The Forgotten Bailout: $25 Billion to Detroit Falls Short

The United States Congress approved a $25 billion loan to General Motors, Ford and Chrysler last week in the hope that this capital infusion would allow the maligned companies to reorganize production toward fuel-efficiency. This sum – in addition to the allotments of previous energy bills and other programs – may delay the inevitable, but it fails to address the real problem facing American companies, according to BusinessWeek.

The Detroit Big Three went to Capitol Hill on bended-knee to ask for a bailout package which they claimed would allow them to compete with Japanese automakers. They charged that the drive toward fuel-efficiency was unforeseeable – the Japanese managed to push efficiency standards a decade ago – and that their dire finances were in need of government intervention.

In a perfect world the Big Three would in fact use this funding to refurbish and retool existing plants and start producing smaller, more efficient vehicles. In a perfect world they would do this while employing more American workers. In a perfect world the American people would have stable incomes and lines of credit with which to purchase and finance these cars of the future.

The world we live in is far from perfect.

The underlying problem which is ravaging the entire industry – Japanese companies have witnessed shrinking sales as well, though not to the extent of U.S. manufacturers – is that consumers cannot afford their typical levels of consumption. Furthermore, the term “sub-prime” was not commonplace until the mortgage crisis of the last year. But car buyers had been taking out large loans in spite of their poor credit histories for years. There are dozens of discount dealerships scattered around most metropolitan areas. The phrase “No credit? No problem!” is often used in advertisements to entice customers who would have had no available finance options a generation ago.

Just as home-ownership boomed during the past five years, car-ownership had been increasing for decades. Automakers offered thousands of dollars in incentives to convince people to buy new car models. Auto sales, which began slipping a few years ago, have plunged to historic lows. Automakers have not made significant annual profits in several years, and their prospects for the future do not seem any brighter.

When you are in the business of selling cars, you simply cannot push a product if the consumer base has no disposable income. The combined mortgage, banking, credit and financial crises have led to strict loan conditions, making lines of credit difficult to come by. They have led to hundreds of thousands of layoffs, further reducing the amount of income available in the marketplace. When combined with the fact that real wages in the U.S. have been stagnant for years, you have a recipe for disaster.

When Congress agreed to the terms of its Detroit bailout, it did so under the assumption that the automakers would actually use the money for its intended purpose – instead of squirreling it away somewhere as has been the case in the past. Congress looked at the conditions and realized that the Big Three could not afford to make the necessary improvements to compete with Japanese, Korean and European brands. However, Congress overlooked the most important fact: The American people cannot afford to buy cars anymore, so it may be “too little too late” for the Big Three regardless of how much taxpayer money is poured into their coffers.

Source BusinessWeek:

Long before the term "subprime mortgage" entered the American language, Detroit knew that as each decade passed more and more of its potential buyers' credit scores were starting to suffer. In 1975, if someone walked into a new car showroom with horrific credit, there was little any finance manager could do to secure him a new loan. By the late 1980s, lenders were more sympathetic to those who had fallen on hard times; with the proper down payment and a good story about their past financial woes, many with poor credit had a good chance of getting financing for their new car. And by the mid-'90s, an entire industry had sprung up to deal with car buyers with seriously challenged credit scores. ... But had anyone really been looking for the truth about Main Street's economic squeeze, it was there in plain sight: The continuous suicidal incentives Detroit has offered have been a desperate roller-coaster attempt to lure financially strapped families into its dealers' showrooms, and that alone told the story. In the past, in healthier historical cycles of new car sales, the record-breaking years for the auto industry in 2000 and 2001 should have led to a natural increase in automotive replacement demand by 2005. But no such thing happened; instead, that summer GM had to offer Employee Discounts for Everyone plus rebates to move the market at all.

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