It looks like President Bush eschewed my advice to allow the automakers to file bankruptcy. Not surprising at this point, but disheartening nonetheless (at least to me).
The best case scenario is that the strong accountability measures that have been announced will actually work to either promote reform or pave the way for an eventual bankruptcy.
Logically, the plan seems to be primarily to give the automakers an opportunity to get their ducks in a row for a prepackaged bankruptcy filing sometime in the spring. In which case, this truly was just an effort to make sure that any bankruptcy will turn out to be "orderly," although it seems like Detroit only has itself to blame for not being better-prepared for a bankruptcy filing right now.
Realistically, however, I'm afraid that isn't going to happen. Sure, President Bush talked a tough game today. But do we really think that come March the Obama Adminstration is going to stick to its guns and enforce the accountability provisions in the bailout? It seems hard to believe that two months into his administration, Obama will let these guys go down, even into a prepackaged bankruptcy.
So what seems most likely is that come March, Detroit will be no better off, and Washington will roll over the loans and provide still more cash for another six months or so. If that is so, then this action--although purportedly short-term and qualified with numerous conditions--is a huge victory for the UAW and incumbent management, who have likely bought themselves time well into 2009 before they have to deal with a reckoning.
Does this really help them beyond that? It is hard to see how. A lot of people object that consumers won't buy a car from a company in Chapter 11. But do we seriously think that many of those consumers will be a car from a company on bailout life-support? If not--and I haven't talked to anyone who thinks it makes a difference whether they are in Chapter 11 or on life-support--then it is hard to see what this action does to fundamentally transform the prospects of the automakers. In other words, bankruptcy still looks inevitable, and it is just a matter of how many billions of taxpayer dollars we're going to throw away before we get there.
But there is a more fundamental issue here. The President faced a fundamental decision whether the fate of the automakers would be decided by the well-established economic process of Chapter 11 reorganization or the ad hoc political process. He opted for the latter. And once he did, he triggered a new political dynamic. Now that the government has extended money with strings, politicians are likely to insist on the power to impose further strings. For instance, if GM wants to close a plant in a given community or discontinue orders from a given parts plant, what's to stop politicians from intervening to try to prevent that from happening?
Consider the issue of the dealers, which may prove the toughest nut to crack without bankruptcy. General consensus holds that GM has too many nameplates and too many dealers. And dealerships are hard and expensive to close because of state dealer-protection laws. But dealers are often among the most important and politically-connected businesses in a given town. After forking over all this cash, will politicians stand by and allow GM to close those dealerships?
It is hard to see how taking this out of the economic process and putting it into the political process is going to improve Detroit's long-term prospects.
All of the micromanaging provisions (like the prohibition on issuance of dividends, wage adjustments, managerial compensation, etc.) are just artificial efforts to replicate the natural processes that occur within a Chapter 11 case. (Amazingly, GM was still issuing dividends as of June of this year). Hayekians will recognize this as constructivist attempts to replicate the knowledge of time and place, with all the problems that implies.
Andrew Grossman has more on "Bush's Awful Auto Bailout" here. Andrew has had several good posts on this issue over the past week or two.