Dec. 17, 2008
Do We Need A Detroit Bailout? Really?
Declan McCullagh Assesses Claims Automakers Bailout Is A "Must-Do"
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Auto Industry Bailout Battle
Bob Schieffer spoke to Sen. Carl Levin, Sen. Sherrod Brown and Sen. Bob Corker about whether or not the White House should take action to bailout the American Auto Industry.
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Our esteemed representatives in Washington are telling us that, without a bailout of Detroit auto makers, economic catastrophe looms.
Members of what really should be called the Bailout Party predict that, as Sen. Carl Levin, D-Mich., put it, saying no to the Big Three would "be felt throughout our economy and in every community across this country." Another senator from Michigan, Debbie Stabenow, claims that 2.5 million people would lose jobs.
Evaluating the Bailout Party's claims and track record is important. If its officials have been correct so far, the case for a $14 billion check drawn on the U.S. Treasury becomes more compelling.
Let's consider the Bailout Party's arguments during the legislative debate over the Troubled Asset Relief Program, or TARP, which already has proven to be poorly-managed.
President Bush said in September that without a Wall Street bailout, the country would experience higher foreclosure rates, job losses, closed businesses and "a long and painful recession." Guess what? Even after doling out billions of dollars, we still have all of that, including rising unemployment, a painful recession, and a much higher deficit.
Rep. Barney Frank, the Massachusetts Democrat who provided political cover for Fannie and Freddie's excesses, echoed Bush. Frank claimed that, absent the TARP legislation, investors will "see further erosion in the value of their stocks" and foreclosures will "continue to increase." Someone should tell the good congressman that the value of the S&P index has eroded by 25 percent since mid-September, and foreclosures are continuing to increase.
Frank also claimed that credit markets are "locked up." This is what other Bailout Party officials were alleging at the time; Treasury Secretary Henry Paulson said "our credit markets froze" and Fed Chairman Ben Bernanke said that "households and state and local governments have also experienced a notable reduction in credit availability."
Few members of the media questioned those claims, even though they provided the primary justification for the TARP law. It turns out that those statements were not, to put it delicately, entirely truthful.
Exhibit A in the case against the Bailout Party is a report published by the Federal Reserve Bank of Minneapolis. It evaluates these claims: bank lending and so-called commercial paper declined sharply; bank-to-bank lending evaporated; and rates rose to unprecedented levels. The surprise is that, using the Fed's own data, the authors conclude that those "claims are myths" perpetrated by politicians and an uncritical press.
An example can be found in the New York Times' report last month about what it described as a "frozen consumer credit market." Yet the Federal Reserve said five days earlier that "consumer credit increased at an annual rate of 1-1/4 percent in the third quarter." How can an increase be "frozen?"
It's true that credit may be more difficult to obtain than a few years ago. Would-be borrowers with poor credit scores may not be able to secure a low interest rate mortgage. Some businesses are having a harder time getting loans. Consumers are receiving fewer credit card solicitations, though most of us would consider less junk mail a plus.
This is a natural response to what was probably history's largest credit bubble, and a sign that the bubble's excesses - "If you breathe, you qualify for a zero-down mortgage!" - are being purged. The market is healing itself. (Meanwhile, in this purportedly "frozen" credit market, Bank of America is offering an "introductory 0% APR" for over a year.)
Exhibit B is a report published last week by Celent, a financial services consultancy. It picks up where the Minneapolis Fed's report left off, and concludes that politicians and bureaucrats appear to have been fibbing to the American public.
It notes that household credit is very close to its all-time high, that short-term credit has become cheaper in the last year thanks to lower interest rates, and that bank lending is at or close to a record high. It says: "The juxtaposition of policymakers' statements regarding the state of the credit market are both puzzling and troubling. A variety of fundamental assertions about the state of the credit industry in the U.S. are not supported, and in many cases flatly contradicted, by the available data. In most cases, these very data are being published by the organizations led by the policymakers in question."
This may sound arcane, but it's really not. If this had been well-known three months ago, the TARP bailout may not have passed. It would have taken only 10 percent of the House of Representatives switching sides for the bill to fail; instead, they were egged on by what Rep. Brad Sherman, D-Calif., described as threats of martial law.
