President Bush surrenders to auto industry | Notes from Jim Haughey

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Notes from Jim Haughey
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President Bush surrenders to auto industry

Jim Haughey

RCD Chief Economist

Dec 22, 2008

Where does the $13.4 billion come from? It is not in a piggy bank in the Treasury Building. Available credit is contracting and will continue to contract for at least another year. This money will either come out of funds available for private loans or will be newly printed, adding to the inflation potential a few years ahead. The era is over when we could do something extra by simply leveraging existing capital a little more. The financial system was worth extraordinary efforts to save a few months ago because it allocates capital to the most productive uses. Then the funds are paid back and recycled. The $13.4 billion for the auto companies is very unlikely to be paid back. Chrysler will spend a share of it right away giving all of its factory workers a month off at 95% pay plus benefits.

The president said he was forced to this decision by the inability of the companies to operate in bankruptcy because they could not get a “debtor in possession” loan in the private financial market. If the president just discovered this, he was the last person in the country to find out. The real reason is that the Republicans want the Democrats to have to ask the UAW, the banks and bondholders and the dealers to agree to change their contracts against their interests. It is very unlikely that any of them will do this. So Obama will have to provide the money to carry extra and overpaid workers or take responsibility for mass layoffs.

No one is willing to take a cheaper approach with a reasonable chance of success. The companies should be forced into a pre-planned bankruptcy with the Treasury providing the debtor in possession financing once the labor, bond and dealer contracts are changed.