The Auto Industry Dilemma

When is a "bailout" not a bailout? When it isn't. The choice of the loaded word "bailout" to describe the recent $700B TARP legislation and now being used in the context of the US auto industry travails is both unfortunate and inaccurate.

First a few facts. As previously explained in this blog we got into this mess because the dems in congress and their activist legal pit bulls cajoled and threatened banks to lend money to people who couldn't afford it to buy houses. Then they compounded the problem by strong arming Frannie and Freddie into guaranteeing those loans so that they could be packaged and sold as high quality investments. This whole house of cards was working fine until the housing bubble popped and folks who had no business being in homes they couldn't afford in the first place were under water and facing higher interest rates as their "teaser" mortgage rates began to reset to market values.

If this weren't bad enough a few "too clever for their own good" insurance industry types created the Credit Default Swap (CDS) product which basically became a naked short vehicle for investors to bet that there would be a higher than normal default rate. This proved to be like throwing gasoline on a fire. The result is history.

So when the media and some in congress referred to the TARP as a Wall Street bailout they were flat out wrong and in some cases purposely disingenuous. The TARP was absolutely necessary to protect Main Street from a complete lock up of the credit markets. Furthermore the way the TARP funds have been used to date is anything but a taxpayer funded bailout of the financial industry. The TARP funds have been used to purchase preferred stock in banks and other financial institutions. These purchases are time bound with respect to when they have to be liquidated and the taxpayers made whole, and in the meantime Joe and Jane taxpayer get to earn a very nice interest rate to boot. Not a bad deal for anyone.

Now to the auto industry discussion. There are people out there that just have it in for Detroit. I am not sure why but just as inexplicable as the left's hatred of Bush there are people who perceive the US auto industry as venal, corrupt and incapable of producing a quality product. I'm not saying the execs in the US industry are angels but let's face it, the real problem with the US auto industry is the legacy of the gold plated union contracts that were cut back in the 50's when the US auto industry was the only game in town. And as far as quality is concerned, I have owned both Ford and GM products for the last 16 years and I would match their quality with any of the foreign competition. The fact is that public perception of the quality of US manufacturers is a decade or more behind the reality. Now this is a legacy that the auto makers have to take ownership of because of all the crap cars they produced in the 70's and 80's. Trust lost is very hard to regain.

The US needs a strong domestically owned auto industry. It's not just jobs but also technology development and manufacturing process improvements. Furthermore once again whatever package is ultimately approved by congress it will not be a "bailout." It will have all kind of hooks to ensure that the taxpayers are repaid (remember we did this once before with Chrysler on Lee Iacoca's watch) and that executive compensation is moderate. My only concern at this point is that in pandering to the enviro-nazi movement the democratic controlled congress may try to dictate products that must be built rather than letting consumers drive that decision.

Bottom line - I am for helping the US auto industry through this trying and temporary situation and I hope you are too.