This time, the Bailout Party wants to bail out General Motors, Ford, and Chrysler at taxpayers' expense. Anyone inclined to believe claims of economic Armageddon absent a billion-dollar payday should take a close look at the outright falsehoods spread the last time around.
Declan McCullagh is the chief political correspondent for CNET. He previously was Wired's Washington bureau chief and a reporter for Time.com and Time magazine in Washington, D.C. He has taught journalism, public policy, and First Amendment law. He is an occasional programmer, avid analog and digital photographer, and lives in the San Francisco Bay area. His e-mail address is declan.mccullagh@cnet.com
By Declan McCullagh
Copyright ©2008 CNET Networks, Inc., a CBS Company. All rights reserved.
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See all 66 CommentsReally?
Consider the other White House "musts":
We must invade Iraq to remove WMDs and prevent a mushroom cloud over America
We must invade Afghanistan to get Osama
We must give tax cuts to millionaires and billionaires to ensure a robust economy
We must have a $700 Billion TARP Bailout or we''ll all die
Old school: Crying "Wolf" -- New School: Crying "Bailout"
When will "we" learn from these "must" blunders?
Got a little bias do you Declan?
"The bipartisan enthusiasm for bailouts shows how the two major political parties have reshuffled themselves. We now have the Bailout Party and the No Bailout Party (populated by some conservatives and libertarians with help from the AFL-CIO and economic populists)."
Both George W. Bush and Nancy Pelosi are members in good standing of the Bailout Party; it''s a not a Republican-Democrat thing. If I''m biased, I''m biased against unnecessary bailouts.
Just as the horse-drawn carriage industry collapsed as it was replaced by automobiles, it is time for new alternative energy auto startup companies to replace the antiquated and bloated big 3. Don''t bail out the big 3, replace them if they can''t adapt. Fill the road with Teslas.
Posted by hitoyou11 at 12:38 PM : Dec 17, 2008
Now now! Let''s put away the swastika here! The FACT is simple, OUR NEW PRESIDENT wants this done and we should give the man what he says he needs to turn this mess around. The fascist who got us into this mess should NEVER be listened to... EVER AGAIN!!
The UAW employees and CEO''s must make concessions in order for the "loan" to ever be repaid, otherwise we are just throwing our tax dollars away. Not all Americans own automobiles, so why should everyone be punished?
It''s all about National Security. Period!
Greed over principle = GOP of late.
What ever happened to my party oh wait the neocons took it over.
They can have it.
This is what we need right now; actual facts as opposed to rhetoric and lies. Many of these politicians know that you tell the truth, yet they deny these facts publicly. They don''t want to further reduce their influence (which is what they''re all about).
I appreciate your candor in this matter. Don''t let the many ignorant posters dissuade you from continuing to publish this type of information.
Keep it coming, we need more people who care about the truth.
P.S. It''s great that you actually posted a comment in regard to your article.
Second, is he putting G.W. Bush in the so called ''Bailout'' party, what bout McCain, since he was for it too?
I''m not saying there is any easy answer to this crisis, but the author of this article is a MORON!
Posted by ghostfighter at 04:39 PM : Dec 17, 2008
Wow!! Ghostfighter you just demonstrated that you''re just not the bright are you?
The "Bailout Party" are those politicians (Republican and Democratic alike) that continually argue that the federal government should provide cover for big business when ALL EVIDENCE and available data clearly demonstrate that big business does not exist to "help" consumers.
Look at the TARP money. Congress gave billions of dollars to banks to "help" consumers, and guess what, the banks didn''t spend the money the way congress expected. Not only that... No one even knows what happened to the money that was provided.
Wow... who didn''t see that coming. Who actually expected the banks to provide money to consumers? We gave money to the very people that created the problem, with absolutely no requirements.
The overwhelming level of incompetence on all sides is mind boggling.
If it were such a sound loan program, our established financial institutions (buoyed by TARP) would be standing in line to float these loans to the big 3. They are not, so it looks like a very unattractive loan program for those with loan sense.
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Posted by timothyone
No, I think his name stands for "someone with at least a lick of common sense".
There is absolutely no need for this bailout BS. It is a fleecing of the taxpayer. You are falling hook, line, and sinker for this one just like the Iraq fiasco.
All the bailout has come to is a quid pro quo for the investor class. IT is NOT going to help average americans one *** bit in the long run. If you understood anything about history or economics you''d understand why we cannot afford to keep handing over public money to rubes and scoundrels.
