Government Motors discussion on Fox News Sunday (continued)

In an earlier post I attempted to correct Dr. Austan Goolsbee’s incorrect and inflammatory statements about President Bush.I would like here to add my views to one additional question on the auto industry discussion on this morning’s edition of Fox News Sunday.

Host Chris Wallace moderated a discussion this morning with:

  • Dr. Austan Goolsbee, Member of President Obama’s Council of Economic Advisers and chief economist on the President’s Economic Recovery Advisory Board;
  • Senator Richard Shelby (R-AL), ranking Republican on the Senate Banking Committee;
  • Thayer Capital Chairman Fred Malek; and
  • Google CEO Eric Schmidt.

I offer kudos to Mr. Schmitt for his thoughtful responses throughout. And the hero of the discussion was Mr. Wallace, who in his questions demonstrated a deep understanding of the actual options faced by policymakers, the choices they made, and the serious consequences of those choices. I thank him for trying to elevate the policy discussion this morning.

Here’s Chris Wallace asking Fred Malek whether the Bush Administration have provided loans before a Chapter 11 filing:

WALLACE: Let me bring in Fred Malek, though. The President says that he has no interest in running businesses, he’s just trying to save them from collapse and get out. [plays clip of President Obama's press conference] Fred Malek, in the middle of a financial crisis, in the middle of a terrible recession, could the President really let General Motors and Chrysler, AIG and Citibank go under?

MALEK: … I think what you have here, is you have two different situations. I would label the injection of capital into the financial institutions, stabilizing the financial systems, that’s a war of necessity. You had to do that. But, getting into General Motors, saving General Motors and then taking them into bankruptcy, that’s a war of choice, it’s the wrong choice.

Senator Shelby later commented on this same question, as did Mr. Malek again:

SHELBY: First of all, I advocated last fall that General Motors and Chrysler’s best bet would have go to Chapter 11 then, it would have saved a lot of money, not a political restructuring like what’s happened, where the bondholders have been sacrificed, the unions have carried the day.

MALEK: I agree with Senator Shelby. Look, we’ve had for decades we’ve had a bankruptcy system in this country that has worked well, and has fueled the free enterprise system in a positive way. It is impervious to politics because it’s run by federal courts. Now, what have you done? You have taken it out of the judicial and you’ve turned it over to the executive, and I think you’ve injected politics into it. Senator Shelby is right, there was no sense in putting billions of dollars in and then declaring Chapter 11 afterwards. They should have let them go into bankruptcy and let the courts work it through. …

Mr. Wallace then asks the critical follow-up question:

WALLACE: Let me just ask. Mr. Goolsbee, if at some point, either the Bush Administration back in the fall, or you guys when you took over, had just said, go into Chapter 11, we’re not going to take an ownership stake, we’re not going to give you 50 billion dollars, what would have happened?

The answer is that GM and Chrysler would have liquidated. Neither GM nor Chrysler was ready for a complex Chapter 11 filing. Had the entered the Chapter 11 process in December or January, the firms and every outside expert told us that the restructuring would have failed and the firms would have liquidated. We estimated this would have resulted in about 1.1 million lost jobs.

Mr. Malek was right, the loans to GM and Chrysler were a choice, but they were not the choice that he and Senator Shelby thought we faced. The choice was loan or liquidate. There was no feasible Chapter 11 option available at the time. (GM may fail even now, after they have had five months to prepare for Chapter 11.) Mr. Schmitt frames it correctly:

SCHMITT: It seems to me that what choice did we have except try to save General Motors, given the roughly million jobs that were related at a time of incredible pain and job loss. So if you think about it , the choice was bankruptcy, the supply chain goes away, the loss of the American automobile industry, or a band-aid. It needs to be a band-aid, and it needs to be something we get out of.

12 responses

  1. Why were GM and Chrysler unprepared for a Chapter 11 filing in December 2008? It was obvious for months earlier that some type of bankruptcy filing was inevitable.

    From the layman’s point of view, GM and Chrysler management intentionally drove their companies to the brink of liquidation to induce a government bailout.

