Unintended Bailout Consequences

I work in auto sales. I sell Subaru. In 2008, Subaru was the only major US marketer to post a sales increase over the previouos year. I feel very fortunate to work in sales for this particular brand. Having said that, here is how the bailout of the US makers affects our sales.

US makers are selling automobiles at a loss. They have to do this to move their inventory. They are able to do this because the US government has bailed them out. So their prices are deeply discounted and they offer low finance rates. Their captive finance companies are offering low rates because, they too, have been bailed out by the government.

So, when a customer comes in to my dealership, they are comparing my auto to a car that is subsidized by the government. The American product costs far less and is far cheaper to finance. Now Subaru has sold at a higher price than most competitors for many years because our product has a great reputation for reliability, durability, and tremendous resale value. We still have those advantages, but the price advantage of the American makes is becoming so great that it is difficult to overcome. American companies are offering discounts from 25% to even 50% off the sticker.

Is it fair for the government to bail out the US makers and thereby drive out of business other makers? Will consumers be better off if this happens? Who has achieved high build quality cars and forced the US manufacturers to improve their quality? Was it foreign competitors or the US government? Who has forced US companies to take better care of their customers? Was it foreign competition or the US government? Who has lead the drive to alternate power technologies? Competiton or government? Who has pioneered improved safety in automobiles? Competition or the US government?

The American manufacturers are on the ropes because of their own short-sightedness. They should be allowed to go bankrupt if that is what the market determines. By sustaining these failed companies and creating unfair competition, the US government may bankrupt companies that have built fine products while saving companies that have served the public poorly. That is the possible unintended consequence of the government bailout.

 

I think there is a distinction in bailing out the bankers and bailing out the auto companies.

Government does have a responsibility to provide a monetary system that is stable and reliable. The govenment left the bankers unregulated to a large degree. The bankers were irresponsible with this freedom, particularly in the area of mortgages and to whom they lent money. Since the bankers were irresponsible they brought about a collapse of the moneaty system. The government as a basic responsibility HAS to step in and do what is necessary to fix that system. Since the financial people have shown themselves incapable of handling the freedom they had, they must now live with more government regulation for the sake of everyone. I wish the bankers had been more responsible, but they were not, so now they suffer the loss of the freedom they had.

However, it is not the responsibility of the governement to ensure the stability of automobile makers. The automakers, particularly GM and Chrysler, made themselves uncompetitive through their own poor decisions. By bailing them out, the government is rewarding their mismanagement and punishing other companies that were operated well. This is as un-American as it can be. The government is propping up bankrupt companies, and by doing so they are going to force bankruptcy on companies that would thrive if the poorly run companies were allowed to die. This is very short-sighted.

 

To a degree this is true. However, the banks started bundling morgtages into mortgage-backed securities which they then sold. Once the banks discovered they could write mortgages and then sell them off, they did not care whether the mortgage holder could meet the payments or not because they were no longer holding the mortgage. That is when they began loaning to unqualified people. They also began to write interest-only loans in which people moved into a house paying only the interest; depending upon the rising housing market so they could sell the house at a profit in 3-5 years. These activities were not forced by the government though the banks were forced to get creative to protect themselves because of the loans the government wanted them to write. Government regulators ignored these bad practices and bankers continued to engage in them though it is obvious that all of it was foolish.

The government, in regard to a stable financial system, has to do whatever it needs to do to keep stability and avoid a complete economic collapse. What they are doing in the financial markets is necessary, though their efforts may ultimately fail anyway. We may yet face a complete financial collapse.

On the other hand, what the government is doing in the automotive market is completely different. Those bailouts are actually counterproductive, because with a shrinking car market in the US and abroad, the system actually NEEDS for some companies to fail. The government is propping up the weak ones at the expense of the strong ones.

 

I'm not sure which came first, the bad mortgages or the bundling, so I'll assume you are right. Thanks for the clarification.

My major point it that, whoever is at fault in the failure of the financial system, the government has, as a basic duty, the job of fixing the financial system for the good of everyone. I am not sure they have actually fixed it or that they can at this point, but they have a responsibility to try. As for the auto industry, the government is actually hurting the overall health of the industry through the bailout of GM and Chrysler.