The Next Bailout: Detroit

First came Bear Stearns, then mortgage lenders and borrowers, followed by Fannie Mae and Freddie Mac: They’ve all looked to Uncle Sam for a bailout, and now the word around Washington is that Detroit will be next on the taxpayer supplicant list.

Bear Stearns wasn’t a bailout. It was a buy out, orchestrated by the government to protect our nations financial infrastructure.

Detroit’s political calculation is plain: Having seen the way Washington has bowed to rescue the mortgage industry and Wall Street, why shouldn’t auto makers give it a try? Michigan is up for grabs in the election, so now is the time to strike with a goal of getting the Bush Administration and both Presidential candidates to agree.

Many of us have already done our part. I own two American cars, both rare examples of exceptional design and appeal. A Chevy Suburban and a Chrysler 300C, both with advanced safety features and cylinder-deactivation technologies that allow for fuel efficiency that belies their size and utility.

None of us should be expected to pay to allow Detroit to play. Our American automakers, as much as most consumers would hate to see them fail, deserve their fate. Our political integrity (I know – that’s an oxymoron) should not be allowed to be held hostage.

They are not victims of the fear and economic conditions brought on by an act of terrorism like the airlines.

They are not critical to our financial system as our major banking and mortgage institutions are.

They are public (most of the time – Cerberus-owned Chrysler a current exception) companies that operate in a free (albeit heavily regulated) market.

While they may have been severely impacted by a spike in fuel prices and a concurrent (and resultant) recession, they are not victims of it.

The car makers can also claim with justification to have been hurt as badly as anyone by Washington’s policy blunders. The weak dollar has contributed to the spike in oil prices that has socked their most profitable vehicles. And the nonsensical way that fuel-economy standards force Detroit to subsidize cars that consumers won’t buy has helped put the Big Three in this hole.

Over the last two decades or so, the vehicles with the highest sales numbers have been either a four door family sedan or a pickup truck. The Big Three have dominated one and consistently ignored the other.

Auto industry publications have been imploring the “Big Three” to be competitive in the family sedan segment for decades while the Japanese, primarily with the Camry and Accord, have almost completely poached the market. Market trends have driven fuel economy for decades as well and the Big Three have ignored the signs. I don’t begrudge them the success they have had in the light truck and SUV segment – but at the same time ignoring the rest of the market has for years left them vulnerable to the inevitable day that gas prices would adjust for inflation, let alone represent a crisis as demand has outstripped supply. 

Americans won’t buy the cars that the Big Three have had to subsidize because the product, until only relatively recently, has lacked quality and appeal. When Honda and Toyota build factories in America to build the cars that GM, Ford and Chrysler claim aren’t profitable, their argument falls apart.

There also happens to be a thriving U.S. auto industry outside of Michigan. These plants are owned by foreign companies, but they employ 92,000 Americans and build and sell cars here. Tens of thousands of their shareholders are Americans.

Certainly the UAW shares a large share of the blame. Their myopic strategy of bleeding their host to death, ignoring market conditions and grossly over-valuing their collective services have forced the Big Three to cut content and engineering to compete on price with the Japanese. The result is a widening of the already formidable gap in quality further undermining consumer goodwill and forcing American domestic brand loyalty beyond its limits. In the end the UAW will be left holding the bag.

A bailout at this point is a really bad idea. First of all, it’s been done before – at least once. The result? The Chrysler minivan which simultaneously saved Chrysler and emasculated millions of American males.

More importantly, our long standing economic dominance in the world is predicated on the fact that capital and talent is free to find it’s highest and best use. Pouring billions of capital into a national bailout is exactly the wrong move, evidenced by the extended Japanese recession not all that many years ago. Good money was sent after bad. Capital became scarce. Failed business models and management teams were kept on life support rather than being forced to retool and reinvent.

Regardless of where and why these federal bailouts started, American taxpayers can’t save everyone. The only way to stop this parade of supplicants is to start saying no — and Detroit is as good a place as any.