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The Auto Bailout Won’t Work

by @ 8:41 am on December 7, 2008. Filed under Auto Industry, Business, Economics

Michael Martineck explains why:

As I’ve argued here before, this decade’s early average of 16.9m new vehicles sold per year was the result of cheap and easy credit. From 2001 to 2003, the Federal Reserve cut the funds rate from 3.5 percent to one percent. The lowest since the 1950s. Low-cost, low-security loans flooded the marketplace, inflating the housing market like a rented bouncy house. The automobile business poached off the same line of credit.

For most of the 00s, credit flowed like champagne at a Ritz reception. The car buying climate was the best it had ever been in history. Combined with relatively inexpensive gasoline, the market for cars and trucks grew to full bloom.

Between 2000 and 2006, the number of licensed drivers grew by 1.1 percent. Car sales went up six percent over the same period, outpacing anyone’s expectations. In 1998, there were about 12m more vehicles than drivers. In 2006, we bought 34m extras. During this same period, median household income, adjusted for inflation, inched up only three percent.

So, the population didn’t boom and there wasn’t a huge influx of disposable income. During the first half of this decade, people were not picking-up new rides based on need. That’s called a bubble, as in dot-com bubble or real estate bubble or any of a number of other past pop hits. Yes, there’s always a pop.

(…)

Demand for all vehicles has contracted greatly, worldwide, in the last quarter. Current numbers are almost certainly an extreme. To where, exactly, the market may bounce back is not clear. A rough consensus of forcasters puts us at 16 million vehicles by 2012. Maybe.

That leaves the U.S. with excess auto production capacity. It’s that excess capacity they’re asking Congress to prop-up.

It can’t be sustained. A third of the auto industry workers across the country are stuck in a Warner Bros. cartoon. The floor’s been blown out– they just haven’t fallen just yet.

In the end, bailing-out Detroit isn’t so much the issue. What is the market going to look like for the next handful of years? Are GM, Ford and Chrysler prepared for it? Are they, in fact, able to turn, flex and shift with the economy? A market becomes more competitive as it shrinks.

The entire bailout debate is based upon the illusion that making changes at the margins of the auto industry are going to be sufficient to save the Big Three. It does nothing to address the fact that the automobile market, both in the United States and worldwide, is undergoing fundamental changes. Auto companies in India and China are starting to flex their muscles, for example, and it won’t be long before they start setting their eyes on the biggest automobile market on the planet.

Pretending that, under government supervision, Detroit and reform itself sufficiently to compete in this new environment is a fatal conceit that is likely to cause more pain in the future than any pain we’d experience now from letting these three companies face their day of reckoning.

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