The team that plans to bring the economy out of the recession is a bit like a traveling circus. Once every few days, it stops on Wall St., the metaphor for all of the troubled banks, brokerages, insurance companies, and pension funds. Then it rolls off to Washington or Detroit, depending on where the next announcement of new stimulus programs is to be made. Over the last several months it has bounced from place to place and there may never be an end to that.
Currently, the Administration's attention is on The Motor City where unemployment has hit 22%. Steve Rattner, a former media industry investment banker who has somehow become the Treasury's point man for the car business, says that GM (GM) and Chrysler will need more money than had been previously forecast. His comments are those of a man driving into the future while looking into the rearview mirror. Once U.S. light vehicle sales dropped over 30% the first two months of the year it was clear that the American auto companies would lose billions of dollars more than they forecast when they gave Congress their initial budgets late in 2008. (See pictures of the remains of Detroit.)
GM and Chrysler say that they need $22 billion. Rattner calls it differently. He told Bloomberg, "It could be considerably higher, I won't deny that", when asked whether U.S. aid sought by the car companies could increase. "Like all management teams they tend to take a reasonably, slightly perhaps, optimistic, view of their business. So it could be more, I can't rule that out."
There is no "could" about it. Since most of the restructuring programs for the car companies are not in place now, and probably cannot be until the middle of the year, their losses in the first two quarters should not be terribly different than they were in the fourth quarter. Depending on which of the P&L lines financial analysts look at, it means that Detroit is going through as much as $9 billion a month. GM (GM) and Chrysler could spend the $22 billion that they are requesting in as little as 90 days. It has been said that a country should never get into a land war in Asia. This is an unfortunate but easy analogy for the government's current predicament with the American car industry.
The government says that Detroit is a "strategic" part of the economy. Saving The Big Three is as important as keeping the nation's large banks operating to maintain the flow of credit. But, the comparison is bogus. As John McCain, a military man much of his life, liked to point out to the President during the election, there is a difference between strategy and tactics. There is nothing strategic about Detroit. Over 50% of the cars sold in the U.S. are made by foreign companies. There is no reason that the number cannot go to 80%. It serves the national interest to save the jobs in Detroit and in related industries while the economy is in trouble. It is hard to make the case that any broader national interest will ever be served by keeping the U.S. car industry afloat indefinitely.
Washington will keep Detroit open until the government can afford for it to close. That will not happen during this recession. If the car companies can work their camel though the eye of a needle, it may not happen at all. That is to say, long term, "Made In America" will not be stamped on very many cars.
Douglas A. McIntyre
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