Should We Let GM Fail?
Kurt Brouwer November 12th, 2008
Politically speaking, a bailout of General Motors may be inevitable. But, bailing out GM would be a mistake in my opinion. It is almost certain that a bailout won’t work unless GM makes radical changes, including obtaining competent leaders, improving its product line and changing its bloated cost structure (see General Motors May Be Worthless). And, the likelihood of those improvements being made in a timely fashion is, roughly, about zero.
Here is an excellent piece on this topic by John Tamny, editor of Real Clear Markets. RCM is one of the sites I visit daily because it is a great source for articles and blog posts on financial and economic issues [emphasis added below].
Time to Pull the Plug on GM (Real Clear Markets, November 11, 2008, John Tamny)
…The latest losses at General Motors reveal yet again that it is the living embodiment of managerial ineptitude, and to insure that it no longer fails its customers while harming the well-being of Americans more broadly, it’s essential to let the firm die.
Many will of course blanch at the presumed loss of jobs that would result from GM’s death, but judging by the high level of unemployment in Michigan, it would be more realistic to say that GM’s continued existence under weak management has served as a capital repellant such that capital and jobs will continue to flee the state if GM is saved with the money of others. Worse, business history, from ships to farming to mining, shows that sectors reliant on government help are invariably weakened as opposed to strengthened.
The above is the case because businesses rarely fail due to a lack of money. Instead, poorly run businesses find it hard to raise money in the capital markets. Government money allows the architects of bad decisions to continue making mistakes that cause a company to be capital deficient to begin with.
This distinction is important considering the efforts of GM’s present management to secure more funds on top of the low interest loans that Congress recently approved. Were GM well managed it would have no need to run to the federal government, but because its management has proven time and again that it lacks ability, capital is correctly searching for better opportunities.
…So in a sense there’s a moral aspect to letting GM implode. Indeed, with companies not in the auto sector presently shedding workers due to a lack of funds, how could Obama or the outgoing administration take even more precious capital from the private sector in order to keep alive a firm notorious for its prodigious misuse of the money offered it?
The better answer for a capital-starved economy would be for the federal government to once again get out of the way, and in doing so, let funds flow to the very best ideas to insure as quick a recovery as possible. Importantly, if investment proves non-existent for GM absent government largess, it’s a certainty that foreign carmakers will step in amid the firm’s bankruptcy in such a way that job losses will be much less of a problem than is often assumed.
…In the end, the state of Michigan and the U.S. automobile sector are struggling not due to back luck, but precisely because they cling to a company that investors no longer value. And with GM shares near all-time lows, those with capital are stating loudly that so long as GM remains as is, the funds necessary for job creation will continue to flee.
So rather than waste precious capital in the naïve hope of propping up that which investors don’t value, it’s essential to let GM fail. Only then will a necessary change of ownership occur; the latter change the only solution when it comes to properly utilizing assets whose misuse is presently destroying a formerly great company, not to mention the economic health of the state in which it is headquartered.
Assuming GM does fail, we could certainly do something to mitigate the pain suffered by its employees and its retirees, but dealing with that issue can wait until we find out whether or not GM joins the bailout bonanza (see Bailout Bonanza for Bad Businesses — Will it ever end?).
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Unless the Feds wimp out, it looks from the news as of 12:38 PST
that they are going to do the right thng and not be enablers/codependants to GM.
At an open AA meeting someone told of a friend who only began to recover when she woke up from a blackout in jail and discovered that while in the blackout, she’d been in her car, and had been in an accident in the midst of her blackout and had killed someone.
She began working the 12 steps of AA in prison. That was what it took. If anyone had tried to ‘help her’ earlier, she’d have taken it as a signal to ‘keep drinking.’
We need to get more ex-rehab counselors into politics and finance.
And more CPAs, too.
Problem with CPAs is that they are quiet, sensible people and loathe the dirtiness of the political arena. Extroverts tend to go into politics and its rare to find someone detail oriented, patient, and capable of both the long and solitary hours needed to function as a CPA plus master the extroversion/public communication and networking skills needed for high political office.
Someone once defined CPAs as ‘the adults who clean up the messes left after adolescent financial tantrums.’
And the citizens pay for the hip boots, mops and cleaning supplies…
No need for reply from Kurt–he is surely busy.
I think it is all crazy! I am really hoping that the FEDs make a good decision on this one! Maybe they’ll read “Deadly Decisions,” by Chris Burns :).