The three automakers...

The three car makers, Chrysler, General Motors and Ford were all asking for an injection of cash from the government in order for them to survive. Their arguments are based on the government's plan of the bailout for the banks(Troubled Assets Relief Program, TARP, or the $700 billion bailout plan), that what they did for the banks, the government should do the same to the car makers. There is a problem with this argument though, as car makers are not similar to banks in terms of their importance to the economy. Yes, people are right to say that these three companies are the American dream, they were built and grew in America, they ought to be bailed out. In this entry, I will try to elaborate on the situation and express my views on it.

First of all, I would like to make clear that TARP was aimed for helping financial institutions by buying their toxic assets in return for some sort of liquidity to survive. For example, once the biggest insurance company in the world, AIG, was brought down to its knees by these troubled assets, CDS(credit default swaps), which are contracts between two counterparties. The buyer makes periodic payments to the seller, and in return receives a payoff if an underlying financial instrument defaults. Now, obviously quite alot of these financial instruments, most of them subprime mortgages or financial instruments repackaged but are related to them, defaulted and AIG was bounded by the contracts to pay these buyers of the CDS. Of course they didn't have this much cash to pay up and in the end had to ask for loans from the government for them to survive.

As mentioned in my last entry, I am a supporter of free market, so I should not be promoting these bailout plans and schemes. However, the situation then was so desperate, the US Treasury and the Fed had to come up with something unprecedented to rescue what was left of the financial system. With the banks, they are the backbones of the whole financial system and financial systems are the backbones of a country's economy. If any of these banks failed, other banks would act like domino effect and fall one by one, that is why the government had to step in. The reason for this effect is the notion of fear. Because banks were so scared of lending to each other, liquidity dried up and no one was able to have any money to pay up their creditors and hence more and more businesses are shutting down. When the Treasury decided to save Bear Stearns, the market thought that the worse was over, but when Lehman Brothers were left out to rot by the government based on the reason that the government had to show that they are not going to save everyone, and had to file for Chapter 11 bankruptcy, the market was so scared that banks tightened their lending even more. It is because of this inconsistantcy that leads to the market we have today. Then why was AIG granted loans for them to cripple on with their business, AIG was not a bank, but like everyone said, it was "too big to fail". These CDSs linked with so many other financial instruments and these instruments were from so many other sectors of the economy that, if AIG was left to fail, all these other business would have been directly affected and the government cannot allow that to happen.

Many people argue that the three car makers are also just as important to the US economy as all the other banks and since these banks were saved, the auto industry should also be bailed out. This point is not totally wrong as these three companies are very important to the American people in another aspect. They were the American people's dream of not needing to import things from other countries. Politicians will have an easier time passing bills to bailout the automakers than they did when passing the TARP. The population felt that the banks were in such bad position because of their greediness and their executives' salaries and bonuses were too high. On the other hand, because these car makers were products of the American people, they didnt mind as much if the government helped them out. What these people did not consider is that these car makers are in this position not mainly because of the credit crunch, as their businesses were in decline already before it started, they are in desperation because of bad management. Many people look at the disadvantages these three companies have when compared against japanese car makers, like unions in the US have more power over employers and so will demand higher wages and other benefits. But things like car trends, car designs, changing of consumers' tastes from high performance cars to environmentally friendly cars can be changed over time, but obviously the three car makers, especially General Motors and Chrysler, never made the attempt to compete with other car makers from Japan. This led to the decline in sales for them and eventually they go close to filing for bankruptcy.

Unfortunately, during the time of me writing this entry, the US government decided to grant loans to General Motors and Chrysler, worth a total of $17.4bn. This boosted the share market for a bit for the next few days, but the government has in turn, told everyone out there, that when a big company is going to fail soon, they will be there to save them no matter what the reason is. The current administration is managed by a Republican, and I understand President Bush's desire to hand over the administration as smoothly as possible, but if so many interventions happen in such short period, surely more will be following under Mr. Obama's new administration and the new Congress, which will be dominated by Democrats. That, will only be a bad thing for the market and the economy as a whole.