EC103-Topic#3: U.S. Automakers: Fix, Rescue, or Fall

We have been discussing labor and output in class along with savings and investment behavior. One of the many headlines garnering a lot of recent attention is the proposed “assistance” to American automakers. Since there is no real proposal to “assist” General Motors (GM), Ford, or Chrysler, I would like you to consider the options that are on the table. I have listed the general ideas as “fix” meaning the government would do something to change the fundamental structure of auto manufacturing; “rescue” meaning the government would simply help the automakers through this difficult period and transition; and “fail” where the government would do nothing, and allow the companies to possibly progress towards bankruptcy. You might also consider a mix of these options. I would like you to think about some of the following ideas and consider alternative viewpoints. Also, I would like you to consider the different costs to taxpayers and workers.

1. Who would get the money in a “rescue” or “fix” plan? Try to find supporting evidence.
2. If the automakers are allowed to “fail” why do you back this plan, and what do you believe the fallout would be? Try to think through the chain of events and remember that bankruptcy does not necessarily mean the company ceases to exist at that moment.
3. Consider the political feasibility of any plan of action. We currently have an unpopular lame-duck President, and an incoming strong Democratic majority Congress.
4. Consider the financing arms of these auto-giants. GMAC, Chrysler Financial, and Ford Credit are all in possible trouble as well. What plan do you support for them?
5. Think about savings, investment, and interest rates. How do all of these bailouts change affect the future of our economy.

For each of these, you need to find your own sources (there are many stories out there). You should NOT use some random blogger’s story or Wikipedia to support your opinion. Try to stick to reliable news sources and facts. Remember that for these assignments you need to put forth your opinion and back it up with facts.

27 thoughts on “EC103-Topic#3: U.S. Automakers: Fix, Rescue, or Fall”

  1. Although the consequences of companies like GMAC and Chrysler filing bankruptcy would have strong negative effects on the economy, any attempt to save these companies is less beneficial to society than letting the companies run their own course. There are couple options presented by Paulson to fund a bailout for these companies. One would be amending the 700 billion bailout to not strictly be attached to financial institutions. Another would be accessing a 25 billion low cost loan program that the government has already set up, but this access would need to be allowed by congress. In each of these options the money is coming from the tax payers to keep these companies afloat. With fallout of this size I think the major negative consequence is the adverse effect on the company’s employees. The government should focus more on helping the employees post bankruptcy than saving the company from bankruptcy. I don’t think this would be such a horrible outcome for the auto industry. Maybe GMAC or whichever companies fail are failing because their product and business is not contributing what it should to the auto industry. I hope newer emerging companies can fill the void left by the larger companies; hopefully these new companies can focus on products that are needed by society like hybrid and other environmental friendly cars. The feasibility of the bailout being passed depends on how the plan is structured. The bill would have to be substantially lower than the 61 billion proposal that was denied in September. And there has to be certain conditions that the company must adhere to for the more conservative politicians to accept the idea. If these major auto companies fail the economy will shrink even more than it has been to due to the failure of the financial intuitions. I think the government should take some steps to expand the economy. The government can increase incentives for investment by lowering taxes on investment. The government could also sell large amounts of bonds to promote money being put into the bank, which would in turn expand the economy.

  2. The lame-duck Presidency under the Bush administration is opposed to authorizing any part of the $700 billion bailout funding towards intervening on behalf on the automakers’ bankruptcy warnings. The Democratic caucus in Congress and President-elect Obama, on the other hand, assert that the bailout money should be offered to the automakers in order to half-rescue, half-fix the auto industry crisis. President-elect Obama, in a meeting with President Bush last week, discussed terms with the current president to send emergency aid to the automakers in order to preempt the possible bankruptcy of G.M., Chrysler, and Ford. Mr. Obama supports short-term aid assistance now from the Bush administration, and says he will offer long-term assistance when his administration begins in January. His terms for aid, however, include fixing the automakers industry by way of changing the auto industry to be cleaner and making more energy-efficient vehicles in order to supplement Mr. Obama’s environmental and energy policies. Mr. Obama also called on the Bush administration to expedite the appropriation of funds from the $25 billion in federal loans for the automakers. In fact, he proposes doubling the federal loan figure to $50 billion. Of course, Mr. Obama is acting on behalf of the auto manufacturers unions, a largely powerful constituency within the Democratic Party. Other interest groups that form a large base in the Democratic Party that Mr. Obama is surely heeding in negotiations with the current president are environmentalists. President Bush, conversely, opposes government intervention in the private auto manufacturers sector. The President already abandoned much of his Republican ideology on free-markets when supporting the initial $700 billion bailout. But in talks with Mr. Obama, President Bush is reportedly willing to negotiate aid for the automakers in return for the Democratic-led Congress to back his initiatives in a pact with Colombia and trade agreements with Panama and South Korea. But Mr. Obama has been said to want no part in a trade of auto industry aid for trade pacts. In all it seems the political feasibility of any plan of action is still in the balance. Mr. Obama is not willing to negotiate with President Bush on the terms he outlined. Democrats are seemingly willing to call the current president’s bluff that he will not allow three of America’s iconic auto manufacturers fail and tragically add to the current economic crisis, which the Center for Automotive Research estimates the cost to local and federal governments could reach $156.4 billion over the next three years, tipping the current recession into an assured depression. If President Bush remains steadfast in his negotiations for trade agreements, the political feasibility of the Bush administration aiding the auto industry seems slim when considering the Democratic Party’s support from organized labor. -Andrea TacconiJackie Calmes, “Obama Asks Bush to Provide Help for Automakers,” The New York Times,

