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...are doomed to repeat it
Systemic risk can render drastic action necessary. But what about the prospects for the long term? Will they truly look up? David Leonhardt writes:
The Chrysler bailout may have saved the company, but it did nothing, after all, to stop Detroit’s long, sad decline.
Barry Ritholtz — who runs an equity research firm in New York and writes The Big Picture, one of the best-read economics blogs — is going to publish a book soon making the case that the bailout actually helped cause the decline. The book is called, “Bailout Nation.” In it, Mr. Ritholtz sketches out an intriguing alternative history of Chrysler and Detroit.
If Chrysler had collapsed, he argues, vulture investors might have swooped in and reconstituted the company as a smaller automaker less tied to the failed strategies of Detroit’s Big Three and their unions.
...Speaking of which, Detroit’s Big Three have come back to Capitol Hill lately, lobbying for billions of dollars in handouts. This time, their executives insist, they’ll use the money to solve their problems.
Posted by Tyler Cowen on September 17, 2008 at 07:38 AM in History | Permalink
Comments
The Big Picture
http://bigpicture.typepad.com/
Posted by: at Sep 17, 2008 7:55:14 AM
"In 1979, the government structured the Chrysler deal so that taxpayers might earn a profit from it (which they did)."
I guess my check got lost in the mail.
Posted by: Andrew at Sep 17, 2008 8:03:02 AM
Am I wrong, or is this a bad analogy? The Chrysler bailout hardly posed systemic risk; it was merely a handout.
I'm not sure present bailouts are good, but I can certainly imagine an informed and impartial observer coming down in favor. And I can at least imagine them working out for the better (or less worse, anyway).
Posted by: KC at Sep 17, 2008 8:35:02 AM
But the net impact of Ford's stand is clear: "Stocks skid: Dow down 12" A regime of constant bailouts would indeed make a Dow move of 12 a "skid."
Posted by: Jonathan at Sep 17, 2008 8:49:51 AM
I hope that the Dow doesn't skid 12 today. That would really stink.
Posted by: liberalarts at Sep 17, 2008 9:12:24 AM
Can one imagine the outcry that will happen if Wall Street gets Fed/Government money for bailouts, but the automakers don't?
Posted by: Yancey Ward at Sep 17, 2008 9:45:53 AM
Joseph Stiglitz has a 6-part plan to make sure that none of this happens again.
What do the Marginal Revolutionaries think?
http://www.cnn.com/2008/POLITICS/09/17/stiglitz.crisis/index.html
Posted by: ck at Sep 17, 2008 10:07:06 AM
Thanks for the kind words Tyler!
Here are The Terrible Lessons of Bear Stearns' bailout:
http://bigpicture.typepad.com/comments/2008/09/the-terrible-le.html
Posted by: Barry Ritholtz at Sep 17, 2008 10:21:40 AM
Am I wrong, or is this a bad analogy? The Chrysler bailout hardly posed systemic risk; it was merely a handout.
That's like saying: "when I bought a lottery ticket, that didn't waste money, it made me rich."
Yes, in hindsight, Chrysler made good on the loan, so it didn't cost anything, but simply gave them the difference between what that loan would have cost them on the private bond market, and the terms they got. However, since the government was pledging to pay lots of money in the (likely at the time) event Chrysler couldn't pay, that new federal liability could have hurt the federal government's credit rating, making it have to pay more to borrow, and otherwise cascade through the financial system, thereby posing -- wait for it -- systemic risk!
Posted by: Person at Sep 17, 2008 10:22:44 AM
The photograph is about President Ford turning down New York City, a rescue package was eventually agreed-- Ford, quite reasonably, asked the City to make cuts like making City College students pay tuition. The City refused.
So it has nothing to do with Chrysler!
Posted by: Valuethinker at Sep 17, 2008 10:58:39 AM
We are reasoning by false analogy here.
AIG is only 'bailed out' in the sense the US government is now free to manage it and sell the operating businesses, The same is true of Fannie and Freddie-- eventually they will be turned over to the private sector.
