Auto Manifesto

November 24, 2008

Detroit Bailout

The American economy appears to be bracing to take a big hit if/when one or more of the Detroit 3 collapse. Millions of jobs, thousands of suppliers and the psychological impact on top of the financial impact will be a devastating loss.

If the government “lends” the companies tens of billions of dollars it will effectively amount to a grant if the companies fail. Not only that, it will shrink the tax base causing even more pain.

Such a loss would also be a drag on the pace of innovation and reduce consumer choice as overcapacity is reduced and supply is brought more in line with demand. The remaining companies will be stronger in the long term. This blog is supposed to be about automotive technology, but the financial events of late have had a serious impact on future direction and developments.

It likely isn’t whether or not one or more of the Detroit 3 will fail. It’s when one or more will. Chrysler and GM are likely to run out of cash. Ford may be in a slightly less precarious position due to having exercised their credit lines prior to the crisis.

So the real issue before Congress is not how the companies will repay any government “loan”. It’s how long they can survive until they fail, and will that be after an economic recovery of sorts so that the economy can better absorb the failure rather than further compound our present banking crisis.

It mostly depends on how prolonged and how deep of a recession we have.

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