Offer the Big Three Automakers a Helping Hand, with Conditions

Detroit’s Big Three automakers need a helping hand. We ought to give it to them — but with tough conditions attached. At the moment, all three companies desperately need cash to keep their operations going. Direct federal loans or federal guarantees for new private loans make sense. But loans or loan guarantees will only work if the government requires Chrysler, Ford, and GM to take cost-cutting measures that will make the firms profitable in the long run. In addition, any assistance program must stipulate that federal taxpayers be given a claim on part of the appreciation in the three companies’ share prices if or when they become profitable.

Giving loan guarantees to an auto company – with conditions – is nothing new. Back in 1979, a federal loan guarantee was given to Chrysler based on the principles just mentioned. The plan worked. With help from the loans and under the pressure of tough loan requirements, Chrysler eventually emerged from its difficulties as a smaller, lower cost, and better managed company. Federal taxpayers ultimately earned a good return on the guarantees.

Government guaranteed loans are a better choice than a Big Three bankruptcy. Bankruptcy would produce unpredictable and incalculable harm to a large and vital part of the U.S. economy – our already weak manufacturing sector. While bankruptcy often works well, it is doubtful how well it could work in this case because of the very nature of the auto industry. A car manufacturer has a long-term relationship with its customers. Consumers who are thinking about purchasing a car are not buying a product they expect to consume immediately or within a couple of weeks. Most of us plan to use our cars for several years. We hope that over the expected life of our car, its warranty will be honored, parts will be available, and trained mechanics will be around who can take care of our vehicle. Under these circumstances, an auto company’s potential or actual bankruptcy can severely and permanently reduce the demand for the company’s products. Consumers who are pessimistic about the survival of the firm will insist on big price discounts, making the ultimate liquidation of the company more likely.

It is certainly true that reorganization of an auto maker under the protection of the bankruptcy laws could produce a more efficient, healthier company. It seems more likely, however, that a standard bankruptcy will needlessly kill a company that could survive and ultimately thrive with a restructuring loan. If GM should disappear, the country would also lose hundreds of thousands of jobs, both at GM and at firms that produce parts for GM cars. Auto producers would spring up or expand to fill the hole in the car market left by GM’s disappearance. But it is not clear whether any of those firms will produce cars here in the United Sates.

By placing tough conditions on any loan guarantee, like the conditions that were part of the 1979 Chrysler rescue package, the federal government can help speed up cost-cutting and rationalization in the auto industry. Such a package would spare hundreds of thousands of workers from the joblessness and disruption that would follow the liquidation of a big American company.

The controversy over offering help to the auto industry is a bit surprising in the context of massive bailout packages for the nation’s banks and insurance companies. Up to $150 billion in federal credit has already been provided to a single insurance company — A.I.G. — because of the failure of a financial product that almost no voter can either describe or understand.

One explanation may be that many of us think we understand the auto industry and its problems. Fewer of us are confident we understand the problems of A.I.G. or the economy-wide implications of its collapse. Critics of the auto industry think the country would be better off if one or all of the Big Three were forced to go through the wringer of bankruptcy. Unfortunately, it is far from clear whether any of the companies would come out of bankruptcy reasonably intact. Thus, it makes more sense to offer loan guarantees – with tough conditions – in order to avoid the unpredictable and possibly calamitous fallout from a Big Three bankruptcy.