Friday, November 14, 2008


I didn't blog about the bank bailouts because I didn't know what to make of it. As presented it didn't sound too bad. The government would buy up bad debtors (mainly mortgages) and hold the loan for a while. Eventually the property would sell and the government would recoup some or all of the investment. Now it turns out that this wasn't fast enough. Instead the government is buying equity stakes in banks. Instead of becoming a mortgage holder, we are becoming partners with the large banks. The banks insist that this let them release credit faster and that the money cannot be used for dividends or golden parachutes. I'm not so sure about this nor do I like that fact that they had to add "sweeteners" (big earmarks) into the original legislation. I have reservations but I accept that this affects the entire country's financial system.

The same case cannot be made for the big three automotive manufacturers.

Around 30 years ago, Chrysler for into trouble. They had a large inventory of big, low-mileage cars. They asked for and received loan guarantees from the government. They used these to redesign their fleet, first with the K-car and later inventing the minivan.

That's not what is happening now. All three companies want direct loans and/or grants. There is little talk about where the money will go. What talk I have heard is from activists who want it to be targeted at green technology. None of this helps the American auto industry.

First, this crisis has been coming for a long time. Detroit has long admitted that it cannot compete in the automotive market. Their profits have rested completely on high-margin SUVs. The main reason that they continued to sell smaller cars was to increase their average fleet mileage. Their costs per car were too high. They pay around 50% more per hour for labor than other car companies. And by "other" car companies, I mean non-unionized auto makers.

Giving the auto makers a handout without gaining major concessions from the unions is a waste of time. We are just supporting them for a while in the hope that the SUV market picks up again.

Giving them money with the stipulation that they only be allowed to build green cars is worse. It leaves the current problems in place and forces them to make cars that may not sell.

Take the just-announced Volt as an example. This is a great piece of technology. It has an all-electric drive-train. You can plug it in to charge. It also has a gas-driven generator on-board which will charge the batteries on the fly. This is what hybrid cars should be. But it will cost $40,000. I can't afford one, not even with gas $5 a gallon. If this is the only thing they sell then they are out of business.

Two special-interest groups are pushing the bailout. The pro-labor group wants bailouts with no strings attached. The greens want to force them to build green cars that may not sell. Both groups are pushing ideology above long-term viability.

Here is the Republicans' first chance at rehabilitation. They should oppose this bail-out unless it includes huge union concessions and allows the car companies enough flexibility to adapt to the market (i.e. build cars that people want to drive).

There are no votes for the Republicans in supporting the bailout. The Democrats will get all of the credit and the groups most affected - mainly unions - are the core support of the Democrats.

The big lesson of Bush's compassionate conservatism is that Republicans cannot compete with Democrats on handing out money. The Democrats will not give them any credit for it and it makes them indistinguishable from the opposition. In 2006 the Democrats ran as the party of fiscal restraint. It is time for the Republicans to reclaim that title (especially since the Democrats have abandoned it so that they will not handicap Obama). A lot of conservative and moderate voters are disenchanted with big-government Republicans and voted Democratic in the last couple of elections.

Early in his administration, Bush and Karl Rove decided that there are no votes in small-government. They would jettison the Libertarian wing and count on evangelicals to win elections. This is a chance for the Republicans in Congress to distance themselves from a lame-dusk president and invite the Libertarians back to the table.

Even if the table is set in the wilderness.

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