Second, is he putting G.W. Bush in the so called ''''Bailout'''' party, what bout McCain, since he was for it too?
I''''m not saying there is any easy answer to this crisis, but the author of this article is a MORON!
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Posted by nolalou
An unsecured loan given away to an unprofitable business without some sensible covenants IS, for all intents and purposes, a bailout GRANT, not a loan. For a loan to be a loan there has to be a reasonably good probability for it to be repaid, otherwise it''s just a deadbed gift.
Unless there is a massive, painful restructuring at all levels of the Big 3, there cannot be any reasonable expectation that they will ever be profitable i nthe long run.
It is YOU sir, who is the unsophisticated moron here.
timothyone: If you think I''m a "right-winger," you may want to check the column archives for what I wrote on election evening. The first sentence: "The Republicans deserved to lose."
avoice: Thanks for the some common sense.
nolalou: I didn''t mention McCain because he''s not really relevant to the current debate. Paulson is, so I mentioned him.
Let''s just put them all in chapter 7, sell off all their assets( of course there won''t be any buyers)layoff all the workers(That gets rid of the UAW)The workers won''t get their 95% unemployment, the creditors will be lucky to get pennies on the dollar, the money owed parts suppliers they can kiss that goodbye, warranty''s on cars null and void (no dealers they''ll all be out of business to).And we''ll still be paying for the bank bailout, which has done nothing for the economy and how many banks even after the bailout are going to go under? kiss those tax dollars goodbye.
To all you in the Congress which by the way has the lowest approval rate in the history of this nation..I salute you and I send an open letter to anyone or all who feel the way l do about this No give a *** Congress and about all their moaning and groaning.. You talk big but say nothing.. You attach raises to important bills this nation needs for your benefits or for the benifit of your friends like the justices raises.. You know l speak the truth.. You make sure you have the best of retirements, hospitalization, and vote yourselves a raise when you need it..but for God''s sake do not give 2 million people about to lose their jobs with the American Auto Industry a hand. You are about to do away with them.. I pity you.. you will eventually get your turn..somewhere .. Carma is for real.. Your afraid of the Unions who really are the reasons for the Auto Industry going down.. and you will not even try to help your people to keep America American and Strong.. Just who do you represent and what drum do you follow..??
tincup356: By Bailout Party, I was referring to a subset of both major political parties. Citing Bush and Democrats as members should be a hint. Follow the link in the column for background.
wontontiger: Thanks for your kind words! I plan to keep doing the same in future columns.
Like, okay they say they want to see car manufacturers succeed, but then what about manufacturing in general - where do they stand in terms of that whole idea that it was something we were going to delegate to developing countries with cheaper labor forces? Are we still going forward with the idea of having an information economy, or are we moving forward with a new idea of having more of a mixed economy that is going to include a revival of manufacturing?
And then what about our whole relationship to debt and consumerism? What is it we''re ideally supposed to be doing right now - have we (collectively) been accruing too much debt that we need to be paying off, or are we wanting to acquire more debt so we can go out and buy more stuff? There''s kind of mixed messages being sent, don''t you feel - like that credit was too available, but also that credit is frozen . . .
I don''t know how to explain it better - it just feels to me like we''re lacking a clear direction of where we''re headed (?)
What''s wrong with this picture?
The simple answer would be to drop the average cost of a car $2,000 to break even and more than $2,000 to make a profit.
The simple answer would be for everyone who works in the car industry, from top to bottom, to take a 2% cut in their income to keep the industy afloat and have jobs to go to.
The simple answer is that nobody is willing to do that. They want a "bailout". A bailout images bailing water out of a boat before it sinks.
The simple answer is to fix the holes in the boat. As long as there are holes you will have to keep bailing out over and over. Cutting costs will fix the holes. Cutting salaries a small percentage will cut the costs.
What''s wrong with this picture?
To let these slimy, anti-American wacko Republicans take this away is just continuing the sad, sorry disaster that is privatization and off-shoring of jobs.
Unions = BAD LOW PAYING JOBS
Bankers = GOOD HIGH PAYING JOBS
HAHAHAHA. We do not need a UNION in the U.S. We need people thay know how to work. That is not the UAW.
And according to the airlines they still haven''t returned to profitability.
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