  3. The feasibility of any plan of action only further goes downhill considering the Republican opposition in Congress to Democratic efforts at a plan to bailout the automaker’s industry. The Democratic caucus is continuing to advocate for $25 billion in funds diverted from the $700 billion bailout to help prevent the bankruptcy of G.M., Chrysler, and Ford during the upcoming lame-duck Congressional session. Such a measure would not feasibly pass in the Senate; Chairman of the Banking Committee, Senator Chris Dodd (D-CT), says that there are not enough votes to pass the Democratic-led plan of action for emergency aid to the auto industry. Basically, any plans to aid auto manufacturers would require 60 votes in the Senate, and with President-elect Obama resigning his Senatorial seat and Vice President-elect Biden not attending the lame-duck session, 11 Republican votes would be needed to pass the legislation. Moreover, President Bush’s veto authority is something else to consider. The GOP are backing the very public position of President Bush who recently spoke at Wall Street, defending capitalism and free trade and attacking over-regulation and putting tax payers dollars towards bailing out car companies that might not be salvageable. In the House, Rep. Barney Frank (D-MA), as Chairman of the House Financial Services Committee, is urging the $25 billion to automakers taken from the $700 billion bailout allocation. But President Bush has not shown any signs of supporting aiding the auto manufacturers industry by tapping into the bailout fund. Backing President Bush’s decision is the Treasury, which says that the money would be better when allocated toward financial institutions as opposed to the private automakers sector. Overall, the feasibility of any plan of action that would strongly support the automakers will most likely not take shape until the Obama administration begins in January, which many feel might be too late for the bankruptcy-likely car companies. Were any plan to aid the automakers passed, it would probably be a largely ineffective, watered-down version so as to garner support of hard-won Republican votes and President Bush. -Andrea Tacconi David M. Herszenhorn, “Dodd Says Auto Bailout Lacks Votes in Senate,” The New York Times,

  4. The US is currently in the midst of a devastating financial and credit crisis. To have an industry that provides American’s with one out of every ten jobs fall into bankruptcy would significantly deepen the crisis. The government must propose a bill that will create “short term bridge help” to the major 3 companies in Detroit. The government needs to assist these companies with a $25 billion bill to aid these companies. In order for this bill to be successful, there must be strong conditions for these companies to drive innovation, more specifically creating more eco-friendly vehicles. This will be achieved by restructuring management of the companies, providing the new management with a direct focus of how to keep the industry prosperous. Additionally, this bill will be funded by the taxpayers and must provide protection to all these people. Yes, saving the “big three” companies is vital but the main focus of an assist bill is the stability and protection for the thirteen million nationwide jobs offered by the auto industry. In a prosperous economy with tons of job opportunities, the big three going into bankruptcy would not be such a critical issue. But with the current state of the economy the government cannot risk for such a vital industry to go bankrupt. Finally, although I wish for such a bill to pass I believe that the current administration will not make it a reality. When the new administration enters office, saving such a critical industry in America will surely be on the front burner.

  5. The state of the U.S. car manufacturing industry is a perfect example of the far-reaching effect banks have on the economy. As we learned in class, banks are essentially the driving force of the economy, as they allow the money supply to reach heights that would otherwise be impossible. As most democrats will argue, this is partially the reason why the state of the car manufacturing industry is not the fault of car manufacturers. Since banks will not allow them to borrow money, democrats believe it is the government’s responsibility to fund them in the form of a $25 billion bailout. On the contrary, republicans argue that without a change in the mindset and strategy of the car manufacturers, a bailout will simply delay an inevitable bankruptcy. Furthermore, it is not fair to taxpayers to spend their public tax dollars on private companies such as GM, Ford, and Chrysler. Finally, we can use the state of the car manufacturing industry as a model for examining how all parts of the economy can have an effect on each other. If the big three were to collapse, it is estimated that nearly 3 billion jobs would be lost. The effect would be far more widespread than this particular industry, extending to other related industries such as manufacturers of auto parts. The impact on the unemployment level would be profound, and it is also likely that Americans would be less likely to save since the economic crisis would only become more prominent. Anderson

  6. The $25 billion rescue plan for the auto industry is a controversial issue in legislation right now. The originally proposed loans in September that were meant to be made over a 12 year increment may no longer be sufficient in rescuing companies like GM, Ford and Chrysler (Hyde).There are three main views in regards to saving U.S. automakers: not bailing them out and allowing them to go bankrupt, bailing them out with loans, and a fix where the companies would be bailed out but with condition on restructuring and changing the way things are run. In all of these cases tax payers will be burdened because even if they are just allowed to fail the workers employed will get severance pay from the government if the auto companies go bankrupt. In both a bail out and a fix tax payers will be lending the auto companies money. I think that if tax payers are going to have to bail out these companies in one way or another there need to be changes made in the companies so that things are more efficiently run in the future. It is obvious that the current product and production are not working as well as they should in order to keep the company afloat. The majority of the money would be used to pay severance and benefit packages to all of the people being laid off in order to keep the company solvent. Some analysts claim that GM could run out of money before the end of the year without government intervention (Hyde). The effect of failure of these companies on the U.S. economy would be devastating. In the first year alone 2.46 million jobs would be lost and the government would lose $156.4 billion in tax revenue after three years (Van Praet). This tremendous loss of jobs and tax revenue would mean that the amount of money the government had coming in would decrease, resulting in an increase in the government deficit (assuming that government spending was maintained at the same level). This hit to our already fragile economy would be very harmful and so it seems that steps to prevent such failures are necessary. However, I feel it is important that the companies are not just given money to continue on the same path that brought them to bankruptcy to begin with. The government should place some conditions regulated changes in the auto industry to help resolve some of the issues that led these companies to this point.Hyde, John. “Doubts about the financial rescue for auto industry intensify” Detroit Free Press. November 14,2008. < /story.html?id=935684>Van Praet, Nicholas. “Auto industry collapse would crush the U.S. economy: study” Financial Post. November 5, 2008. < 20081114/BUSINESS01/811140341?imw=Y>Willa Pohlman

