Bankruptcy or Bailout?

The post that preceded this one summed up the main reasons that the Detroit three manufacturers are in danger of collapse. As stated then, their coziness with elected officials ensured that they were protected to death and were not therefore placed under pressure to produce vehicles that were fuel-efficient. Their Japanese competitors appeared to have taken this into account and are selling substantial numbers of vehicles in the US and throughout the world.

That the three main vehicle manufacturers made the wrong bets is clear but the debate has just commenced about how to respond to the possibility of their collapse. Indeed, president-elect Obama appears to be asking for the presentation of a bailout of the firms. The second choice is to allow them to consider the possibility of bankruptcy proceedings or to be left to their devices with the possibility of their quick collapse and the attendant loss of jobs.

David Brooks in the New York Times here, takes the very reasonable and my favoured view that to save the corporations will not only result in moral hazard that failure is intolerable, but also entrench the influence of these firms with the public sector. On the other hand, while Daniel Gross admits in this article that the management of the three firms are culpable, he is concerned that the mechanics of Chapter 11 would be inappropriate for the firms. As he states, the nature of the vehicle manufacturers is that they are connected to many other firms that would in turn be forced to close and trigger other closures down the line.

In all this, I think that the domino effect is overstated and that the firms ought to be left to their devices. The arguments about the financial sector bailout found more sympathy with me than the argument that the automobile industry is also a very critical part of the US economy. Simply put, if any of these firms were to go into bankruptcy, most US citizens will still be able to find vehicles to drive through the imperative of competition. And yet it appears that the bailout will occur. As David Brooks says, this may be a bailout to nowhere.