Lawrence Lessig: the mistake in bailouts

Discuss

69 Responses to “Lawrence Lessig: the mistake in bailouts”

  1. Brainspore says:

    To be fair to the auto industry, they have probably behaved at least as responsibly as the financial industry which has already received much larger bailouts. But that doesn’t mean that either one should get any of my tax dollars.

  2. AGC says:

    #46 posted by schr0559 , December 9, 2008 8:28 PM

    GM has lots of military contracts. Ford looks like it will survive. Chrysler is looks the weakest.

    Demographics. Demographics saved Chrysler in the 1980s. As the children of the baby boomers grew up they needed a new car, Chrysler introduced the Kcar and the Minivan – it got lucky. Today the popular SUVs are not selling as well because of demographics. Disposable incomes are done as the children of the children of the boomers start families.

    Fuel. Oil companies hiked the price of oil up in the last couple of years. People started buying more fuel economical cars. Now the oil companies will start to feel hurt as the economy fails.

  3. kenmce says:

    theraptscallion:
    “My personal 2 cents is that the biggest loss in liquidating the big three isn’t the loss of the supply chain and those who maintain it… but rather the large amount of R&D that goes on as a result of the auto industry being centered in Detroit.”

    The last time I went to look at a new American car the only new thing the salesman could point out was that it came with a built-in telephone. Oh, and the cupholders were very nice.

  4. zuzu says:

    Maybe it’s just me, but after $700b to incompetent fools who just gamble with other people’s money, I can’t get too worked up about $15b to incompetent fools that actually manufacture objects.

    There’s a name for this cognitive bias in behavioral finance, but it escapes me at the moment. Basically, it’s as stupid as paying $100 extra for floor mats from the dealership just because you’re buying a $20,000 car. The bias has to do with what you’re comparing the marginal cost to, rather than analyzing the absolute cost. Regardless of the price of the car, $100 for floor mats is still way expensive.

    $15 billion is still alot of money.

  5. bwcbwc says:

    Considering the irrational exuberance and depression that we’ve seen in free markets ranging from stocks to commodities to credit swaps over the past few years, any free-market ideologue that thinks that the market is an efficient mechanism for determining value is drinking way too much of the Kool-Aid. The free market has a rational, value-based component and an irrational psychological component. Regulation and bailouts should in theory be designed to counteract both the irrational exuberance and the depression, but in practice no one in government wants to be the party pooper (plus the government wants the increased tax revenue), so you don’t see capital gains taxes going up to 35% when there’s a bubble. You only see the bailouts when there’s a collapse. Considering that oil prices have fallen by more than 60%, I wonder why the oil producers aren’t in line asking for a bail-out too.

  6. thomas12345 says:

    @ #18:
    To be fair to the auto industry, they have probably behaved at least as responsibly as the financial industry which has already received much larger bailouts. But that doesn’t mean that either one should get any of my tax dollars.

    What part of “loan” don’t you understand?

    The Big 3 are asking for LOANS.
    Not free money, but loans that would be repaid.

    I’m not saying I disagree with you (I was really against the financial industry bailouts) but this is a very different situation.

  7. El_Cid says:

    Given their current situation, a Chapter 7 is more likely than Chapter 11. That means liquidation, not reorganization.

    http://news.morningstar.com/articlenet/article.aspx?id=267461

    And still, even if Chapter 11 were possible, the taxpayer will be on the hook for the pensions. Wait and see.

  8. Antinous says:

    There will be no credit to be extended to these companies under Chapter 11, as Paul Krugman has pointed out. There is only failure and collapse.

    Krugman actually said that they’ll probably fold but should be bailed out anyway.

  9. DD4U says:

    @#14)

    On the contrary, CDs being cheaper and Tower records failing have a lot to do with each other. Technology and market development changed the world, and Tower’s business model became obsolete. There is nothing wrong with this, just the opposite: we are all better off, including Tower shareholders and employees.

    And good day to you, too.

  10. regeya says:

    “They’re struggling because they have to pay for healthcare but Toyota, Honda and Volkswagen generally don’t.”

    I’m sure that would come as a huge surprise to Honda, Toyota, and Volkswagen employees, at least US employees, who all have healthcare benefits.

    Now, outside the US, the gloves tend to be off, even in Big 3 factories.

  11. Matt McKnight says:

    Warren Buffet put $230M in for 10% of BYD (leading cell phone battery manufacturer rolling out electric cars.) For $25B you could start 10 of those companies in the US (and invest the remainder in Tesla). The govt could get warrant coverage on the investments so we could convert to stock if anyone ever IPOs again. We could use the profits to pay a portion of the lost pension benefits. The government already operates several venture funds for military purposes, so it’s legally protected. These 3 Detroit behemoths aren’t going to be competing on the world stage.