  7. It is important for the government to fix and rescue at least one or two of US Automakers from their impending collapse because US Automakers are one of the largest industries hiring thousands of workers in America, as the article “Crash of US Carmakers Risk Three Million Jobs” by James Doran points out. However, the government should allow at least one of the U.S. Automakers companies to fall which will shrink the car industry allowing the government to oversee the needed changes that must happen in the US car industry for it to become successful. The bailout money will help make the reforms the American car industry needs to reduce the chances of failure of providing what consumers need now. If all the U.S. automakers fail, the government will have more unemployment under its belt to deal with this will eventually cause a major shrinkage in the US economy. A $25 billion portion of the bailout money for US banks and strict requirements for future outputs for one or two large automakers (Chrysler, General Motors, or Ford) can help US car industry get to the level of its competitors and begin making cars that people want. This bailout plan will still cause unemployment level to rise to around 80,000 job losses per failed car industry as Doran estimates, however this can be temporary if the American car industry can succeed in attracting consumers again. If US cars can create and market more fuel efficient cars, US car industries can expand and lessen unemployment. This bailout plan is a long term investment in successfully putting American car industries back on track on satisfying its consumer’s needs. The entire US car industry should not all fail because this would continue America’s spiral into a deeper hole in the already failing economy. The loss of an entire long held industry causes the morale and confidence in America to fall significantly. In the article “Showdown Looming in Congress of Automaker Rescue,” Stephen Ohlemacher quotes Senator Carl Levin, “The auto industry touches millions and millions of lives,” the government allowing the cease of the car industry will have affects of production level in America as well as consumption of goods in America. Restoring American confidence in one of the oldest industries in America can be the reinvigoration that America needs in the rough times we are having. “Crash of US Carmakers Risks Three Million Job” Associated Press State & Local Wire: “Showdown Looming in Congress of Automaker Rescue”

  8. Although I personally agree with the Austrian school of thought- that the “market will correct itself” but in the case of the controversial GM motors’ possible bailout, I think it is necessary for the government to directly help out the automobile industry. It does make me angry that the American people have to decide between a bailout plan, which the American tax payers would have to pay for, and paying taxes to pay off GM’s union workers’ contracts. In other words, it looks like the American people are between a rock and a hard stone. Although, it is important to note that the crisis GM is experiencing is not only because of bad management and because they are not building the right products, it is also because “there is no credit available to purchase,” and because “people are not buying cars because they are afraid” (3). Therefore, a restructuring is necessary. If the government does decide to help with GM, and the other automobile companies, the plan needs to allow the government to completely restructure the automobile industry to fit the current needs of consumers and the low availability of gas (3). The plan cannot have ‘no strings attached,’ as Obama agreed, stating that “he believes that aid is needed but that it should be provided as part of a long-term plan for a ‘sustainable U.S. auto industry,’ not simply as a blank check” (3). As many republican senators recognize, the U.S. automobile industry is a “‘dinosaur’ whose ‘day of reckoning’ is coming” (3). Because they recognize that the reason why these automobile industries are failing is because they are producing a car that does not correspond with the needs of the market. In fact, maybe this can be the green-energy industry Obama wanted to create while he was in office. Sources:1. 2. &st=cse&oref=slogin3.

  9. There is no doubt that the only reason some people check the news these days is to monitor our country’s economic crisis. Now, on top of the bank failures, the country is faced with a new issue: an auto industry is on the brink of collapse. There is a lot of controversy on the subject because the proposed bailout of the automakers would take $25 billion out of the estimated $700 billion designated for the credit market bailout. Sen. Johnny Isakson of Georgia believes that the government shouldn’t give the companies aid because the credit market is what is really important now, and if that is stabilized, “consumer’s will regain confidence.” Other republican state representatives, like Senator Saxby Chambliss, also believe that simply throwing money at the problem will not solve it. A real dilemma here is that if the government does in fact decide to bail out the auto industry, the companies will most likely use some of the $25 billion as compensation to employees who will be laid off. On the other hand, if the government chooses not to give the automakers the money, it’s probable that some of the companies will go bankrupt, resulting in the loss of many more jobs. I do think that the government should lend a hand to the struggling companies because it’s possible that millions of jobs could be lost very quickly, but they should do so very carefully, and with a very sound plan. Along with receiving the money, the auto industry would need to restructure itself so as to not find itself in this problem again.~Skip

  10. Many argue that fixing the automotive industry is necessary for national security reasons, because in times of war, it is not our military that is the strength of America, but the economy (1) and a “strong domestic manufacturing secure is important (4).” If the automobile industry in America collapses, there will be no American made cars, which could present a problem if there is a war with a foreign country that makes automobiles (1). Some more effects would be a loss of money for the sports industry because the automobile industry provides a lot of money for advertising (2), and GM will not be able to pay its contractors, “meet its loan covenants or cover health care obligations in its labor contracts,” which the American tax payer would have to cover, so there would be higher taxes (5). There will also be a significant loss of jobs, which would affect the unemployment rate (4), and therefore, national GDP. Overall, the profound costs if the government decides not to fix the automobile industry with a re-structuring plan are not worth punishing the automobile companies for making bad business decisions.1. 2. &st=cse&oref=slogin3.