  2. Slightly off topic, but one of Goolsbee’s comments from Fox News Sunday (full disclosure: we were classmates in college and I know he is a decent guy) is really sticking in my craw. When talking about the fact that unemployment is now at 9.4%, much higher than the 8% forecast by the Administration in their budgeting, he claimed that nobody in the private sector saw this coming. This is a flat out lie. There were numerous private sector analysts saying that the Obama forecast was far too positive on unemployment and that it could easily reach double-digits. The criticisms of the bank stress tests were roundly criticized on this front as we were already passing the base case and the worst case on the unemployment number as they were being released.

    It is getting very frustrating listening to the standard Obama Administration line that “Gosh, we’ve just been deal a bad hand by the evil Bush Administration, so don’t criticize us.” Nobody is expecting Obama to turn the economy around in three months, but it is reasonable to be skeptical of their budgetary approach when they are presenting a high-deficit plan that is already based on optimistic (and now out-of-date) numbers.

  3. I’d like to ask a really stupid question.

    It’s my understanding that one of the major liabilities that GM (and Chrysler and Ford) face is the benefits they are required to pay to their retirees. I’ve seen it claimed that GM has 90,000 or so active employees, and pays benefits to 500,000 retirees (and, I guess family members of retirees).

    Rather than shovelling money at these companies and then more or less nationalizing them, couldn’t the federal government simply have taken over their retiree benefit plans, thereby removing a massive cost from them, and putting them on a more level playing field with foreign (and newer domestic) competitors who don’t have such massive retiree benefits liabilities? It would have been expensive, but I imagine less expensive than what’s actually going on now.

    I know I’m grossly oversimplyfing the question, but it seems to me that providing benefits to retired people is something that the federal government actually has a lot of experience in, whereas running auto companies is not.

    What am I missing?

  4. @James D: Not at all a stupid question. Yes, the government could have relieved GM of its obligations to its retirees. It would have required new legislation, but the basic mechanism exists, and has existed for a long time (see e.g. ERISA/the Pension Benefit Guaranty Corporation).

    As to why they didn’t do it, I think that the priority was to keep GM going and avoid a liquidation and massive job losses when the economy was already reeling from the Wall Street carnage. Also, relieving GM of its obligations to its retirees would probably not have been enough to keep GM going in the face of rapidly shrinking sales.

  5. This is a great site, thoughtful questions and comments. Plus great “inside baseball” observations and analysis. Bravo!

  6. Vlad discussion of Goolsbee is interesting. When an academic goes to the Beltway, he will likely leave his diploma and concience to join the political fray.

    Summers and Romer have made the most outrageous statements, trying to leverage their qualifications from academia for crass political reasons to support the administration’s political aims.

    This is perhaps not true for everybody. It is very evident in this administration. You cannot take these guys seriously. You have to check and cross check everything they say.

  7. IMHO, it’s still all about votes. Michigan is a freaking shell of a state, but it reliably delivers democrats to congress thanks to huge GOTV drives. GM goes down, and votes go away. Am I too cynical?

  8. GM and Chrysler bankruptcy(s) and filings of Chapter 11 were part of the actual plan from the start in my opinion. First however, a bridge had to be built to get to Chapter 11 and the infusion of $$'s was needed quickly or these companies would have not been going into Chapter 11, but Chapter 7 which would have destroyed the country. America did not need to go further into a recession that was already bad. Any future growth would have taken a couple years longer had these companies went Chapter 7. I believe that it was the right choice to provide the bridge loans to these companies and it will be rewarded with vehicles that get huge sayings in gas efficiency and will result in huge reductions in foreign oil purchases, the ultimate goal for the country.

  9. You will be greatly surprised but the Republican administration enjoys a huge success in the Detroit area for membership. Alot of UAW members are Republican, contrary to what is said in the media. Rep. McCotter is a Republican and continues to be re-elected and is a very knowledgeable congressman in a district with a strong UAW presence. Don't believe that the UAW is "Democratic strong" because it is not.

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