  12. grimc says:

    … and CDs are now cheaper as as plentiful as ever, so we are actually better off.

    I remember CDs being $15-20 when Tower was still around, and on Amazon they’re…$15-20.

  13. Ernunnos says:

    Bailout or no bailout, some auto makers are going to have to fail. We’ve got more capacity to build cars than people are willing to buy. Of any kind. Unless we’re going to pay those people to build cars that will just get shredded and recycled, those jobs are going to have to go away, and probably a company or two.

    The status quo is not sustainable. These jobs are already lost. These companies are already dead. The demand to sustain them naturally simply isn’t there. The money we spend today to keep them alive is just creating zombies that will be back for more in another six months.

    It’s time to get over the denial and let them die. This whole affair is starting to remind me of that old Steve Buscemi movie, Ed and His Dead Mother, about a momma’s boy who can’t let go and so decides to burn his entire inheritance turning her (the delightful Miriam Margolyes) into a flesh-eating, pie-baking zombie.

  14. Ernunnos says:

    The Big 3 are asking for LOANS.
    Not free money, but loans that would be repaid.

    No they wouldn’t. People aren’t buying cars. And the cars they’re not buying are mostly from Detroit companies. Bailing them out now isn’t going to make people buy more cars. Absent a massive increase in demand, where are they going to get the sales to even begin to run in the black, much less pay back these massive “loans”?

    They’re not. So these aren’t loans.

    It doesn’t matter how you structure the bailout, it doesn’t matter if you call it a loan, it doesn’t matter who you blame. You cannot support the existing car manufacturing capacity on the kind of sales we’ve got, and are likely to have for the foreseeable future. The weakest auto makers will die, and the weakest just happen to be in Detroit.

  15. Anonymous says:

    Lessig says: “If there’s one thing worse than Detroit managed by the managers who have been driving the American auto industry into the ground for the past three decades, it is Detroit managed by politicians.”

    Why is that? Our country is managed by politicians, as are our states and localities. Is this just because Lessig is a libertarian and firmly believes in the free market, where “free market” means no political interference or guidance? (Unrelatedly, I would ask if the free market led us to where we are, but I have the funny feeling that will just play out along the lines of political belief.)

  16. Troglodyte says:

    I’m a huge bleeding heart liberal, and I couldn’t agree more. It’s not a function of the economics of the situation, either. It’s the fact that for the last 20 years the Big Three have been systematically mismanaged and run into the ground. The Big 3 aren’t making cars people want, they can’t deal with the UAW in any kind of positive fashion, the executives are living it up like Capone-era mobsters… Everything about these companies says that they need to fire the entire upper-management caste and replace them with executives that have proven their competency.

    As for the banking bailout, I’m still bitter. There was too little oversight on the money, which was my primary concern when they were voting on it. Now that’s bearing out as it becomes clear that it’s a colossal failure. Just like the auto industry, it’s rapidly becoming clear that, like the auto industry, the banking industry had a culture of waste and inefficiency, which is now biting them in the ass. MASSIVE “lifestyle” expenses– recruiting, dining expensed to the company, travel, etc. can CLEARLY be cut out of these businesses, without even touching the absurd compensation even low-level investment bankers receive. Why wasn’t this mandated?

    Finally– here’s where my “bleeding heart liberal” comes into play– this money could have been used better. 830 BILLION dollars could have funded a lot of drug treatment programs, or bought us hydrogen cars, according to at least one estimate, or FIXED WORLD HUNGER… instead, we’re ensuring that for the investment bankers and auto execs of the world, the status quo remains as unchanged as possible.

  17. IWood says:

    Everybody buy a Glyde!.

    Then again, they cost more than my ’97 Civic…

  18. indiebass says:

    @18

    But that doesn’t mean that either one should get any of my tax dollars.

    See, that’s the issue right there. They’re not *your* tax dollars, they’re the American Government’s. People assert this ownership over tax dollars, when in fact taxes are the fees you pay to live in a place and enjoy the benefits of it. You don’t have the right to go through the Federal Budget, line-by-line, and proportionally deduct money for things you don’t believe in.

    Unfortunately, getting folks to realize that is a Sisyphean task. Taxes aren’t *your* money. And taxes are used for the benefit of everyone (ideally). If anything, this is a prime example of responsible use of tax dollars.

  19. Teresa Nielsen Hayden / Moderator says:

    Zuzu, your free market doesn’t do what you think it does. It never has, it never will. That’s why one keeps hearing people say true capitalism has never been tried. That’s because what they mean by true capitalism — the sort where everyone plays by the same rules — is incapable of happening.

