December 16, 2008

Will the Bailout actually cripple the Big 3?

By Dan Riehl

The currently proposed car maker loan / bailout program could actually cripple the very same businesses government is trying to help. Briefly think this through. Two articles published yesterday are worth pondering.

Bill Kristol criticizes the Right via the New York Times for not proposing a deregulatory agenda for helping the Big Three.

Meanwhile, on the right, free-market analysts have explained that our regulatory scheme of fuel-efficiency standards is counterproductive. But despite the fact that the government is partly responsible for the Big Three's problems, the right hasn't really been stirred to enthusiastically promote a deregulatory agenda to help the auto companies. What excites it is mobilizing to oppose bailouts for unionized workers.

Meanwhile, Daimler AG is taking steps to manufacture lithium-ion car batteries internally, in a very real sense. It would be prudent to consider how these two events are linked and could produce negative unintended consequences which too often accompany any piece of bad legislation. There are several potential negative consequences in play here because of how government works.

Is Daimler's a good or bad business move? We honestly don't know at this point. As with any merger, acquisition, or business decision, the jury is still out. In a mostly free market world, Daimler has opted to take that risk.

Hypothetically, while much current conventional wisdom holds that EVs or Electric Cars and Hybrids represent the future, others suggest Hydrogen, or even other alternatives, will ultimately win in the market place. We honestly can't say at this point, as the market place has not weighed in. Now put that in context of currently proposed relevant bailout legislation and think of what might result.

For starters, a car maker would not be free to make such a move without government approval given current regulations and restrictions Congress would invoke for political cover. We're watching your money because we care about you!

Not only would the time lag and lack of transparency jeopardize what is ultimately a strategic and competitive business decision for a car maker, but both Hydrogen and Electric proponents will assemble lobbies and dollars to influence government regulators and the decisions they, not the car makers themselves, get to make. The market won't be the judge, instead some unknown regulator would. A bad decision, influenced by lobbying or not, could cost taxpayers billions and a car maker a competitive edge.

I'm not siding with Hydrogen or Electricity, or bailout or not here. I'm simply pointing out that options which would be best left to fight it out in the free market won't get that chance given regulations and restrictions Congress would seem to demand in exchange for the cash.

So, what's to be done? We need to see this as two different issues; and government should consider making their bailout decision as an objective financial analyst with over-riding economic concerns might.

If they believe that millions of potential job losses will result from a Big 3 failure, presenting a blow to the US economy we currently cannot abide, they need to step up and put our dollars in the hands of the business people who know their business better than anyone else. Certainly, they know it better than Congress does, most of whom have little or no experience in the private sector.

Alternatively, if for any reason they lack the confidence in those business people to make good decisions down the road, than the argument would be, no -- we're not going to "make this loan." That's simply common sense.

If Congress is ultimately going to decide for an auto bailout, they need to step up and make it on the merits of what is being considered -- not further intrude into a business for which regulation has traditionally been a serious challenge.

Will Congress display the courage of their seeming convictions and do the right thing on both counts above: lessen, or at least not increase regulations and controls that strip auto makers of their competitive edge; and infuse them with the cash they require to once again thrive? Or will they encumber them further while potentially driving business decisions that could go bust in the end?

Unfortunately, that jury remains out for the present, as well. Frankly, I have my doubts.