Have You Ever Tried Bailing Out A Sinking Boat?

Have you ever tried bailing out a sinking boat? If you have, you will know that it doesn't work. Unless the leak has been repaired or the rain stops, the boat will continue to take on water faster than you can remove it. It will eventually sink, taking you along with it. You would be better off abandoning the boat and trying to save yourself while you can.

That brings me to the auto industry bailouts, or in fact the bailout of any business that is taking on debt faster than the government can plug the holes. Take the case of General Motors. It has already received nearly $14 BILLION in bailouts and is looking for a lot more money, reportedly more than $16 BILLION (See Mlive.com, Rick Hagland, March 3, 2009). Peter Cohan writing in Daily Finance on March 4, 2009 estimated that the bailouts of the three major auto companies may amount to $100 BILLION when all is said and done. Have the leaks, however, been fixed? No, not at all. GM's sales reportedly fell 53.1% in February, the worst sales figures in 27 years. It has lost $82 BILLION dollars over the last four years. In a government filing made today Thursday, March 5, GM's accounting firm has reportedly stated that there is "substantial doubt" that GM can survive ( See CNMoney.com). As with a sinking boat, there are not enough hands on deck with bailing cans to avoid the inevitable collapse.

My rudimentary knowledge of economics tells me that something is wrong here. The automobile companies seeking bailouts are being heavily subsidized by government, i.e. taxpayer, money. This means that the prices of their products do not accurately reflect the true costs of their production. This artificially inflates the consumer demand for these products, since the costs of these products are being externalized. Rather than consumers shifting their purchasing decisions to more cost efficient products, they are being encouraged to stick with the less efficiently produced ones.

But do not take it from me. The argument against bailing out automobile manufacturers has been succinctly explained by my colleague, Dr. Moin Yahya, in an article which he wrote in the February 6, 2009 issue of the Lawyers Weekly. Here is part of what Moin had to say:

"Conservative governments proclaim their loyalty to free markets, but it seems that when markets fail, their loyalty fails too. Just recently, the federal government announced that it would offer some taxpayer funds to the troubled automakers in order to "bail" them out. But for these bailouts, the politicians scream, the auto sector and the millions of jobs associated with it would disappear.

These claims are nonsensical. If the automakers are unable to pay their debts, they should do what other companies have to do, namely file for bankruptcy protection. This is, in fact, what hundreds of companies big and small have done with no expectation of any bailout from treasury. The protections afforded under the various insolvency statutes allow those companies who are in temporary fiscal distress, but otherwise fundamentally sound, to gain some breathing room and reorganize. Such companies can insulate themselves from creditors while they restructure their costs structures. They may require that wages of both upper management and workers be readjusted for the new harsh times. On the other hand, those companies that are unsound in their economic fundamentals will be liquidated, and their assets can be redeployed for better use.

The bailout, therefore, is a terrible deal for taxpayers on two grounds. First, it discriminates against those companies and individuals who do not have political presence or persuasion. Second, throwing such dollars without account, since the public program has little accountability, is doomed to failure. In other words, this bailout is a pure wealth transfer from the diffuse taxpayers to the concentrated special interests. Worse, these measures will not save the automakers from their fundamental inefficiencies, which will inevitably mean more bailouts in the future. These bailouts provide the companies with an unfair competitive advantage over the rest of the market participants."

Dr. Yahya goes on to argue that these bailouts should be challenged in court and suggests what legal arguments can be made. The piece makes for interesting reading and I recommend it. Meanwhile, let's see what our governments do when the next request for more money comes, as it surely soon will.