    One of the things people invariably do when they become rich is try to circumvent and finagle the law. They want more advantage, less risk, special privileges, higher returns, lower taxes. If their business concerns are big enough, the amount of additional profit they can make by tipping the scales in their own favor is so great that it’s relatively trivial for them to suborn officials, or try to buy elections.

    I’ve seen people try to argue that the disadvantage of having successful people fiddling with the rules of the game is outweighed by the vast amounts of cash they bring into the system. This is incorrect, for several reasons.

    First, if they’re grabbing off unfair advantages, others are being disadvantaged. We can’t give away those other people’s rights.

    Second, corruption is often hideously wasteful. It’s like that situation with metal thieves we were talking about, where they’ll wreck tens of thousands of dollars’ worth of equipment in order to steal thirty or forty dollars’ worth of copper wiring. The loss is not their loss, but the gain is their gain, so they don’t care how disproportionate it is.

    Third, if you let privilege run unchecked for too long, the tendency is for the rich and powerful to capture more and more of the total cashflow of the system, until it’s all running through a very small elite that no longer needs all the rest of the population.

    When human communities fall into chaos and disorder, their default state isn’t capitalism. It’s warlordism, which is like having a bunch of jumped-up Tony Sopranos running everything for their own benefit.

    Your free market is a false god. In the state of nature, there is no free market. It’s artificial, a social construct, and can only exist when backed up by law and society.

  20. Anonymous says:

    @Thomas

    Yes everyone has forgotten about Tower records. Just because you have some sort of attachment to that company doesn’t mean it was a viable business, or one that was run properly. If you measure great record stores by the inventory that you like, then maybe it wasn’t as great of a store as you thought. Because a good store needs to have products people buy from at the right prices and to operate making continual profits using ethical and legal means.

    Many of us couldn’t care less about this historic entity you call “Tower Records”, just like Ford and Chevy. What will we care about a company’s brand for? Because we were taught to get touchy feely over their advertisements. We should care about people. Individuals innovate. And people can reorganize themselves into other companies to create new things when they have a need and desire to do so.

    Let it go. The bailout is a loser and you probably need to watch ‘who killed the electric car?’ once or twice to see if you really think these companies need to be given another free lunch to continue business-as-usual. Because they have received plenty of government money already and they didn’t use it wisely. Had they done that, their cars would be flying right now as the technology is now here to create the cars people want/need to buy.

    The answer is let the companies fend for themselves, then if they go bankrupt, their assets and maybe more important, their patents can be sold to companies that will do the job. You know any company right now can stop the production line of one car, and produce an Electric Vehicle right now. The batteries are there and it can be done affordably. They don’t want to, and that’s why they cancelled the programs despite receiving federal money. Advertisers think they are so smart because they find ways to convince people they need something. But their techniques don’t work in tough times so these companies need to actually have the goods that sell itself. And when the don’t, they fail.

  21. around says:

    Detroit needs to change its dependency on the Big Three. There is almost no public transportation, and there is little city to speak of, so most of the population is in suburbs. Detroit still drives in new American cars: drive an hour south to Ohio, and there is immediately an increase in older, foreign rides. Detroit’s car culture never seemed very in touch with the way the rest of the country used cars to me. Even in the epicenter, it relies on deep family discounts and the “Buy American” slogan to convince people to stay with the Big Three.

    Granted, I am probably still bitter that my peer’s parents in middle management were greatly overpaid, that even in middle school almost anything could turn into a discussion about cars. It gets old after a while.

    That said, if Detroit doesn’t diversify, I don’t know how it can survive. I don’t think the Big Three deserve the bailout, but I know that without the automotive companies Michigan doesn’t stand a chance. I hope that it focuses on attracting new industry, because the automotive industry clearly cannot sustain it.

  22. Chrome says:

    #24 ERNUNNOS – GM sells as many cars as Toyota. Ford sells as many cars as Volkswagen and LOTS more than Honda. So it’s not that the US auto companies don’t know how to make cars that people want.

    They’re struggling because they have to pay for healthcare but Toyota, Honda and Volkswagen generally don’t. And where those companies are manufacturing in the USA, they’ve received massive subsidies, often agreed by Republican Governors.

    So conservatives seem to basically be happy for the US auto companies to go to the wall, while subsidizing European and Japanese companies to set up in Alabama and Kentucky.

    Why do conservatives hate America?

  23. Brainspore says:

    @ #20: What part of “loan” don’t you understand?

    The Big 3 are asking for LOANS.
    Not free money, but loans that would be repaid.

    I’m not saying I disagree with you (I was really against the financial industry bailouts) but this is a very different situation.

