Saturday, November 15, 2008

Big Three Bailout - A Better Bet for Everyone.

What’s better:

1. A 50% chance of recovering a $50 billion bet in 5 years?
2. A 0% chance of recovering $156 billion over three years?

That’s the questions legislators should be asking themselves when debating the relative merits of extending loans to the domestic auto manufacturers. In choice number 1, the $50 billion represents the aggregate loan amounts being considered for the 3 American automotive manufacturers. In choice number 2, the $156 billion represents the cost (in LOST TAX REVENUES and increased TRANSFER payments) of allowing one or more of the American automotive manufactures to fail (according to the Center for Automotive Research Research Memorandum dated November 4, 2008). The potential impact is actually worse because the CAR report ignored the impact of the big 3 and supplier pensions being off-loaded to the Pension Benefit Guarantee Corporation - Delphi’s unfunded liabilities alone total more than $3.3 billion.

Simple math says extending the loan makes sense, but only if it favorably alters the course of the industry. That’s were the hard work comes in because it requires the federal government to change mentality regarding automotive regulation (which has served as a poor proxy for an energy policy via CAFE). It also requires intelligent and long range investment decisions by the manufacturers.

We are at a tipping point as a nation; we’re here because of poor regulation, over regulation, lax national energy policies, and crushing legacy costs caused by union overreach (jobs bank) and management hubris (assuming the jobs bank would never be used). We’re dealing with an unprecedented global financial crisis requiring difficult decisions.

Set ideologies aside and look and the numbers - betting on Detroit gives us a strong chance of preserving an national manufacturing base while making an investment with an expected return. Accepting failure costs the government 3 times as much, and that’s only the financial costs; the human toll will extend for many more years.

No comments: