December 4, 2008

Auto Bailout Conundrum

Yes, I'm a social science geek, and topics that I find fascinating bore most people. I was captivated by today's Senate hearings on the auto bailout. While the hearings might not be everyone's idea of must-see TV, the topic should be of interest to most Americans. These hearings aren't about complex Wall Street machinations that most of us don't understand. They are about everyday economics that impact you and me where we live: jobs, sales tax revenue for our towns and cities, our ability to own a car, the quality of vehicle we can buy for our hard-earned money, and even the environment. As I see it, the viability of the auto industry is far more important to the well-being of the average American than is the solvency of Wall Street fat cats.

Everyone seems to agree that a bailout is necessary and likely to happen, despite reports of inadequate support in Congress. But as I listened to today's testimony, one question kept nagging me: if consumers can't buy cars, how will this bailout save the industry? Dr. Mark Zandi, Chief Economist at Moody's, provided the answer in his testimony: It won't. Additional money will be needed, $75 to $125 billion, along with money from the Wall Street bailout package for auto financing companies. The Big Three have requested money from Secretary Paulson for the financing branches of their companies, but thus far their requests have not been approved. Furthermore, Zandi is far from convinced that American auto makers will execute their recovery plans faithfully and effectively. Nevertheless, Zandi is convinced the current $35 billion request is necessary for survival of the industry--necessary, but not sufficient.

It's hard to foresee where this will end. The companies are promising to change their ways, to become more responsive and more responsible. The best-case scenario would be a US auto industry that is radically reborn in its vision and its operations. If that were to happen, this crisis would look like a blessing in disguise. But to achieve that outcome, so many things would have to go just right. The alternative is that the bailout, if it happens, will merely postpone the inevitable catastrophic losses of jobs and commerce and add to the already unimaginable--and perhaps unsupportable--- US budget deficit.

CBS news story: What's The Real Price Of Bailout?

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