    It’s not as different as you would have us believe, and as one of the people they are asking for money I say they still have a lot of convincing to do. When was the last time one of these so-called “loans” was actually paid back?

    Thousands of small American businesses are now facing bankruptcy. Why should we give a few lucky businesses special treatment that is denied to the rest?

  24. Jayel Aheram says:

    When can we expect an entertainment industry bailout? Think of all the workers.

  25. Brainspore says:

    @ #27

    See, that’s the issue right there. They’re not *your* tax dollars, they’re the American Government’s. People assert this ownership over tax dollars, when in fact taxes are the fees you pay to live in a place and enjoy the benefits of it.

    I’d rephrase that as the American People’s tax dollars which have been entrusted to our elected representatives. As one of those people I have every right to say how I would like them spent, as do you.

    You don’t have the right to go through the Federal Budget, line-by-line, and proportionally deduct money for things you don’t believe in.

    Of course not, I never implied that I did. But as a citizen I do have a right, if not an obligation, to voice my opinion on which things I do and don’t believe in.

    Unfortunately, getting folks to realize that is a Sisyphean task. Taxes aren’t *your* money. And taxes are used for the benefit of everyone (ideally). If anything, this is a prime example of responsible use of tax dollars.

    Tax dollars aren’t “my” money in the singular sense, but they are in the collective sense just like “my city” or “my country.” I have strong opinions about how those should be managed too. So cool your jets. I was just expressing an opinion, not demanding a line item veto.

    • Antinous says:

      taxes are the fees you pay to live in a place and enjoy the benefits of it.

      That almost makes sense when you fantasize your tax dollars going to build roads and fund schools. Iraq and Afghanistan, not so much.

  26. grimc says:

    @brainspore

    When was the last time one of these so-called “loans” was actually paid back?

    Iaccoca’s Chrysler. Granted, today’s captains of the industrial Titanic haven’t shown anything to hope that they would be as competent, but comments like Senator Dodd’s–that should the Big 3 get money, GM’s chief should probably be “moving on”–give a little hope that new leadership will be put in place.

    And yes, thousands of small American businesses are facing bankruptcy; and many of them are not only suppliers to the Big 3, but depend on the employees of the Big 3 to buy their goods and services.

  27. ill lich says:

    Just like presidential elections, it’s all about fear and “the lesser of two evils.” Nobody (with the exception of the “Big 3″ executives) likes the idea of a bailout, but the fear of the economic ripples from GM going under are enough to change minds (ignoring whether or not congress is for sale to auto-industry lobbyists).

    What I want to know is: WHO would buy GM? Toyota (which Lessig uses as an example)? Some other huge industrial concern? China? You know there are plenty of car-makers that are long gone: AMC, Hudson, Studebaker. The days of one maker buying up another like GM bought up Buick and Oldsmobile might be long gone (If Toyota, or whoever, bought GM I suspect they probably wouldn’t keep all the lines active, maybe just the niche models like Cadillacs and Corvettes, models that have a unique history and who’s brands have a certain value by themselves.)

    Then there’s his dismissal of politicians running the car industry– it sounds like he’s just dismissing politicians altogether. And maybe he’s right; are politicians good for anything other than arguing? Well, I hope so. Has it always been this way, did politicians always stink? Certainly there have always been bad politicians, but a democracy is supposed to weed them out (ideally). When FDR instructed GM to start building tanks and planes in 1941 was that bad? It sure seems wise in retrospect. The roots of our current economic problem lies with politicians– perhaps whether GM fails or not is a smaller issue.

  28. Anonymous says:

    @INDIEBASS

    I don’t know why you seem to think that tax dollars aren’t YOURS. Of course they are. Government doesn’t generate money, they take it from you and me in order to create a collection for larger initiatives. So using big words like “sisphean” was it? That’s not helping you explain anything.

    A budget is made and approved every year based on a sh*t ton of factors and operating costs. And our representatives know they are operating with our money and our interests. If they don’t know, they need to be strung up by the f-ing balls, until they realize it. Why would you want them to think differently. It’s called ‘public service’, not “the job where you can ride a wave of cash from other people”

    That’s why people get on the Sarah Palins when they find out that they foot the bill for dinners at home and hotels for the kids, and church engagements. It’s your money and they shouldn’t be f–king with it. Now certainly we are losing money because we surrender power to the representatives to handle the business of collecting information and helping decide on the right course for the money.

    It’s idiotic to think that it’s not your money. And it’s idiotic to give it away freely assuming that it belongs to the government. Don’t trust the government and get involved whenever you can. That’s how things can stay on a more level playing field and maybe even work in favor of the people. I can’t buy a road, but WE can. So we should talk if we want OUR money for roads here, not for blowing bridges somewhere else.

