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Bankruptcy as a way of sticking it to the man


 

More neo-con dogma. Joseph Stiglitz, 2001 Nobel laureate in economics, noted critic of “free market fundamentalism” and author of Whither Socialism, Globalization and Its Discontents, and other works, gets all ideological about the auto bailout:

Financial markets are supposed to allocate capital and monitor that it is used to good effect. They are supposed to be rewarded when they do that job well, but bear the consequences when they fail. The markets failed. Wall Street’s focus on quarterly returns encouraged the short-sighted behaviour that contributed to their own demise and that of America’s manufacturing, including the automotive industry. Today, they are asking to escape accountability. We should not allow it.

That’s neat — a market-skeptical argument for “letting the market work.” But it rather sloppily conflates “market failure” with the failure of particular players within the market. The argument for markets is not that everyone always gets things right, but that those who get things wrong are punished. Yet those who invested in the auto industry were sheltered from the consequences of their failure by decades of mini-bailouts: subsidies, voluntary export restraints, innovation funds, location incentives and the like. That looks more like government failure than market failure. Markets accurately priced in government support for the industry, just as management and labour did what government, in effect, told them to do about the industry’s problems: nothing. Whereas an unsubsidized, unprotected auto industry would have been forced to clean up its act long ago.

To be sure, Stiglitz is open, given the current state of financial markets, to some form of government backstop for the auto companies — after they have entered bankruptcy, ie erased shareholders’ equity. But

the “bridge loan to nowhere” – the down payment on what could be a sinkhole of enormous proportions – is another example of the short-sighted behaviour that got us into this mess.

Stiglitz is famous for his writings on how markets work — or don’t work — in the presence of asymmetric information, ie where buyers know much less than sellers about a product, a field he pioneered along with fellow laureate George Akerlof, whose seminal “The Market for Lemons” is much cited these days with regard to the crisis in financial markets. Basically, the problem is that no one knows whether the financial instruments they’re being offered today are “lemons,” so nobody’s buying, or not without a substantial discount.

But in Detroit’s case everyone knew they were selling lemons. Somehow that became an argument for showering them with state favours, again and again and again. You don’t suppose history could be about to repeat itself. do you?


 
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Bankruptcy as a way of sticking it to the man

  1. you wrapped it up neatly. exposing the damage done by the liberals bumbling and kowtowing to the rich and powerful for contributions to their bulging wallets and campaign funds. aided by their oft conspirators the ndp who supported them for who knows what rewards. and letting union wages rise to lofty heights on the backs of workers who make only minimum wages yet have to pay the same high prices for rents and food which rises with every union contract to what the high paid union guys can pay with no hardship,

  2. Credit crisis? Failure of the market for perverse incentives for lobbyists subverting government
    Madoff case? Failure of the market for risk-free long-term rewards for well-connected people
    Blagojevitch? Failure of the market for senate seats
    Auto bailout? Failure of the market to support new entrants through creative destruction

    It just goes on and on. Who thought of this free market thing anyhow? It’s just a flawed ideology.

  3. Is it possible that the auto industry is going badly because it is based in Detroit and Detroit is such a unattractive city?

    Just google “worst places to live in USA”, “MOST DANGEROUS cities USA”… you’ll find Detroit..

    Imagine that you are a top notch havard graduate and you get an offer from detroit (car industry) or california (any industry)?

    what do u choose?

  4. Well I’m glad that Mr. Coyne is now citing Stiglitz – even if it’s only selectively and in service of his own reliably predictable thinking – instead of you know…Greenspan or Friedman. Baby steps.

    I actually agree with him that the Big 3 have to be massively reorganized. The status quo is clearly no longer an option and should have stopped being an option a long LONG time ago, Is bankruptcy the answer? Perhaps. Although I can’t think of a worse possible moment to let the Big 3 go bankrupt and for all those people to lose their jobs at once. I might wait until the financial market is no longer having a heart attack before scaring the hell out of everyone again. Also it might be nice to let those auto workers enjoy Christmas with their families.