  11. Launching a multibillion-dollar bailout plan to “rescue” The Big Three automakers, GM, Chrysler, and Ford, would not only fail to solve our current economic crisis but also would leave to additional financial struggles for our nation in the future. The purpose of the automaker bailout differs from the Wall Street bailout, which proved effective by saving the financial system of America itself. Furthermore, bailing out these automakers grants them immortality from bankruptcy, which would set a precedent for the future that these corporations need not worry about their financial status as the government will always be around to bail them out of their troubles. Even if the Big Three were to declare bankruptcy, the American economic system has safety nets built in such as unemployment insurance so that the workers themselves do not suffer due to their companies’ downturns. In the past, bankruptcy has actually led to the growth of new corporations that help the economy to regenerate and prosper. With that being said, in a “worst case scenario” in which the Big Three end up filing for bankruptcy, although that does not signify a permanent collapse of the auto industry, it would lead to a messy situation in our current economic recession. Also, although the Big Three automakers are seen as politically powerful corporations they also support over 250,000 middle class workers as well as millions of retirees and other dependents. Therefore, from an economic as well as ethical standpoint, while the Big Three should not be blindly “rescued” a temporary “fix” to assist the companies through out current crisis would benefit all sectors. This bailout should not come as free money but rather only be given to the companies upon agreement to stipulations such as reconstruction of the companies to focus on energy efficient models, firing top management, forbidding the payment of dividends to stockholders and putting limits on executive pay. In order to survive even after receiving government aid, these companies cannot continue their old structure of basing their success on the sales of gas-guzzling SUVs. With a restructuring focused on more efficient models there is no guarantee of future success but the companies will be organized in a stronger and more effective manner for stable growth.Brooks, David. “Bailout to Nowhere”. The New York Times. “Saving Detroit From Itself”. The New York Times. Leit

  12. The government should rescue the automaker industry through a series of strategized rescue packages. If the government fixed the automakers, they might allocate money in areas that are not cost-effective. The industry’s experts know where to put the money to survive without a Chapter 11, which is crucial to the national credit crisis. While our free-market economy is fundamentally opposed to private-industrial funding, defense contracting will provide a benefit to the industry as it has in aircraft and electronics industries. Much of technology development in the auto industry comes from government funding; “General Motors received $806 million dollars that year [2006], mostly from the Army.” (Coll The New Yorker) Defense contracting will have to take alternative energy into account with our energy crisis, leading to innovative technology that can buy used in the domestic auto industry. Thus, the industry will naturally green itself and become more energy-efficient, as soon as it is cost-effective, thanks to the defense sector. Without a bailout, assuming the “Big Three” fail, the defense sector would be unable to market its green innovation to transportation. This innovation will also create competition in international trade, leading to a greener planet as well as preventing the loss of the estimated 5 million US jobs that rely on the industry (Scherer Christian Science Monitor). The failing of the “Big Three” would also worsen the credit crisis, possibly leading to widespread panic and an increase in saving, halting even more economic growth. Kulbashian

  13. If GM goes under there is no hiding the fact that thosands would loose jobs. However shelling 25 million to bail out GM would simply not fix there current failure— It would just cover up there problems but eventually the problems would arise again. That is unless they are willing to start fresh; get rid of managers who led the company in to this mess, control the labor unions, and do something about the cost to fire an employee. If we decide that we save these companies it needs to be with a purpose— one better than just saving them. If these companies are to stay afloat the car manufacturers need to change there current stratagies— looking in to the future with new technologies such as more fuel effiecient vehicles, electrics cars, better quality cars, etc. Otherwise if nothing changes it will be a waste of a 25 million bail out becuase in the end they will end up bankrupt again unless the companies are ready for bigger changes then they have done in the past.- Becca Ormsby

  14. The crisis in the auto industry is real and could create economic downfalls in main industries. The focus of the crisis lay with General Motors and Ford, and secondarily Chrysler. I believe that General Motors and secondarily Chrysler should get a government bailout of $25 million to prevent the seemingly eventual downturn of the industry. These two companies are in dire need and are on the edge of bankruptcy. Ford on the other hand is loaded and has more assets and liquidity than GM and Chrysler (Bill Saporito from Time Magazine). Since there is already a $25 million government program for fuel efficient cars, a subsequent bailout might seem unnecessary (Kendra Marr from the Washington Post). This program however distributes money rather slowly and only for specific projects. The economic consequences of revamping the auto industry are colossal. The network the auto industry has made within the economy involving distribution and anyone from the supply chain to the car dealerships. This includes all the employees. These companies are giants and should be bailed out due to the vast nature of their presence in the industry, one of the largest in America.Tim Marsh

  15. It is clear that if automakers in America were simply allowed to fail, there would be major repercussions seen in the economy. Hundreds of thousands of jobs could be lost in auto manufacturing alone, not to mention jobs in companies that supply the automakers. Even if the large auto companies were to receive bankruptcy protection, they would still be forced to cut down their operations to a smaller size, thereby eliminating jobs. Many of the suppliers for the Big Three also provide materials to other auto manufacturers; if these suppliers also went down with American automakers, this could severely impact auto production on a more global scale. Besides these consequences, the United States would also lose a source of innovation, as certain automakers in the U.S. are involved in the development of alternate fuel sources and other technology. It is necessary to provide some sort of assistance to save these companies from failing completely and bringing about these sorts of consequences. Men and women in Congress are unsure about whether to pass a bailout because they are worried that the money will not be used well and the same thing will happen again in the future. Financial assistance must come with regulations and requirements to restructure the management of the auto companies and begin making cars that more people will want to drive.