    But yes there’s also debt to pay because the Federal Reserve has weaseled it’s way into collecting interest from government loans into infinity. We also owe other countries. So in that case, taxes are already spent. However, there are moves an individual can make to shelter themselves from either being screwed, or just making sure ALL of us pay the share we should be paying. For example, a tax break to a chemical company that pollutes a body of water, which public funds are used to clean it up…that is where you need the gloves to come off and the message needs to be clear to our representatives.

  29. normd says:

    I never liked Tower Records.

  30. Brainspore says:

    no one will be able to keep and run their cars. Probably be cheaper to buy another bargain and toss the broken one.

    If there are millions of people driving American cars then there will always be someone willing to service them. If the big three go bankrupt and their assets are liquidated, some other company will buy those assets so they can make money selling replacement parts.

    Hell, I ride an Italian motor scooter built in 1962 and I’ve never had trouble getting it serviced.

  31. zuzu says:

    Teresa, I completely agree about the problem of political corruption, but I take that as a problem with the existence of political authority itself.

    When human communities fall into chaos and disorder, their default state isn’t capitalism. It’s warlordism, which is like having a bunch of jumped-up Tony Sopranos running everything for their own benefit.

    How quintessentially Hobbesian of you to say.

    Your free market is a false god. In the state of nature, there is no free market. It’s artificial, a social construct, and can only exist when backed up by law and society.

    Law and society are also social constructs and false “in the state of nature” by the same reasoning.

    How we engage in social behavior derives from how we choose to interact with each other: by submission to the biggest gang around (i.e. authority), or by the mutual consent of peers (i.e. autonomy). The world is what we make of it.

  32. Brainspore says:

    I think my biggest concern with letting the auto industry go bankrupt is that China might buy up the equipment and export it from the US. This would leave the US mostly reliant upon other nations for vehicles.

    The biggest threat to U.S. automakers isn’t cars produced overseas, it’s cars produced domestically by foreign companies. If Toyota comes out on top after the big three go down then that will just mean a bunch of auto workers will be working for them instead.

    The national security question is a reasonable one but overlooks the fact that we are already living in a fundamentally different world than we were prior to WWII. Having an all-out war with China would be a logistical nightmare for both parties as our economies and manufacturing industries are so intertwined. And if we had another war with, say, Japan then there’s no reason to think the government wouldn’t just seize all of Toyota’s U.S. facilities for our own use.

  33. Joe says:

    Lessig is channeling Herbert Hoover.

    The question’s already been researched: the public won’t buy automobiles from a bankrupt auto manufacturer. It’s too much of a risk, since you may be cut off from spare parts, service, etc. If GM and Chrysler enter bankruptcy, there won’t be a chapter 11 reorganization. They’ll liquidate, and the main beneficiaries will be Chinese auto companies, as they are the ones with the spare cash.

    • Mark Frauenfelder says:

      Also, China has at least two electric cars coming out with a 125-mile range, so they are going to dominate that market, too. Detroit dropped the ball on electric cars, unfortunately.

  34. catbeller says:

    Lessig is a conservative Republican, you know.

  35. dimmer says:

    Legally, computer companies must keep “on stock” 7 years worth of parts*. 7 years in computing is probably around 700 in thing-with-wheels-and-a-putt-putt device is.

    (* yes, in an asset that can’t be compromised even if the original company goes tits-up mode.)

  36. Anonymous says:

    I’m viewed as a left-winger, and I still have a major issue with the bailout.

    Not because of the elevated union wages (although that is a concern), but because I just don’t see how it will work.

    My Two big fears…

    Firstly, what happened between last month’s request ($25B) and this months $36B request? I suspect they combined to lose $11B in the meantime.

    If that is the case, then what kind of backstop is the bailout going to be?

    Most likely, they will be back in five months asking for another $25B, and America will be in a “we can’t let that last bailout go to waste” mindset, and we will give them $100B before it ends.

    Secondly, the point of the bailout is to supposedly give Detroit a headstart into the eco-car market, right?

    As a entrepreneur, I can tell you that the worst way to innovate is to do it while slashing costs and jobs – it just doesn’t work that way.

    Most likely, what Detroit will come back with is what they know how to do… a lineup of cheap and crappy $5000 cars, stripped of all safety features, that will fall apart after 75,000 miles, but capable of 50MPH.

    And they will sell, but that is not the innovation people are expecting from any bailout.

  37. Thebes says:

    I think my biggest concern with letting the auto industry go bankrupt is that China might buy up the equipment and export it from the US. This would leave the US mostly reliant upon other nations for vehicles.

