Friday, November 14, 2008

Bail out of U.S. auto makers is a bad idea

Don't get me wrong. I want all three (GM, Ford, and Chrysler) to continue and to thrive. They are important to our economy and need to become strong and vibrant once again. But let's be realistic. The problems plaguing the industry did not happen over night. Anyone with eyes to see has been aware for the last thirty years that Detroit just didn't get it. It took them decades to understand that U. S. consumers desired high quality and fuel efficiency. They persisted in making lower quality gas guzzlers even to the point of convincing Congress that SUV's were really trucks and therefore should be exempt from the gas mileage standards. Mean while the Japanese manufacturer took quality management to heart and provided the American consumers with the cars they wanted. Later Korean cars did the same thing.

To give taxpayer money to be spent by the people that drove the American auto companies into the ditch just doesn't make any sense. Our economic system has a way for companies to deal with these problems and it is called bankruptcy, specifically Chapter 11. Just look at the way that major American airlines used bankruptcy to realigned its cost structure so it could return to profitability. Auto companies did to do the same. Frankly without going into bankruptcy, I doubt that they can reduced their structural costs and return to market viability.

The problem is that a company going into Chapter 11 needs to obtain financing and they are few financial institutions which would give the massive loans required. This is where the government can play a role by guaranteeing these reorganization loans. This would enable any of the three to go through the bankruptcy process rather than taking money or even loans from the federal government in the hopes that they would straighten out their affairs. The role of a federal bankruptcy judge is to insure that management does exactly that. Accountability to politicians is a weak and ineffectual substitute for this time tested legal procedure.

A bankruptcy is not an easy process. It will require reworking labor and supplier contracts to bring the cost structure in line with global competition. Honda and Toyota have shown that it is possible to build quality cars in the U.S. American manufacturers are not being asked to do the impossible just the difficult. Everyone needs to give a little, perhaps more than just a little. If American consumers end up paying a bit more for quality cars from American companies, that would be a small price to pay to keep this section viable. But just to have the same bad actors burn through more taxpayer money to end up in the same place is unacceptable.