A Note on the Auto Bail-Out

I haven't written anything on the auto bail-out. But as someone who writes on economic matters it's probably something I should mention.

Here's my basic opinion. I have spent a fair amount of time criticizing lampooning the US auto industry. All three companies are run by people who give the word idiot a bad name. And the fact the head of Ford made $50 million over the last 2 years indicates the Board of Directors is just as stupid (I am sure he's not alone -- I just happen to know that number off the top of my head). And no -- this is not the unions fault. The problems rest squarely with management -- you know, the people who are supposed to run the company.

What the auto execs are basically doing right now is using their employees as hostages. At any other time in economic history a bankruptcy the size of GM or Ford would lead to a quarter of negative US growth followed by a resumption of 3%+ growth (maybe two quarters, but you get the idea). Unfortunately, right now the economy cannot afford a bankruptcy of that size without running the risk of that particular event leading to a major and prolonged downswing. It would be like throwing a boulder into a puddle -- the puddle will probably disappear.

That being said, I am an incredibly reluctant supporter of the bail-out, not because I think it's a good idea but because letting a US car company go bankrupt would be an incredibly bad idea. As a result, I would attach a ton of conditions to the money. For example, mileage standards would have to improve big-time. The big three's reliance on the SUV business model would go bye-bye. Executive compensation would have to be cut until the companies showed a profit (personally, I would propose a package and then subtract the total compensation for the last 5 years for the Board of Directors and Executives from the package total because these guys clearly didn't earn that money). Major financial cuts at all levels would happen. That means executive fly coach and rent compact cars on business trips. Downsizing from a physical plant and personnel perspective is a must. Simply put, the car companies would still have to face major restructuring. It's simply unavoidable at this point; the US auto industry would look very different when this is all said and done.

Angry Bear adds some really interesting ideas and observations