    Fair enough, you might say. But remember that it was largely the automotive industry (GM, Saginaw Steering, etc) who produced for the massive needs of the nation’s military during WWII. I don’t imagine that China would be so kind as to sell us guns and tanks if we should ever go to war with her.

    I do not like bailouts. I especially do not like bailouts of bloated corporations out of touch with reality. But, we have already promised a $700 Billion blank check to the banking industry, plus further Fed “infusions”, debt guarantees, the AIG bailout, etc, etc totally roughly $8.5 TRILLION.

    That makes what the auto industry is seeking seem like small change. I am pissed as bloody hell about the $50,000 for every working American that the financial corporations get, virtually without debate. I am not nearly so upset that I might need to contribute another 100 bucks to be able to buy a domestically produced car.

  38. scartol says:

    And bankruptcy means the assets of these dinosaurs get reorganized: Someone else buys these companies, at a price the market sets, and runs them profitably, because of the price the market set.

    Except that Chrysler has already gone through this – under the guidance of a private investment firm called Cerberus – and they’re still in the toilet. So much for that argument.

  39. Usimian says:

    Well I’m a liberal democrat and I fully support the idea of letting the automakers enjoy the fruits of a capitalistic system…even if that means they go bankrupt. If they can’t compete, they deserve to die.

    The one thing both the GOP and the Dems have in common is that their congressional votes are for sale.

  40. zuzu says:

    any free-market ideologue that thinks that the market is an efficient mechanism for determining value is drinking way too much of the Kool-Aid.

    This is called blaming the victim.

    The problem is with government monetary policy, not free markets.

    Criticism of the Gramm-Leach-Bliley Act:

    Economists Robert Ekelund and Mark Thornton have criticized the Act as contributing to the 2007 subprime mortgage financial crisis, arguing that while “in a world regulated by a gold standard, 100% reserve banking, and no FDIC deposit insurance” the Financial Services Modernization Act would have made “perfect sense” as a legitimate act of deregulation, under the present fiat monetary system it “amounts to corporate welfare for financial institutions and a moral hazard that will make taxpayers pay dearly”.

  41. Deviant says:

    Mark: Also, China has at least two electric cars coming out with a 125-mile range, so they are going to dominate that market, too. Detroit dropped the ball on electric cars, unfortunately.

    Electric car technology ain’t the issue. It’s our complete lack of an infrastructure to support them on a wide scale coupled with the inanity of trying to remedy that with windmills in North Dakota.

  42. Anonymous says:

    There will be no credit to be extended to these companies under Chapter 11, as Paul Krugman has pointed out. There is only failure and collapse.

  43. CitizenLame says:

    Is this blog now about reposting conservative economic commentary?

    I guess trickle down economics is back in full force. Reaganomics worked so well for everybody, and this is all Clinton’s fault anyway. The Republican’s should dictate which industries recieve federal bailouts and which don’t, regardless of their minority position. Banking yes, Manufacturing NO! While we are at it, why don’t we change the constition so Bush can continue to lead us through these challenges, since conservative leadership is always best.

  44. grimc says:

    Electric car technology ain’t the issue. It’s our complete lack of an infrastructure to support them

    You can still find electric charging stations in parking lots and spaces around Los Angeles. They’re this century’s version of the curbside iron rings in Portland that people used to tie horses to.

  45. Teresa Nielsen Hayden / Moderator says:

    CitizenLame @4: You misspelled receive and Constitution, inserted an erroneous apostrophe in Republicans, and failed to hyphenate trickle-down when using it as a compound adjective.

    (This has been an instance of the extended or Homeric synecdoche.)

  46. MrJM says:

    Professor Lessig’s post is based on a faulty premise, i.e. that the automotive bailout is about automobile manufacturing.

    It isn’t.

    It is about the future of the United Auto Workers. If government loans are extended to the Big Three auto manufacturers, the the pro-Democratic auto worker’s union will survive. If those loans are denied, a longstanding conservative goal will be achieved: the UAW — the first major union willing to organize African-American workers — will be destroyed.

    If you look at the auto industry “bailout” story from this perspective, it makes much more sense than if you view it in terms of the so-called “free market”.

    Mr.JM

  47. AGC says:

    Satirically said. Let’s let the big 3 fall. Get rid of speed limits, and safety regulations like seat belts and air bags. Sell all the roads to private companies, no one dime of public money should be spent on roads and bridges. Don’t be wimpy, go all the way.

