholly beyond its control. That was the original idea behind the bailout—to give the lending sector a bit of confidence that things wouldn’t get out of control.

Cars, on the other hand, are physical objects, and can be measured in cost per unit. The Big Three aren’t losing money due to external events—they’re losing money because they don’t work.

American cars aren’t very good, at least compared to foreign ones. Toyota and Honda are reliable—Ford and GM aren’t. And in a competitive environment, it’s hard to compete while making poor cars.

And when the Big Three do manage to sell one of their second-rate (not that every American car is bad—but on average, they do rate below Japanese cars) cars, they lose money on it. So when GM, say, sells five million cars, each car sold represents a net loss. Let me be the ten thousandth person to point out that GM loses money per sale, but they make it up in volume (ha ha). That’s not a very good way to stay in business.

Some claim that any of the Big Three are “too big to fail.” They’re right—we really can’t afford to have another huge corporation (or two) go bankrupt. But we can’t afford to bail them out even more.

First, that would destroy the idea of “moral hazard,” that by going into business you stand a chance of losing what you invest. If the federal government becomes, in essence, a massive investment insurer, both moral hazard and a great deal of incentive will be lost.

Further, bailing out GM (which would probably be the first automaker to be bailed out) would set up a slippery slope. No business is safe in our economic situation. Which would be the next sector of big business looking for a federal government bailout?

Finally, bailing out the Big Three wouldn’t solve anything. They would still lose money on their cars, and their cars wouldn’t improve in quality. Giving them cash would only let them continue to lose money. Were GM to fail, it would represent a true catastrophe—but it wouldn’t be as bad as having the federal government bail it out.