  16. The automotive industry accounts for roughly one out of ten jobs in U.S., meaning that if any of the Big Three automotive firms [GM Motors, Chrysler, and Ford] were to go into bankruptcy, there would be thousands of unemployed workers who don’t necessarily have the skills to move onto other forms of labor. Some may claim that bankruptcy may become the incentive to innovate new products, but with the size and importance of the automotive industry to the country, such a possibility could become highly unlikely. Instead of letting these firms fail, the government should take steps to ‘fix’ them rather than risk the potential loss of jobs and the further decline of US-based automobile manufacturing.It is necessary to initiate changes within the industry without having any of the Big Three declare bankruptcy. By ‘fixing’ the automakers through government regulations, automakers will be less likely to repeat the same mistakes that led to its downfall in the first place. Possible regulations include the consolidation of automakers’ various brands, thereby limiting company-wide cannibalization of their products, or even the forced manufacturing of electric cars. If the automotive industry and the government could agree on set proposals and regulations of this nature, the government could bail out the Big Three using the $25B as well as fix their conduct to prevent or prolong the threat of industry collapse. An agreement of this nature could also renew faith from investors, bringing more investments these companies. This also leads to the possibility that this inflowing money could help these car manufacturers make do on the proposed agreement by advancing their electric car manufacturing procedures and reestablishing their current brands. This ideal hypothetical situation, however, is hindered by the current Republican opposition to the bailout. The idea for a proposal including government regulation will be more likely by the time President-elect Barack Obama, along with the Democratic-majority Congress, take their place in the government. However, taking into account the current situation, prolonging the wait for relief brings the automobile industry closer to losing its largest incumbents every day. Automakers must be bailed out as soon as possible.Herszenhorn, D. M. “Detroit’s Bid for Aid Fails — For Now”. New York Times. Retrieved November 20, 2008., T. and Hyde, J. “Auto industry survival in hands of Congress”. Detroit Free Press. Retrieved November 20, 2008.

  17. I think I would be in support of an economic bail-out plan for Detroit’s “Big Three”. The repercussions of the bankruptcy of GM, which is forecasted to coincide with the turn of the year, would create huge job loss and would help shrink the economy, as all of the companies it engages in trade with for intermediate products and all the laborers and branches, etc., would have to shut down, decreasing economic activity. Plus, officials are forecasting that the bankruptcy of GM would be a harbinger of the bankruptcies of Ford and Chrysler. I’m not sure if this is economically or politically viable, but here’s a thought: the $25 billion plan previously passed to support alternative-fuel vehicle development and research should be renamed for the time being and distributed as the bail-out money to avoid an immediate fall into bankruptcy. Then, over the coming months, perhaps year, the three companies would be evaluated, perhaps by an oversight czar as President-elect Obama supports. Then, if it appears the companies are beginning to turn around their bad spending practices and are using the money to cover their debts and restructure themselves, then another $25 billion, the block amount that is being debated now, would be passed and distributed in place of the environmental development block of money. This would require a bit of faith on the part of the bipartisan groups who got the developmental fuel money passed, in the idea that their money would be given out, only later. However, if the three failed to shape up their practices, then the second block of money would not be passed through, and then the companies should be allowed to fail. This supports restructuring and a chance to regroup, and then, if it works, permission to pursue alternative fuel automobiles and the new future wave of vehicles that the companies could begin to turn out – which would be a promising basis of new marketing and a new, more conscious way of heading into the future of automobile manufacturing, providing goals and company development aims. Of course this all rests upon the shoulders of taxpayers who do not all have immense faith in the abilities of the automobile manufacturers to turn their companies around. However, the health benefits and retirement packages the companies pay for would have to be shouldered by the public upon bankruptcy, and it seems that if possible, it would be better for the public to pay taxes towards helping regenerate the economic machine, rather than having to be burdened with paying for something that ultimately is a drain on the budget and does not bring hope of future economic activity. The companies would have to play around with their situations in order to really shape up. For example, perhaps corporate restructuring would be necessary – lower salaries for executives, a switch-up of people in power (out with the old and perhaps corrupt, in with the new). -Emily CohenWorks Cited

  18. General Motors, Ford Motors Chrysler, the three largest US automotive companies, were already struggling over the past couple of years and took a severe hit from the current economic crisis. Over the past week, Congress has been debating over whether or not bailing out these companies would prevent them from going bankrupt and if they even deserve the aid. Earlier this week president-elect Obama and Democrats expressed their support of a bailout for the auto industry in order to prevent further job loss in the US. However, after a disappointing meeting with the executives of these companies, congress was not convinced that even if the government aid could save these companies that the structural issues would be dealt with. Even though the automotive executive have not shown Congress that they deserve to be saved form bankruptcy, I think it is important that the government provide some sort of aid to the automotive industry in order to prevent Americans from losing their jobs and further economic downturn. The Auto industry provides an incredible amount of jobs for Americans and business for US companies reaching beyond just the auto industry. The Center for Automotive Research estimated that in letting GM file for bankruptcy would result in a loss of 2.5 billion jobs throughout the auto industry and these businesses that heavily rely on automaker spending (Isidore). Our already fragile economy would not be able to with stand this type of loss so letting these companies go bankrupt would do more harm than good. Congress has instructed the executives to come up with a plan to show them why they should give them a 25 billion loan. If the government were to not only give the auto industry this loan but also provide them further aid from the $700 billion bailout plan, there would have to be major restructuring throughout the companies. More specifically, they would have to go even further than making higher mileage vehicle and begin working on more fuel efficient and electric cars (Sanger). In doing so these companies would be able to begin to start competing with Japanese automotive companies and increase their US auto sales from the current 47% (Isidore). At the moment the fate of the big three automotive companies is still unknown. Hopefully, the executive realized just how unhappy America is with their performance over the past decade and will come up with plan that will convince congress to bail them out. -Lili CarrierDavid M. Herszenhorn, “Detroit’s Bid for Aid Fails — For Now,” The New York Times, Isidore, “More trouble for auto bailout,”, Isidore, “How to fix the Big Three,”, E. Sanger, “The Great Bailout Debate” The New York Times,

