Now that the Great Auto Bailout of 2009 looks successful, folks are elbowing each other both to take retroactive credit and to revive the debate over whether corporate bailouts in the past automatically mean corporate bailouts in the future. Which, of course, we want to avoid. That would be a no-no, the oft-cited "moral hazard," which encourage companies to assume excessive risk because they know Uncle Sam will catch them when they fall.
Have the carmakers really done anything risky recently?
The argument generally starts with the implicit assumption that both automakers and banks were guilty of indulging in those hazardous morals. But let's unpack that for a moment.
The finance sector grew fat on a steady diet of deregulation in the 1980s and 1990s. As one asset class after another was transformed into an investment bubble, the banks joined in an orgy of risk. "Too big to fail" sort of missed the point -- institutions like AIG were simply too hungry to have their risk appetites reined in.
You can't, however, look at the auto industry as being made up of risk gluttons who naturally assumed that the government had their back. True, Chrysler had been bailed out once before. But that was decades ago, and that bailout, by TARP standards, was fairly modest in scale.
If anything, the auto industry wound up being bailed out because it had succeeded in accounting for a big chunk of the U.S. economy without rolling the dice. Even when things started to look bad in 2005, Ford (F) was taking to the debt markets on its own, figuring that if it couldn't survive, it would join plenty of other carmakers in U.S. history that had gone out of business.
SUVs will set us free
In late 2008, as the global economy was tanking, General Motors (GM) -- which had been losing billions since 2005 -- was still counting on a halfhearted restructuring and some targeted Department of Energy plant-retooling loans to keep it afloat until a revived truck and SUV market would restore its fortunes.
Goldman Sachs (GS), meanwhile, was deep in the throes of shorting its own mortgage bets because it knew that if AIG failed, threatening Goldman's existence, the Feds would take action to backstop the system and keep the dominoes from falling. Including Goldman Sachs, the falling domino of last resort.
Different strokes for different folks
Still, the idea that the banks and the automakers were engaged in the same morally hazardous games continues to get traction. This is from Fox Business -- and by the way, the commenter isn't a Tea Baggy right-winger but the head of the Center for Economic Policy and Research:
Some believe policy makers let banks and other companies off the hook by not taking enacting harsher penalties that would serve as deterrents for taking risky behavior in the future.It gets worse. This is Douglas Holtz-Eakin, who ran the Congressional Budget Office and used to work for John McCain:
[Dean] Baker suggested a number of steps the government could have taken given its leverage, including wiping out shareholders, forcing bondholders to take a haircut, removing well-paid management teams in place and forcing companies to commit to fundamentally changing their risky behavior.
"Moral hazard is real," said Holtz-Eakin. "If you have large manufacturers who perceive themselves to be important to America, they may be more risky knowing the government has a backstop. You're not literally thinking, 'I'll just let the government pick up the tab,' but you're less prudent."Actually, if you perceive yourself to be "important to America," I'd argue you're less likely to engage in risky business behavior -- and that's pretty much what the automakers did, although they certainly didn't manage their businesses very creatively. They plodded along until they fell down and couldn't get up.
The catastrophe came from banks who consider the needs of fluid international capital flows above, you know, jobs. Look no further to find a true repository of moral hazard and an industry that will need to be bailed out again long before another carmaker looks for a handout.