The Democrats’ GM Fiction

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The Democrats have decided to run in 2012 as the bailout party. It is an odd choice — the 2008–09 bailouts were deeply unpopular among the general public, and even their backers were notably conflicted about the precedent being set and the ensuing moral hazard. But Democrats have nonetheless made one of the most abusive episodes in the entire bailout era their economic cornerstone: the government takeover of General Motors.

The GM bailout was always an odd duck: The Troubled Asset Relief Program (TARP) was created in order to preserve liquidity in the financial markets by heading off the collapse of key financial institutions that had made catastrophically bad bets on real-estate securities — nothing at all to do with cars, really. GM’s financial arm, today known as Ally Financial, was in trouble, but GM’s fundamental problem was that its products were not profitable enough to support its work-force expenses. A single dominant factor — the United Auto Workers union’s extortionate contracts with GM — prevented the carmaker from either reducing its work-force costs or making its products more efficiently. And its hidebound management didn’t help.

Admirers of the GM bailout should bear in mind that it was the Bush administration that first decided to intervene at the firm, offering a bridge loan on the condition that it draw up a deeply revised business plan. President Obama’s unique contribution was effectively to nationalize the company, seeing to it that the federal government violated normal bankruptcy processes and legal precedent to protect the defective element at the heart of GM’s troubles: the financial interests of the UAW. It did this by strong-arming GM’s bondholders into taking haircuts in order to sweeten the pot for the UAW. The Obama administration also creatively construed tax law to relieve GM of tens of billions of dollars in obligations — at the same time that Barack Obama & Co. were caterwauling about the supposed lack of patriotism of firms that used legal means rather than political favoritism to reduce their tax bills.

Mitt Romney’s proposal for a structured bankruptcy would have necessitated considerable federal involvement, too, but with a key difference: The UAW contracts would have been renegotiated, and GM’s executive suites would have been cleaned out, placing the company on a path toward innovation and self-sufficiency rather than permanent life support. Which is to say, Obama did for GM what he is doing by un-reforming welfare: creating a dependent constituency.

Check out the whole article here.

Comments

  1. General Motors should change their name to China Motors. The CEO has moved so much of the operation of the company to China. Now 7 our of 10 of their vehicles are not made in the good old USA. If you google General Motors you will find a video of their CEO bragging about the relationship with China.

  2. Yep, I agree with you on this one. So much for saving US jobs when it is shipped out to China… a country who really has no respect for us at all…. sometimes I wonder…..

  3. Romney is slandered for wanting this and other companies to go through bankruptcy! A couple of points come to my mind. IF bankruptcy for the rest of us becomes the best way to get out of unpayable crushing debt and to reorganize why would it not have done as much for these companies?
    If the give away was such a success why has the bulk of GM moved to or is moving to overseas locations.
    Bin Laden is dead but so are 4 brave Americans and GM is living on foriegn soil.