  19. GMAC, Chrysler Financial, and Ford have not been successful because they have not been meeting consumer demands unlike their competitors. People are not seeking to pay extra for cars that do not meet consumer standards at a time when the price of oil alone forces people to cut back on driving. One of the factors that is adding to these costs are Unions, it costs more to employ a worker who is unionized than to hire a nonunion worker. This is precisely why these three automakers have not been successful.If Congress decides to not bail out the three automakers, it will give other automakers room for expansion and incentives to strive for better business decisions. Expanding will create more jobs and potentially rehire those that were fired by GMAC, Chrysler Financial, and Ford. This will stabilize GDP. Evidence can be seen by Honda’s a new assembly plant that is expected to open in 2008 in Indiana. This “would create 1,500 jobs in a state that already has two other plants owned by foreign auto companies.” Furthermore, due to Honda’s expansion, “Toyota is also looking for places to build at least two new plants: one to produce vehicles, the other to build engines.” With three automakers out of the competition, there will be plenty of room for the already existing car companies to reach into different markets.- Arturo

  20. The NY Times article How High Gas Prices Can Save the Car Industry concerning the recent “assistance” plan for American automakers explains, “We’ve been down this road before. In 1980, Chrysler was reported to be within hours of bankruptcy”1. The recent threat of a possible massive economic failure of different American automakers such as General Motors Corp., Ford Motor Co. and Chrysler LLC. has been a phenomenon of the past. Since the so-called glory days of the 50s and 60s, the American automobile industry has been in decline. “Ever since the oil crises and the Japanese import invasion of the 1970s, the automakers have repeatedly flirted with financial ruin”1. The main affected target is not only the auto making industry, but most importantly the auto supplier companies because key parts makers might run out of cash and fail due to the deep decline in demand for new vehicles. Even worst, banks and creditors are not willing to provide loans to any company in the “faltering automotive industry,” such decision can augment the economic crisis by jeopardizing the opportunity for productivity and investment in the market. There is a predicted possible shortage of auto parts that can potentially affect the vehicle assembly lines. Some auto suppliers have even their own suppliers, meaning that a great number of these small supply companies might now face failure. Professor of operations management at the University of Buffalo, Bob Viswanathan best describes the current situation as, “A house of cards. Everybody knows that the finance markets are so interconnected, but the auto industry is worse”2. Some automakers might choose to import auto parts from overseas as a solution; however, this would only generate greater expenses. Even foreign companies such as Toyota Motor Corp., Nissan Motor Co., and Honda Motor Co. might be at risk because they get their parts from the vast network of U.S. suppliers. One possible interesting solution is for the federal government to establish a price floor of $3.50 per gallon of gasoline. “If the price drops below that, the federal government will impose a variable tax to bring the price up $3.50. If the price goes above, then the tax disappears. The money raised by this variable tax would be used, at least in short term, to provide loan guarantees to the auto companies. A price floor of $3.50 per gallon would generate more than $17 billion in one month-a big chunk of the $25 billion bail out”1. If congress does not make a prompt decision and a quick solution to the problem these auto making industries will certainly fail. If these auto supplier and auto making companies fail there will be a higher unemployment rate, private saving will increase as people consume less, interest rates on loans might go up as banks and/or creditors face greater risks and if in this case they refuse to loan because of the faltering economy, then there will be a decrease in investment and economic productivity. As a result, the auto making problem has to be solved by primarily providing the money to the auto suppliers, which are facing an even greater risk of failure and whose failure will directly threaten the collapse of the major U.S. auto assembling lines or auto making industries. Daniel Sperling and Deborah Gordon. “How High Gas Prices Can Save the Car Industry.” New York Times 16 Nov. 2. The Associated Press. “Experts: Supplier Woes Put Auto Industry in Danger.” New York Times 16 Nov. 2008.Kariela Almonte

  21. Bailing out the “Big Three” auto industries GM, Ford, and Chrysler and giving them aid from the $700 TARP bailout plan for financial institutions is a bad idea. Just giving them more money is not going to solve their problems with old and bad marketing strategies, expensive union contracts, and their massive obligations to their retirees. GM might not even be considered to receive aid on that bill or the 25 billion dollar loan anyway considering they do not have long-term viability and it is restricted to making fuel-efficient cars. As Senator Richard Shelby of Alabama has said, “the bad times for the Big Three isn’t because of our current economic distress but the uncompetitive structure of its manufacturing and labor force. This is not a national problem but their own.” Giving them billions of dollars with no promises of reforming the real causes of the problem isn’t fair to taxpayers or good fiscal policy. It is highly doubtful that the Senate will pass this bill before January since many Republicans and the Bush administration are against it, and it is very likely that the Big Three will fail before the end of the year and the Obama administration moves in. Letting them fail would also cause huge stress on our economy, because the Big Three account for 4% of our GDP and will affect 3.1 million people who also work in part suppliers and dealers who depend on the Big Three’s business. The smart thing to do is force the Big Three to change the way they are doing business. Considering that the Republicans and Bush want Congress to amend the restricted use of the 25 billion dollars they are already giving the auto industries so that they can use that money for other motives, the Democrats should really take advantage of that. The government could also influence the Big Three to create more fuel-efficient cars by placing a price floor on gas so that people want to buy cars that get better gas mileage. By amending the restrictions on the 25 billion dollar loan Congress could also speed along the process for the United Auto Workers and GM to set up a mechanism to minimize the health care costs that GM is dealing with. In 2007 GM set up a mechanism to unload their union retiree health obligations by 2010 to trusts controlled by the United Auto Workers, but it is not up and running yet. If the government subsidized this it would allow the Big Three to put their cash into other failing parts of their businesses. Letting the Big Three fail will be horrible for many working Americans and the entire auto industry in the U.S. But if the government and consumers amend the loans we are already lending to the auto industries and attach some protections so that the taxpayers are not taken advantage of. So by freezing salaries of executives, ensuring taxpayer money isn’t being used to pay dividends to shareholders, and a requirement that new management be brought in the government can protect against misuse of their funds, and these are all requirements that Fannie Mae, Freddie Mac, and AIG had to go through to get aid. It is not unreasonable and definitely necessary. Bailout Turns on Auto Makers’ Viability Fly, but No Aid for Detroit Dwindle on Bailout Plan for Automakers – NY times Katie Swartwood

