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GM Bailout Makes Most of Bad Situation

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Tuesday 02 June 2009
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The Obama administration's plan for General Motors is a serious effort to try to make the best of a really awful situation.

In the current economic climate, sitting back and allowing GM to be liquidated was not a serious option. This would have wiped out a whole network of suppliers and ancillary businesses in Michigan, Ohio and Indiana, devastating the economies of these three states.

The federal government would have been forced to step in with large-scale aid, in this case, just to prevent mass destitution. The state and local governments would have lacked the resources just to maintain basic services like schools, hospitals and sanitation facilities. Of course, the plan is not perfect, and it can be argued that one or another of the parties got too much or too little.

The oft-told story that the United Auto Workers made out like bandits is nonsense. Workers are making substantial concessions, and many will be losing retiree health care benefits for which they already worked decades. The bondholders are great whiners, but none of them have said that they wanted the company liquidated. They know that they would get less if the federal government had not intervened. They whine because they know the media are always sympathetic to investors, so their whines will be presented to the public as serious arguments. This could create a political environment in which they could get more money, offering substantial returns to speculators who just bought GM debt at steep discounts.

It is remarkable how much anger has been generated over the government lending money to GM. This is an effort to save jobs and save the economy of the Midwest. In exchange, the government is getting a substantial ownership stake in GM. While the future value of the government's stake in General Motors will depend on many factors, including the overall health of the economy, it could - in principle - end up with a profit on its investment.

The GM investment is an important contrast to the $12.9 billion that the government handed to Goldman Sachs through American International Group. That money was paid out to honor derivative contracts that Goldman had with AIG. The government had no legal or moral obligation to honor these contracts. Goldman had used bad business judgment in signing contracts with a counterparty that was not able to make good on its commitments. In a market economy, companies are supposed to suffer the consequences of their bad judgment.

Instead, the government simply handed over the money that AIG was unable to pay. It got nothing in return for this - no stocks, no bonds; there is no pretense that this money will ever be paid back. And the only jobs we saved were probably the jobs of Goldman's lobbyists, who want to make sure that we don't regulate the derivatives that helped bring on this disaster.

Somehow, this gift to Goldman aroused nowhere near as much anger as the bailout of General Motors. This is especially ironic, since the proximate cause of the crisis at GM and Chrysler is the crisis brought on by the irresponsible behavior of the Wall Street banks.

The Big Three have made many mistakes over the years, and they have suffered as a result. However, the reason that GM and Chrysler were suddenly pushed into bankruptcy was the economic collapse that followed the crash of the housing bubble. All the major auto manufacturers have seen a huge falloff in demand. Even Toyota and Honda, the superstars of the world auto industry, have seen sales decline by more than 30 percent. The difference is that they were in a strong enough position to withstand this falloff, unlike GM and Chrysler.

Under the circumstances, it hardly seems unreasonable to offer a lifeline to keep GM and Chrysler afloat. Given recent events, Detroit offers us a much better future than Wall Street - or at least a more honest one.

Dean Baker is the Co-director of the Center for Economic and Policy Research.

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Dr. Dean Baker is a macroeconomist and Co-Director of the Center for Economic and Policy Research in Washington, D.C. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. (more...)
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