Wednesday, September 24, 2008

Impairing creative destruction

Last week we heard that Detroit was getting a bailout to the tune of $25 billion, and today we heard that it's a done deal that'll be signed as early as this weekend. US News & World Report gives the details:

  • Adjusted for inflation, the Chrystler bailout of 1980 cost $4 billion, while today each big three US carmarkers is getting $5 billion, with $10 billion left over for suppliers.
  • The law actually requires nothing of the automarkers. It mandates uses for the money (fuel-efficient technology and some other things), but money is fungible if they were already planning on spending that much money on whatever it was that it was earmarked for.
  • Chrystler is owned by a private equity firm, and is not a publicly-traded company. I.e., unless you happen to have a couple billion dollars, you don't have a stake in it.
  • Without the money, at least some of the automakers would probably go bankrupt. There is a very real chance that this is preventing or delaying the creative destruction that is necessary in a capitalist system.
  • "There's more aid coming." According to the article, Detroit is going to try again next year for another $25 billion.

What I implied last week – that Detroit got the bailout as a sort of consolation prize – turns out to be only 76% true:

It might seem like a stealth rescue, but the plan has been in the works for at least 18 months. Approval for the loans was first included in last year's Energy Independence Act. Earlier this year, the automakers sought a first installment of loans totaling about $6 billion. But the nationwide credit crunch severely crimped their ability to borrow, and besides, next to bailouts like $200 billion for Fannie Mae and Freddie Mac, a mere $6 billion started to seem unduly modest. So Detroit raised the ante to $25 billion, the most allowed under current law.

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