    How about this as a possible creative solution…

    (1) Merge GM, Chrysler and Ford into ONE company (perhaps after a bankrupty). Keep the best parts of each business.

    (2) Phase out any job cuts or changes to compensation over 1-2 years so that there is less of a shock to the larger economy. Provide meaningful re-training opportunities for workers who will lose their jobs.

    (3) Concentrate R&D efforts on building new models that people actually want: reduced fuel consumption, reliability, greener cars, etc. Make this a requirement of any bailout.

    (4) Insist to Japan, Korea and China that they must open their markets to North American models. Make this a top priority of our trade and diplomatic negotiators. Protectionism can no longer be tolerated. Either we have a truly global economy and we are all in this together or we’re not.

    (5) Link executive compensation directly to the health of the company. For instance one rule might be that no executive can can be paid more than 15 times more compensation (ALL forms of compensation) than the lowest-paid worker in the company. Then executives have a direct incentive to run their companies in such a way that employees will share in the benefit of any growth.

  5. quebecois separatiste – Not to worry. It’s not as if the multi-millionaire CEOs actually live in Detroit (please!). They live in the wealthy suburbs like Auburn Hills (think Rosedale or Westmount). Although I imagine as a result of their unbelievable greed then there’s a chance those suburbs will start to be less wealthy now.

  6. From “A Bankruptcy to Save GM” by Joshua Rauh and Luigi Zingales posted on VOX:

    “The restructuring cost at GM will of course be high, both in human and financial terms. But the alternative is worse: to spend $25 billion on aggravating and postponing the problem. It would be better to give away that money directly to the workers rather than let GM decide how to dissipate it. At over $200,000 for each of GM’s 123,000 North American employees it would a very nice gift. The taxpayers’ cost would be the same, but at least the money would help secure a future to hard-hit households.

    Overall, however, we believe that paying off workers and liquidating the company is equivalent to putting the patient out of his misery before attempting to administer the best economic medicine. Some may argue that GM has been receiving medicine from taxpayers for quite some time, but clearly it has been receiving the wrong medicine. A Chapter 11 bankruptcy gives a firm that needs to restructure the chance to recover. If Chapter 11 cannot save GM, then nothing can.”

  7. While I agree that bailing out the big 3, and having done so repeatedly in the past (on a smaller scale), is a problem (at least in the manner in that it has been done), I am not sure that market failure ought to be dismissed; but, it has to be considered more broadly.

    While we both agree that there is ample evidence that the problems of the Big3 reflect the failure of particular ‘players’ in the market rather than market failure, I am less inclined to beleive that market failure is not an issue when you claim that this “looks more like government failure than market failure.”

    If the ideology of free markets is to be taken up, then we would expect that in selecting governments, citizens express their preferences, as they do in the market. The bigger question becomes, has political market failed to provide a suitable ‘c’ conservative alternative (see Andrew’s other columns this morning re the ‘C’onservatives foray into a range of sectors and experimentation with shipbuilding).

    I suppose Andrew, that we would have to consider that there is insufficient demand in the country to sustain such an alternative.

  8. “But in Detroit’s case everyone knew they were selling lemons.”

    If by “everyone knew” you mean “self-perpetuating myth”

  9. ‘But it rather sloppily conflates “market failure” with the failure of particular players within the market.’ I think we can safely assume that Stiglitz knows the difference. However, Coyne ‘conflates’ the long-term structural problems of the Detroit Three, which at least GM and Ford in recent times actually had begun to clean up, with short-term (so one would hope) distortions of credit availability to both manufacturers and customers. The Detroit Three may have been mismanaged, but nowhere near as badly as Wall Street and the government.

  10. ‘But it rather sloppily conflates “market failure” with the failure of particular players within the market.’ I think we can safely assume that Stiglitz knows the difference. However, Coyne ‘conflates’ the long-term structural problems of the Detroit Three, which at least GM and Ford in recent times actually had begun to clean up, with short-term (so one would hope) distortions of credit availability to both manufacturers and customers. The Detroit Three may have been mismanaged, but nowhere near as badly as Wall Street and the government.