The goal with Chrysler was presumably to preserve jobs and an American car company. The goal with AIG was to prevent a massive default which would ripple across business and the entire banking system.
Economists have long recognised that the settlement of securities is special in terms of the role in the economy.
Posted by: Valuethinker at Sep 17, 2008 11:02:17 AM
I seems to me that crisis is too strong a word for what is happening.
Posted by: floccina at Sep 17, 2008 11:16:41 AM
"AIG is only 'bailed out' in the sense the US government is now free to manage it and sell the operating businesses, The same is true of Fannie and Freddie-- eventually they will be turned over to the private sector."
Oh great. Privatize the gains, socialize the losses, then privatize the gains again. That had BETTER not happen.
Posted by: meter at Sep 17, 2008 11:17:33 AM
It WILL happen again. Governments the world over, when faced with businesses that they decide they should no longer be owning, always manage to sell them for a song, usually to a group of people with (wait for it) close ties to leading government figures. Think Russia, the UK (the rail system).
If the government here sells the rescued businesses back to the private sector for anything approaching their real worth, I will be stunned.
Posted by: Graham Shevlin at Sep 17, 2008 8:54:54 PM
Maybe the government should have a standard IPO for the rescued companies or a dutch auction like google did when it went public.
Posted by: adam at Sep 17, 2008 9:51:09 PM
The government took over the wreckage of the Penn Central and quickly privatized the freight portion of the company, which it eventually sold of in a highly successful IPO. Unfortunately, it kept Amtrak, but the Conrail example shows it that the U.S. can do it right.
Posted by: MHodak at Sep 17, 2008 11:09:23 PM
Santayana's Prophesy : "Those who cannot remember the past are condemned to repeat it."
Muller's Corollary: "Those who cannot remember the past won't even know if they're repeating it."
Posted by: TDMuller at Sep 18, 2008 5:19:35 AM
The photograph is about President Ford turning down New York City, a rescue package was eventually agreed-- Ford, quite reasonably, asked the City to make cuts like making City College students pay tuition. The City refused.
So it has nothing to do with Chrysler!
Clueless.
By the way, here's a Chrysler New Yorker.
Posted by: at Sep 18, 2008 7:17:43 AM
The Chrysler bailout may have saved the company, but it did nothing, after all, to stop Detroit’s long, sad decline.
But, we're talking three decades between the bailout and now. During that time, it wasn't one long slow decline -- there were bust years and also boom years when the Detroit automakers were flush with cash and went on buying sprees (Saab, Volvo, Jaguar but also GM bought EDS and even Chrysler bought Gulfstream in the 1980s). Ten years ago, Chrysler was as large as Daimler (and more profitable) at the time of the, ahem, 'merger of equals'.
Which was why Detroit never was willing to have knock-down, drag-out fight with the UAW it would have taken to be cost-competitive with the transplants. Especially because it would have had to have been one of the companies sacrificing itself for the sake of the group (remember, each contract cycle, there's only a single 'strike target' -- the most successful of the three at the given time, the one with the most to lose). And the UAW, never perceiving where things were heading, never would have given in. What was necessary was simply not doable 10 or 15 or 20 years ago. The wolf had to be at the door -- the brink of bankruptcy was the only way.
Posted by: Slocum at Sep 18, 2008 7:43:04 AM
"That's like saying: 'when I bought a lottery ticket, that didn't waste money, it made me rich.'"
You seem to have compounded the initial bad analogy with an even worse one.
My point was simply that AIG is different than Chrysler: *not* bailing out AIG arguably poses systemic risk, and therefore may be justifiable. Bailing out Chrysler was just plain stupid -- regardless of what happened to happen ex post.
So what I originally said is nothing "Like saying 'when I bought a lottery ticket, that didn't waste money, it made me rich.'"
Posted by: KC at Sep 18, 2008 11:31:20 AM
If the stockmarket expires will we find skid marks on its underwear?
Posted by: Asher at Sep 18, 2008 1:23:23 PM
