Logical Traps in the Bailout Deal

According to the NYT the forecasting firm CSM Worldwide thinks that with or without a bailout Chrysler will at best go into a "slow wind down" over the next several years. That would lead one to conclude that it would be silly to add any money to a presumed failure. They suggest that Chrysler, while having some viable brands simply does not have the scale to continue to compete. In my mind a second objection to offering any money to Chrysler is that its two major investors (Daimler and Cerberus partners) are different than a normal shareholder owned entity. The investors thought private capital could solve the company's long term problems. They were wrong. Now, we are being asked to backstop their wrong decision. If anything Chrysler and its investors should be allowed to pass on. Perhaps some of the parts of the company can be picked up or reworked by other companies. But the rest should be allowed to fail.

CSM also projects that auto sales next year will drop by about 10% (in addition to the roughly 25% that they dropped this year) - the numbers go from about 16 million units in 2007 to 11 million in 2009. That suggests that whatever is done needs to think about ultimate capacity of the entire industry. The conclusion of CSM is that the other two might be able to survive.

But then comes the wise questions from Mickey Kaus. He points out that in typical legislative wording the "bridge" financing can be recalled by the car czar if in the czar's judgment the individual companies have not arrived at a plan for long term viability. What confuses Kaus is just how would the government recover its investment? Presumably the money which might go out to the companies fairly soon will have been spent before the czar has a chance to make the viability determination. The only logical conclusion is that the bill which was agreed to in principle yesterday is the down payment for a much larger involvement in the auto industry.

This sounds a lot like a bridge loan to nowhere. But then Congress has a long history of doing these kinds of projects. As opposed to the one in Alaska which was eventually recalled, this one involves, in the first instance, a huge amount of money.