  11. I made a conscious choice about 12 years ago to go from buying Japanese to buying North American.

    I’ve had no problems with Big 3 cars. Japanese are probably better but the pricing reflects that.

    Prior to that I bought Japanese because the quality and reliability were clearly better. That has changed but the reputation remains.

  12. Sure, they have made some boneheaded calls by focusing on short-term results instead of long-term trends, but don’t forget – GM and Ford have both been in business for more than 100 years, and old companies become encrusted with customers and practices the way barnacles grow on a ship.

    They haven’t been competing on a level paying field with import manufacturers who were able to start with a clean sheet of paper a few decades ago when it came to choosing and locating dealers and building factories.

    Oh, and by the way, they haven’t been getting rich at the same time that they fleeced investors, the way some of the boys on Wall Street did. Every stock option ever awarded in Detroit is under so much water it has probably drowned by now.

  13. Problem is free markets weren’t allowed to work. Goodness the prediction of overcapacity in the auto industry has been talked about for 20 years!! Every single time the union and management link arms and soak the taxpayer.

    The unions argument that labour represents only 7% of the cost of a car and therefore they have nothing to give…well lets take them at their word (I have doubts) and do the math anyway. 7% on an average dealer cost of 25,000 is 1,700. A 20% reduction in the effective wage (which means AMOUNT of labour put in, meaning lower per hour or fewer hours needed from better work rules) is 340 a car…..doesnt sound like much until you realize that they sell a huge number of cars, 12million in abad year like this to 17 million in a good year.

    So restructuring labour gets the industry between 4 and 6 billion a year…each and every year. Right now between Canada ind the US they are talking about 50 billion between them in cash, loan guarantees over time etc. A 30% change yields between 6 billion and 8.5 BILLION ANNUALLY.

    Labour is PART of the solution, since it seems transplants pay less nominally and generate a lower effective wage otherwise. How can the union justify a premium for its members labour, are they better skilled, more productive or is it just extortion. A wage adjustment needs to take place, per the market.

    Bondholders are the other problem. THey need to be punished, they have continued to supply capital to an industry that didnt deserve it. Why, looking for protection form the government, in bailouts etc. The bondholders and other capital suppliers need to learn one large lesson and that is from taking a loss.

    Problem is this has been allowed to go on for too long. All groups are in distorted situations. Only the government can gore the appropriate oxes if one assumes that the time for a normal bankruptcy reorg wont work, which is my preferred solution. So critics say that would be too traumatic because of te time it takes. So the government can do something that takes less time.

    1) Buy GM for $1, buy chrysler for $1 into a government ebtity, call it newcar
    2) You rip up the union contract and decertify then send the assets back into the marketplace for recapitalization, government keeps 9.9% of equity to fund liabilities
    3) All liabilities are kept within newcar. Bondholders get whatever comes out of government 9.9% stake
    4) Govt pays the payables of the parts industry, the only strategic thing that is worth protecting
    5) Dealers, totally cut loose…new ones will appear
    6) Union can reform if they wish, for the moment I would take whatever the wage is at the average of the transplants and pay that…..I bet the union wont reappear.
    7) Industry then reorganizes as it needs to with new cpatial and likely new management.
    8) Lesson taught to the capital market that there is a COST to obtaining taxpayer assistance.
    9) Supply chian maitained (the part worthwhile)
    10) Dealerships go under….oh well new ones will form.

    Now I am normally a free market guy, but IF the situation is so dire that normal processes cannot be followed then the government should be used in a productive way. If you think this is too draconian then maybe the situation isnt as dire as you say and the normal processes should be followed.

    If we had learned the discipline of letting these things fold and merge and reorganize when they should have we wouldnt be held over a barrell now. Screw the bondholders and break the union and you then have malleable enough conditions to actually have a viable industry. If this action isnt required then let a judge decide like every other industry and company.

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