The $50 Billion Bail-Out

I wonder how Main-Street feels about this one. Even though millions of Americans are already outraged over bailing out Wall Street, they are now being asked to bail out Detroit too.

Later this morning expect dismal third-quarter results from GM and Ford, estimated at $2 billion each, which will probably plunge the markets even deeper down. 

After years of growing fat on the back of profits building ever bigger cars, trucks and SUVs, the executives of Detroit’s “Big Three” automakers – GM, Ford, and Chrysler – are expecting seriously lean times ahead. Some say they might not even survive.

Yesterday with cap in hand they raveled to Washington to ask for financial aid from the federal government because of the bleak prospects for their industry. They asked for federal aid for up to $25 billion in loans, which is in addition to the $25 billion in low-interest loans to be available from the Energy Department to assist them in developing more fuel-efficient vehicles. That is $50 billion in total.

They met the Democratic big guns such as  the House speaker, Nancy Pelosi, and the Senate majority leader, Harry Reid.  Afterwards, Pelosi issued a statement saying the group discussed “how to protect hundreds of thousands of workers and retirees, safeguard the interests of American taxpayers, and use cutting-edge technology to transform blue-collar jobs to green-collar jobs for generations to come.”

But the industry has to take some blame for this: they have been busily building bigger cars and SUVs on which they make more money. Go to any car show and yes there would have been a couple of token green concept cars, but the main show was still built around sex, speed and power.

No one in the industry predicted the perfect storm would hit in which the credit crunch, recent high oil price and growing environmental consciousness, car sales would decline and that consumers would demand cleaner and greener cars.  Someone, somewhere in this multi-billion industry must have seen these trends coming.
Even if no one could have predicted the scale of the financial melt-down, over the last two decades environmental groups have repeatedly warned of transport’s contribution to climate change. Could the industry have stooped so low as to listen to its critics? Of course not.

But it would not have taken much to look at the success of Toyota’s Prius for the Big Three to realize that they had bet good money on the wrong horse. Such was their short-sightedness, they had even turned up at the wrong race. And now American tax-payers are being asked to pay the price for this arrogance, greed and stupidity.

Moreover, the new Obama administration has to be careful – it cannot just give money to the Big Three to go green and ignore the fact that both the Japanese and European car manufacturers have huge operations in America too. If the Obama Administration is seen to favour American companies, you could expect retaliatory action from the EU or Japan or even Korea. Obama may have hinted at economic protectionism, but by bailing out the Big Three he could spark a trade war. But Detroit’s crisis could be his first real test.