  48. carsten says:

    i have to say that just because someone knows a lot about one thing that doesn’t mean they know a lot about everything … lawyers seem to be prone to fall into this trap and Lessig while great when it comes to copyright and other legal issues shows that he is not really following basic business news here.

    first off, his assumptions are based on the market being able to solve everything … well, as we have seen across the last couple of years, that is not really the case.

    second, right now cash is really hard to come by. companies are not investing in anything. so the idea that anyone would pick up any of the three companies is not sure. them going into chapter 11 does not mean that a couple of months they will be bought by some shining knight. who would be the buyers?

    private equity? well you have the cash and loan problem … they will need money to buy these companies but will likely have a hard time getting it.

    other car companies? daimler already tried with chrysler and failed. why should they invest in any of the three, instead they can just sell more of their existing cars (which could easily be build outside of the US).

    so yes, while chapter 11 is an option, it is an option which could backfire, and do we really want to test the market to see what happens to the US economy if the auto industry implodes?

  49. Chicago D says:

    @ Carsten: many good points.

    In general, this is not about the UAW, or the Big Three per se. All through the Great Lakes basin there are companies that produce items used by the Big Three, or even the people who supply the Big Three. If the Big Three declare bankruptcy, this supplier base will likely be wiped out. It won’t come back when the Big Three do, and we will never get it back. THAT is a major, major issue.

    The “markets” are not run by an invisible hand. They are run by sheep who mostly do what everyone around them does. Relying on the market in the middle of a market panic is like reasoning with a screaming toddler. It makes sense in theory, but doesn’t work at all.

  50. coldspell says:

    @#4 CITIZENLAME:

    I guess trickle down economics is back in full force.

    Aren’t these automaker an act of trickle-down economics? Trickle-up economics would be to let the companies fail and then “bail out” the workers (through some undefined mechanism).

  51. thomas12345 says:

    And bankruptcy means the assets of these dinosaurs get reorganized: Someone else buys these companies, at a price the market sets, and runs them profitably, because of the price the market set.

    Utter horse shit.

    Bankruptcy also means that the assets can be bought and LIQUIDATED and the companies destroyed.

    Has everyone forgotten what happened to Tower Records, one of the last great record/CD chains?

    Bankrupt, bought, liquidated, and decimated all in short order.

  52. zuzu says:

    I’d rephrase that as the American People’s tax dollars which have been entrusted to our elected representatives. As one of those people I have every right to say how I would like them spent, as do you.

    c.f. principal-agent problem, public choice theory

    They’ll liquidate, and the main beneficiaries will be Chinese auto companies, as they are the ones with the spare cash.

    Oh noes, not Chinese people! They’re so Unamerican!

  53. Sean Eric FAgan says:

    In addition to the comments above, don’t forget that a large part of any bail-out-the-auto-makers discussion is because of the jobs. Union and non-union; the auto-makers account for a lot of jobs, both directly and indirectly. (I’ve heard numbers between two and three million. That’s just in the US.) These are the direct employees; the parts manufacturers; the delivery companies; the support companies; the dealerships; etc.

    While I’m completely iffy about the auto-makers’ fates, I’m much less sanguine about the jobs associated with them. In a recession, job losses ripple — and those 2 million jobs would affect many more.

    I’m also really, really pissed at the different attitudes given the “Wall Street” firms compared to the auto-makers. None of the banks or credit companies has yet had to justify their spending decisions; none of them has had their non-executive compensation questions; none of them has been told to come back later with a viable restructuring plan. It’s pretty offensive.

  54. TheNipponese says:

    Agreed. I think the issue is: the buyers will probably be Chinese or Arab. The US does not want a repeat of Japan’s killer 80′s buying power where we ended up loosing a shit-load of assets to foreigners. Em.barrass.ing

  55. DD4U says:

    @thomas12345: Has everyone forgotten what happened to Tower Records, one of the last great record/CD chains? Bankrupt, bought, liquidated, and decimated all in short order.

    … and CDs are now cheaper as as plentiful as ever, so we are actually better off.

  56. Anonymous says:

    What happens to Detroit if the auto industry goes under? Millions of jobs lost from nearly every sector–if the auto industry goes, so does everything else in Michigan. The state economy will be close to ruin. What happens to Michigan, and the rest of the country, between the time these millions of jobs are lost and the market swoops down with some new innovation? What happens to the manufacturing industry? Where are the jobs for all of those former employees with families and only a high school degree? What’s the best possible scenario?

  57. Chrome says:

    Good grief, Mark. First the ridiculous and misleading posting about UAW wages, and now this from a new-Hooverite conservative commenter.

    Did you eat right-wing Wheeties today?

    Fact: the UAW wages quoted a couple of posts ago were for a skilled worker with 15 years of seniority. Not at all comparable with “an average manufacturing worker”.

    Fact: comparing apples-to-apples shows a UAW electrician earning a tad below $60,000 a year, compared to a non-union one in a brand new plant earning just over $52,000 a year. Hardly a huge difference considering the difference in living costs between Detroit and Alabama.

