If there’s one provision in the GM/Chrysler bailout that I just don’t get, it’s the suggestion that the automakers must be financially viable by March 31st next year or they will have to repay the loans.

Unless I’m missing something, if you’re not financially viable, repaying $17.4 billion will be just a tad difficult. This will presumably force those automakers into Chapter 11, which is what the bailout was meant to avoid, at least partly to avoid the “ripple effect” that the much more responsible Ford is worried about. In these market conditions, it is hard to see any way that the companies can meet that condition without engaging in some sort of fire sale (which will in turn have ripple effects).

It therefore looks like, rather than some pre-packaged bankruptcy, the Bush administration has handed its successor a pre-packaged crisis. On April Fools’ Day, of all days, President Obama will be forced to extend the loans, provide more funds or otherwise cave to GM/Chrysler/UAW demands.

However you look at it, this is not responsible government. This bailout beggars belief.

(A further post will provide details of what sort of non-financial bailout could help).

Eli, in answer to the blog post you phrased as a question, the argument from the individual you heard, echoed by other Big 3 execs, is not a valid point in support of a bailout.

Their claim that consumers won’t buy from an automaker in bankruptcy is a specious argument. Yes, some won’t, but many consumers also are not going to buy cars from companies perceived to be so weak that they have to beg for a bailout from the government. A company’s clutching to a government lifeline to keep from going bankrupt wouldn’t be that much different for many car buyers than an actual bankruptcy.

This is particularly true if the government forces the companies, as a condition of the bailout, to make “environmentally correct” cars that no one really wants. A company emerging from a Chapter 11 bankruptcy, by contrast, has a chance to win consumers back by making products that they want.

I also addressed your argument that “If the manufacturer no longer exists, then the car parts might not” in a previous Open Market entry (that was cited in a brilliant Washington Times editorial on Thursday). That entry noted the thriving reproduction parts industries for DeLoreans and Studebakers, both made by automakers long defunct (DeLorean went bankrupt in the ’80s and Studebaker folded up shop in the ’60s). The fact of these industries’ existence cuts in favor of consumers in a Big 3 bankruptcy. Given that there would be millions more Big 3 cars on the road than DeLoreans and Studebakers, entrepreneurial firms would rush to acquire the intellectual property rights that a bankruptcy court could easily award so that new parts could be made for consumers. Warranty claims could also be given priority by the bankruptcy court, as the Times editorial noted, and those are usually backed up by the insurance company of the warranty issuer, anyway.

It looks like to tide the companies over, Congress is going to vote this week to let them use money already appropriated for “green cars” for general operating purposes. From a free-market perspective, this action is neutral and may even be a net positive, as it reduces the promotion of a state-directed “green agenda.”

But when Congress comes back next year, bankruptcy must be on the table for both big automakers and big banks, as it is for small businesses every day. Otherwise, the economy may never get out of “Reverse.”

Unfettered greed is the suspect many point at to explain the current economic crisis. To some extent, they are right, but it isn’t irrational greed on the part of bank managers or fat cat CEOs. It is the unwieldy bank regulations that forced the entire industry to walk the proverbial plank and then blame it for drowning.

Critics have alternately claimed that over-regulation and under-regulation are the causes for the current crisis. I believe one specific regulation, the Community Reinvestment Act (CRA), should shoulder a lot of the blame for creating an environment where a lending institution’s short-term survival hinged on it making the decisions that in the long-term would likely cause its demise.

As I noted in my paper The Community Reinvestment Act’s Harmful Legacy, one of the effects of the CRA was the creation of a weapon that has been effectively utilized to extort money from lenders. When lending institutions wish to open a new branch, expand, or merge, they must apply for permission from one of the four governing bodies (Federal Reserve, Office of Comptroller of the Currency, Federal Deposit Insurance Corporation, and Office of Thrift Supervision). Their request can be postponed or outright denied if any community group files a CRA protest. Lending institutions can of course fight these protests, but CRA investigations can take months and cost large sums of money.

Read the full story

The House of Representatives just voted down the $700 billion corporate finance bailout, despite earlier urging from President Bush to push the measure through. Look for in depth analysis from our very own John Berlau and the rest of the policy team as the day progresses. Read CEI’s roundup of the continuing finance crisis (and sign up for email updates) here.

NEW: John Berlau responds (and speaks!) in reaction to today’s vote. Updated post and audio clip here.