No good options for Detroit

I am of the opinion that while the executives at GM, Ford and Chrysler are total jackasses and short-sighted morons, it's quite necessary that some type of bailout take place.

In more normal times, the answer may be different. Chapter 11 bankruptcy would be a credible option. Unfortunately, these are not normal times. Chapter 11 is simply not a realistic option right now. GM is literally on its last legs. Who would run the company while things were being settled in court, and how would they keep it running with no cash, no credit, and absolutely no one willing to lend them the billions of dollars necessary to keep making and selling cars? Here's Jonathan Cohn , making this precise point:

One reason for the casual support for letting GM fail is the assumption that bankruptcy would be no big deal: As USA Today editorialized recently, "Bankruptcy need not mean that the company disappears." But, while it's worked out that way for the airlines, among others, it's unlikely a GM business failure would play out in the same fashion. In order to seek so-called Chapter 11 status, a distressed company must find some way to operate while the bankruptcy court keeps creditors at bay. But GM can't build cars without parts, and it can't get parts without credit. Chapter 11 companies typically get that sort of credit from something called Debtor-in-Possession (DIP) loans. But the same Wall Street meltdown that has dragged down the economy and GM sales has also dried up the DIP money GM would need to operate.

And for that matter, who would buy a car from a bankrupt manufacturer? What about warranty/service coverage? It's not like buying an airline ticket, which is a one-time thing; you use it to get from one place to another, and that's it. But a car is a long term investment. You don't want the maker of your new Cadillac to go out of business next week.

What would happen to the Big 3 instead is Chapter 7: total liquidation, and millions of people suddenly without jobs, health insurance, or pensions. Millions of people newly dependent on social assistance from the government, which would itself cost billions and billions of dollars. The repercussions for an already sinking economy would be devastating. Stock markets went into another tailspin today, partly because of uncertainty on this very issue. If these companies actually went under, it just might be what turns this nasty recession into a longer-term depression.

As unpalatable as it is, I think a bailout is the only option, provided that it has serious strings attached, as President-elect Obama seems to be in favor of. If American taxpayers are going to bail out these failing companies, Detroit must be given some real shock treatment, forcing them to start making cars for the 21st century. Take it or leave it.

Give us some more money please

The Big 3 automakers are at it again, asking for more money from the US government. They've already been promised $25 billion (Obama proposes doubling it to $50 billion), earmarked to help them restructure and retool for the future. But insiders say that a quicker injection of funds is necessary just to help them meet current expenses and payroll.

It's difficult to understate just how dire the automakers' situation is. At a time of prohibitively expensive gasoline, their products are hopelessly obsolete compared to the competition. While Japanese and European manufacturers focused on capturing the compact and sedan markets, Ford, GM, and Chrysler preferred to focus on the gas-guzzling SUV and pickup truck market. And with the Bush administration opposed to any meaningful increase in CAFE fuel mileage standards, they were free to do so, thinking only for the short term, utterly ignorant of the coming crisis (last year the Bush administration finally signed a bill into law that increased standards, but too late to save the automakers from themselves).

If there was ever a business that deserved to fail, this is it. Here's John Cole:

This is not a damned surprise. They had years to re-tool and build vehicles that got better gas mileage, were more efficient, and used new technology, and instead they spent all their time building behemoths and paying lobbyists to fight higher CAFE standards. It was inevitable that once there was a gas crunch, they would get hammered. Why are we bailing out people who engaged in what was obviously bad business practices for years. Their focus on SUV’s was the business equivalent of malpractice, yet they did it anyway because that was where the quick bucks were.

The problem is that if they go under, they'll take millions of jobs with them. And that is certainly not what the US (or Canadian) economy needs right now.

Obama has smartly proposed tying federal aid to increased fuel efficiency standards. Tougher regulation seems to me to be the only way to go, as common sense has apparently been insufficient.