  22. After the government gave an $85 billion bailout to AIG earlier this year in order to prevent the company from going bankrupt, it seems to me that more and more companies are asking for bailouts, believing that they deserve one, too. This is a startling problem to me, given that prior to the AIG bailout, this type of action was few and far between given its unpredictable circumstances. However, once the proverbial ball started rolling, I believe that many companies wanted a bailout, and thus giving GM, Ford, and Chrysler a bailout would simply give another example of government funding that would lead to a situation in which more and more companies ask for bailouts when they don’t need them. This is why I believe that GM, Ford, and Chrysler must be left as they are without a bailout, and they must be left to fail, even though there obviously will be consequences if the companies declare bankruptcy.As we discussed in class, if these auto companies were to receive a bailout, a number of things could occur. First, the money could be given upfront with no requirements on how it must be spend, similar to what happened with the Wall Street bailouts earlier in the year. I believe this would be a bad idea, because as we discussed, the owners and executives of these companies could simply choose to fire their workers and use the money to pay them severance, leaving their workers unemployed anyway despite the bailout. If given the bailout without any restrictions, I believe that this is would the companies would be most likely to do. Another possibility would be that the government would only give the money if they were able to come in and restructure the systems of the various companies. My issue with this suggestion is that in order to create a well thought out plan that helps save the companies today without jeopardizing the future would be a task that would take time to not only conceive of, but to have it approved. As we saw with the AIG bailout and other Wall Street bailouts, the initial attempts by Ben Bernanke to have the plans passed were resisted until various additions to the bills were made that profited those who passed the bills. This would take time that the auto industry doesn’t have, and any plan that is proposed without this vigorous foresight might be apt to manipulation by owners of the various companies.While the impact of letting such a major company go bankrupt would naturally have repercussions, an article by Catherine Rampell in the New York Times indicates that the amount of job losses has been overstated in this scenario. While the number of Americans that would lose jobs if these companies went under would be great, the impact has been overstated by those pushing for the bailout. The statistics used by the BLS are dubious at best, as they include various job losses including people working the in the car-wash industry losing their jobs with the decline of GM. As Rampell writes, this could be avoided, for example, if another company steps in and produces just as many cars as GM produces. I believe that it is seemingly small overstatements such as these that are actually manipulations by those who seek to get the bailout passed in order to keep these poorly functioning companies continuing as they are by presenting an overdramatic, apocalyptic prediction of what the future will hold if the companies are not bailed out. Yes, it would be difficult to simply allow so many people to lose their jobs, and there would be consequences on the rest of the market if this panic continues, but I believe that setting the precedent of simply bailing out every company in every industry is too dangerous of a precedent to set, and if this must be avoided by allowing these companies to fail, then The Fed cannot waver and must resist bailing out another industry.References Ethan

  23. I do not believe the government should bail out the American auto makers. This is because whatever money the government grants them will be spent to temporarily bring the industry to its feet, just delaying the disaster of another industry failure to another day. Mitt Romney states in an article he wrote for the New York Times that “[if the American auto manufacturers receive a bailout they will continue the course] of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses” (Let Detroit Go Bankrupt). In addition, the foreign auto industry has been rapidly growing over the years and some may say it has overpowered the big three American companies. This is due to the difference in cost that American car manufactures face in relation to that of foreign companies. As a result of this cost difference a company such as Ford needs to cut an estimated $2,000 of technology and additions to each Ford Taurus they produce, simply just to be competitive with one of Toyota’s sedans. So if given money in a bail out, Ford will be spending a large portion of it just too merely compete with a company which has already surpassed them.”Let Detroit go bankrupt”

  24. The downfall in General Motors Corp. does not come at a surprise. Over ten years ago, when foreign auto makers recognized a top priority in consumer choice to be gas mileage and began producing hybrid vehicles, GM continued to produce large trucks, boat sized, inefficient ford Tauruses and then thought they hit the jackpot with the SUV boom of the late 90s. Stating GM’s faults does not reverse the fact that the company now is faced with going under if not bailed out, which would mean a loss of millions of jobs in the Midwest and a severe cut to the United States’ industrial productivity. The discussion that is now taking place, through CNN interviews and newsstand headlines is not how or why GM failed, but what to do to fix it. The options on the table are 1) $50 billion government bailout/ rescue package 2) $25 billion government loan with the demand for increased fuel economy 3) do nothing, allow GM to file chapter 11. The $50 billion dollar bailout seems to be the most popular with most Americans and it is highly unlikely that the Bush administration with do anything towards the matter in its last few months. There are few economists that provide good reasons for supporting the third option and allowing GM to go file for Chapter 11. It’s clear that a bankruptcy will hit the Midwest hard with a large loss of jobs and huge loss of investors, but the benefits may outweigh the losses. If GM is bailed out with a $50 Billion package with no strings attached, what’s to prevent the company from continuing on its downwards spiral after maybe 5 years of production. If they were left to file chapter 11, several good things for the companies future may come out of it. “In bankruptcy, a judge can modify a firm’s labor contracts and debts. GM needs the benefits of bankruptcy without the uncertainties, but the political process—so far—resists that desirable bargain,” (Samuelson 2008). American airline companies have been going in and out of bankruptcy for years, which has allowed them to maintain lower costs that GM has not seen and is why they have been selling cars below sticker price for years. “GM could use Chapter 11 to rewrite union contracts, potentially enabling it to slash retiree benefits and close plants without having to pay furloughed workers,” (BusinessWeek 2005). Allowing GM to continue to pay extremely high wages (average $71/hr vs. Toyota’s 41$/hr) and simply giving them $50 billion to maybe stay afloat for 5 years does not make much sense. If it was at all feasible, we should make the oil companies bailout the companies that they depend on, especially when they’re making $11 billion per quarter.Robert J. SamuelsonHow to Bail Out General Motors O’Callahan (News Tribune)General Motors bailout: Don’t reinforce failure If GM Did Go Bankrupt…

