Tuesday, September 9, 2008

What's Good for General Motors...

The US government is being pressured by the "Big 3" to provide $25 billion in low interest loans (read: lower than what they can get from the banks or capital markets).
DETROIT — The auto industry this week begins a hectic push to get Congress to fund $25 billion in promised loan guarantees. Some in the industry even hope for an additional $25 billion...High gas prices and declining home values have pushed auto sales down 11.2% this year, straining cash reserves to finance new technologies. The housing collapse disrupted credit markets. Low-interest loans thanks to government backing would save millions for struggling automakers. Bond ratings deep in junk territory are forcing them to pay upward of 20% for credit.
An analyst from the unfortunately named "Gimme Credit" is being quoted as saying that we risk losing them without such a loan: "I wouldn't say they automatically go to bankruptcy without the loans, but it's really going to be touch-and-go if they don't get them."

This is at a time when the US government is going to run an even larger budget deficit than expected:
CBO estimates that the deficit for 2008 will be $407 billion, substantially higher than last year’s $161 billion. As a share of the economy, the deficit is projected to rise to 2.9 percent of GDP this year, up from 1.2 percent of GDP in 2007. That 1.7 percentage point increase as a share of GDP is roughly evenly split between a 0.9 percentage point decline in revenue relative to GDP (reflecting the impact of lower corporate tax revenue and the rebates enacted as part of stimulus legislation this year) and a 0.8 percentage point increase in spending relative to GDP.
I can't imagine what would happen of these three firms really went bankrupt.

Still, there's
a few things to consider:

What message does this send to other large industries that find themselves in dire straits (what economists call a "moral hazard")?

What message does this send to other countries, who we routinely criticize for subsidizing their industries?

What message does it send to the people who work at the Nissan plant in Tennessee or the Mercedes plant in Alabama when we take their tax dollars and give it to their competitors because their corporate headquarters happens to be located on US soil?

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