no third solution

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A “Loan” is Still A Bailout

November 12th, 2008

There has been a lot (especially locally) of media coverage surrounding the fate of the Big 3, and General Motors in particular, which are on the verge of bankruptcy.

A lot of people are saying things like, “It’s not really a bailout. It’s a loan.” Nice try. It’s still a bad idea.

If they are getting money that nobody would freely lend, then it’s a bailout. If they are getting subsidized interest rates, then it’s a bailout. The end result is that by shielding these organizations from failure, the government will be incentivizing the very behavior that resulted in this dismal state of affairs. By giving these manufacturers a bailout, the government allows them to maintain prices otherwise unsustainable. By not holding them accountable to the market, they will be allowed to continue making overpriced cars that nobody wants to buy.

I did the math. In order to remain solvent, General Motors would need to triple its 3Q sales volume over the next two quarters, just to meet its obligations and keep enough cash on hand to pay the bills that come due.

By January, GM may not be able to “pay its suppliers, meet its loan covenants or cover health care obligations in its labor contracts.” Therefore, our “representatives” in Congress are hammering out a deal that would give our money to these very same companies. According to Nancy Pelosi,

Emergency assistance to the automobile industry would be conditioned on executive compensation restrictions, a prohibition on golden parachutes, rigorous independent oversight and other taxpayer protections to ensure that any companies that benefit from this assistance and not the taxpayers bear the full burden of repaying any costs that are incurred.

You see, the companies are going to bear the burden, not the taxpayers.

The entire point of a bailout is to reduce and/or eliminate a corporation’s financial duress! And this can only be done by making someone else accountable for its shortcomings. Where is the money coming from?

It’s either coming from taxes (i.e., from taxpayers) or its coming hot off the printing press and being loaned to these megalithic corporations, who will be able to spend the money into existence before prices have risen to accommodate the additional supply. In either case, individuals will bear this burden, not the corporations.

And what if the bailout doesn’t work? What if we’re forced to pump $50B or $100B or more into the industry (immediately and perceptibly reducing our current standards of living) and the companies still fail?

Who is going to bear that burden?

no third solution

Blogging about liberty, anarchy, economics and politics