  25. The only real way for GM to survive in the long run would be for it to file for Chapter Eleven. GM just spent $9 billion dollars in the first 9 months of 2008. If congress grants them another $25 billion how do we know that in 2 years they aren’t going to be back where they started? Many risks apply to a bailout; will GM use the $25 billion effectively? Will the money allow for enough restructuring so that the company can operate more efficiently than before? Bailing out GM is not a long-term solution, yet allowing them to fail could cause a worldwide retail meltdown. Although, bankruptcy doesn’t come without drawbacks, it would give the company a much-needed chance to restructure and would, in the long run, be cheaper than any other option. The government should not give them a loan but should issue GM with reorganizational financing. This way the company is forced to use the money when it needs it, and in the most beneficial way possible. This also takes care of one of their main bankruptcy concerns, which is the ability to find financing in such a vulnerable market. This could also be considered a “prepackaged bankruptcy.” House speaker Nancy Pelosi said “rather than going to that next step, let's hope we can solve it before that.” But, if GM is expected to run out of cash before the end of the year isn’t it possible we are already at “that”? GM spokesman Tony Cervone says that it “doesn’t consider bankruptcy a viable option.” Yet, Argus Research analyst Kevin Tynan make a valid point when he says that “the board must be able to say that it needs the government loans, because the company has considered all of its options and it's the best one.” If GM is not willing to consider bankruptcy, they only reconfirm the board’s inadequacy and need for restructuring. Mia Guajardo

  26. U.S. government should bailout our three auto manufacturing giants, General Motor, Ford, and Chrysler. Although these three auto manufacturing giants have issues with severe mismanagements for years, and most of the populations resist giving financial aids to GM, Ford, and Chrysler; ones should understand the devastating consequences if the U.S. government refuses to assist these three companies to overcome their financial difficulties. In another word, our government must bailout these three auto manufacturing giants regardless their internal mismanagements because “The consequence of major failure in the automotive industry far outweigh the cost of keeping the major automotive companies going” (Jones, 2008). One of the most direct impacts we would face after these companies declare bankruptcy is that unemployment skyrocketed. It is estimated that 2.5 million Americans, including layoffs from the three automotive companies themselves and their suppliers, would lose their jobs. These 2.5 million unemployed work forces would put an even greater pressure on our government on top of the 10.1 million unemployed workers (BLS, 2008). Not only our government has to feed the 12.6 million unemployed workers, the U.S. government, including federal and state government, would also lose billions of tax dollars from the unemployed work force and the related industries that fell with the automotive industries. It is true that the taxpayers would have to take the burden in order to bailout the auto industries, but the consequences of high unemployment and the massive lose of tax revenues would also eventually fall to the taxpayers. Moreover, the auto industry expects sales to rise again in 2010(Jones, 2008); so the government only has to assist them to overcome their difficult time for a little more than a year.

  27. Congress is currently in the process of ironing out all of the details for the “massive” $700 Billion bailout plan for the financial industry. On top of the $700 billion dollars that congress will be distributing throughout the financial world, congress plans on authorizing $25 Billion for the failing Detroit auto manufactures. Juxtaposed with the $700 billion bailout of the financial industry, $25 Billion seems like almost nothing; however, this bailout is many orders of magnitude larger then the Detroit bailout in the 80’s. How is this twenty-five billion dollar plan going to help save the auto manufactures and how do we know that this is not just a quick fix?In the 80’s, when congress gave the Detroit 3 money to help save the failing industry, there were many strings attached to the money. The current plan that is being developed states that the planned loans are contingent on very few regulations. Congress has stated that “the money be used to retool old assembly lines and develop advanced, fuel-efficient technology.”Personally, I feel like congress is approaching the auto industry in a completely flawed manner. The companies are failing for a reason. Most likely, they are failing because of poor investments in the past decade, bad leadership and lack in foresight. How will granting these flawed companies billions of dollars in loans help to save these companies in the long run? These companies will maybe become temporarily solvent due to the extra capital from the loans; however, without regulating how the money will be spent and without advising the company in restructuring, the companies are likely to fail in the near future. It’s hard to ignore the immediate impact on the economy that the failure of such large employers would yield; however, in the long run, letting these companies fail could be the best option. These companies are failing for a reason and maybe we just need to employ the laissez faire economic stance and let everything take its course. Instead of giving the money to the failing companies, maybe the government should distribute money to the Detroit 3’s employees that will soon be out of a job. -A $25 Billion Lifeline for GM, Ford, and ChryslerSeptember 24, 2008 05:45 PM ET

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