Some regulation here too, please

So I always read Greg Easterbrook on ESPN (or Tuesday Morning Quarterback, as he goes by), even though he hates my Patriots and thinks he knows everything about everything (even though he doesn't), because his football commentary is some of the best out there. Anyway, buried deep within this morning's column was a really spot-on criticism of the North American auto industry and its inability to adjust to reality:

More on Mileage and Politics: Last fall, after 20 years of strident inaction, Congress finally passed a bill to increase the fuel efficiency of cars, SUVs and pickup trucks. There was a lot self-congratulation on Capitol Hill. The law seemed to mandate roughly a one-third increase in new-vehicle MPG by 2020 - enough to eliminate the oil the United States imports from the Persian Gulf. Sounds great! But as your columnist wrote in December 2007, "TMQ is hugely suspicious … [there is] a waiver provision that says that if the new standards prove too onerous, automakers can ask they be waived. That is a formula for what Washington specializes in: the appearance of dramatic action while nothing actually happens." So what's going on in Washington right now? Pleading poormouth, the big three automakers are already asking for a waiver from the 2015 interim standard, which requires roughly a 15 percent improvement in fuel efficiency. That standard does not take effect for seven years, and already Detroit automakers are saying they can't meet it.

Or perhaps, they don't want to try. Lee Hyun-Soon, president of Hyundai, told the Wall Street Journal last week his company will meet the entire 2020 standard by 2015, and will do so entirely with conventional vehicles -- no complex plug-in hybrids, just sensible engineering using existing technology. Whenever Washington seems to get serious about oil waste, Toyota, Honda, Hyundai and Subaru put their engineers to work -- then build, at American factories staffed by American workers, vehicles that comply with MPG rules. Whenever Washington seems to get serious about oil waste, Chrysler, Ford and General Motors put their lobbyists at work to dilute or evade the standards. There are only 535 people in the United States so gullible they would believe Korean engineers can meet a technical standard, yet American engineers cannot. Unfortunately, those 535 people are the members of the United States Congress.

Has anyone from the mainstream media followed up on how last year's seemingly strict MPG bill is being watered down? As Eric Patashnik of the University of Virginia details in his powerful and timely new book "Reforms at Risk," reporters are often present when "dramatic" legislation passes, then treat the enactment as the end of the story -- paying no attention as lobbyists later water down a bill. As Thomas Friedman points out in his important new book "Hot, Flat and Crowded," the refusal of Congress and the White House to take any real action against oil waste has had the effect of transferring hundreds of billions of dollars to Moscow, and to the oil sheiks who support anti-Western and anti-Israel terrorism. If MPG standards were higher, oil demand would fall. Instead, high demand holds up barrel prices, enriching Persian Gulf dictatorships and Vladimir Putin. Why, Friedman asks, is Russia suddenly confrontational? Because in the past two years, Russian elites have gotten super-rich, owing to rising oil prices brought on at least in part by U.S. stupidity regarding petroleum waste. If Congress grants Detroit the MPG waivers it seeks, the stupidity will march on.

This is precisely the problem. Every time the US Congress tries to impose stricter fuel efficiency standards, the industry's lobbyists whine and moan about how damn hard it will be, and how it will hurt competitiveness, and how it will help the Japanese, and how Americans need gas guzzling cars for their self-esteem, and how the Earth as we know it will end if we make are cars just a little bit more efficient.

And Congress goes along with it. I doubt it's a question of "gullibility"; I'd like to know about the money changing hands before I accept that even Congressmen are that stupid.

Of course, this strategy has proved more than a little counterproductive. The Big Three of American auto makers have suffered a massive loss in market share to Japanese manufacturers like Honda, Toyota, and Nissan. Why? Many reasons, but not least because those cars are more fuel efficient. So directly contrary to the lobbyists' claims of higher efficiency standards hurting competitivity, the lack of standards can be directly blamed for at least some of the misfortune currently afflicting the industry.

And still they whine. If this keeps up, the domestic American automobile industry will go the same route as the domestic American financial industry.