    Fact: the US auto-makers are in trouble because they have huge healthcare costs to cover. If conservatives hadn’t been so idiotically idealogical as to create an employer-based healthcare system, GM and Ford would be leading the industry. Take the healthcare costs away with universal healthcare and GM saves $1,500 a vehicle. Think conservatives will go for that?

    Fact: reorganization via bankruptcy WON’T work right now because it depends on credit, and nobody is lending. This is elementary stuff that one would think that Lessig would know.

    Why, it’s almost as though Lessig isn’t being intellectually honest!

  58. schr0559 says:

    It’s interesting that this debate, for once, doesn’t fit that well into the usual partisan buckets. Makes people actually think about their arguments since you could find reasons from either side of the aisle to go one way or another.

    I wonder why there isn’t serious talk of a partial bailout — give one or two companies a large(r) sum of money, with lotsa strings, chief among them that they merge/buy up the remaining automaker(s). People aren’t going to buy as many cars (American or not) as they used to for a good while, and I think we’re better off propping up a smaller American auto industry than letting them all fail, or trying to keep all three bloated machines on life support indefinitely.

    In that event, there would still be a big shakeup, but not as bad as a total collapse. With this “soft landing” we could more easily handle a shift in employment to Obama’s big infrastructure projects. If the forced merger idea is too statist for you, skip that and just bail out the two companies with the best plans.

    As an aside — it occurs to me that it’s gonna be a good few years to be a mechanic, when nobody can afford to replace their cars…

  59. thomas12345 says:

    @ #12)
    … and CDs are now cheaper as as plentiful as ever, so we are actually better off.”

    1.) CDs being cheaper had nothing to do with Tower failing.

    2.) We are not discussing the cost of the goods, but the fate of the companies.

    3.) Good day to you, sir.

  60. bwcbwc says:

    Basically, if you let the auto manufacturers die, about 90% of manufacturing jobs in the midwest will vanish, along with substantial parts of the regional transportation and finance industries. The entire supply chain of auto parts from from what remains of the US steel industry through the parts manufacturers. You will then have triggered a national/global depression, just as surely as if we didn’t bail out the financial industry when the credit crunch hit.

    The best bailout option is probably to give them just enough money so that they can finance a merger, merge Chrysler with GM, and then get down to some serious slashing. Reducing the job base by 40-50% instead of 90%, and maybe the closed manufacturing facilities can be re-purposed.

    In hindsight, it looks like the primary focus of the financial bailout should have gone to the smaller local banks rather than the big ones. The smaller banks are more likely to actually use the money as intended by congress.

  61. Brainspore says:

    Has everyone forgotten what happened to Tower Records, one of the last great record/CD chains?

    What’s a CD?

  62. theraptscallion says:

    @Carsten & Chrome: kudos

    Another interesting fact is that the market capitalization of all three, (but specifically GM, which is somewhere around 3-30 billion depending on fluctuations) is phenomenally low. Even if liquid credit existed, going into bankruptcy with such a low market capitalization is like hanging a sign on the front of GM that says “Liquidate.” The reason that nobody wants to do so is that they are losing 30 million dollars PER MONTH, and you get the bad (losses) with the good (tons of real estate and manufacturing capacity, not to mention hundreds of millions in intellectual property).

    My personal 2 cents is that the biggest loss in liquidating the big three isn’t the loss of the supply chain and those who maintain it (they’ll most likely have to retool and produce the parts for foreign automobile manufacturers and their models) but rather the large amount of R&D that goes on as a result of the auto industry being centered in Detroit.

  63. grimc says:

    The bail-out is on.

    Maybe it’s just me, but after $700b to incompetent fools who just gamble with other people’s money, I can’t get too worked up about $15b to incompetent fools that actually manufacture objects.

  64. Takuan says:

    no one will be able to keep and run their cars. Probably be cheaper to buy another bargain and toss the broken one.

  65. IWood says:

    #4 posted by CitizenLame:

    Lessig’s basic premise is sound: continuous failure on such a massive scale shouldn’t be rewarded.

    You create a cartoon parody of his position. He writes, “I’m not against all bailouts [...] I’m willing to be persuaded that intervention is necessary there [...] And I’m all for minimizing the pain where the pain is doing no good [...] I don’t see why the government should be in the business of building safety nets for the (relatively) well off [...]”

    That does not even remotely resemble “…why don’t we change the constition [sic] so Bush can continue to lead us through these challenges, since conservative leadership is always best.”

    So, you may want to watch your chin, there…your knee might break it if it keeps jerking so violently. Then again, you’ve only ever made three comments on BB, all of them today, all of them about this issue, and all of them pro-UAW, so maybe that’s just your way. 8-|

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