Things are really bad here in the Detroit area, in case you haven't heard. The housing market is one of the worst in the country, Detroit's political landscape has been riddled with scandal, and of course the auto industry is in a dismal state to say the least.
On Tuesday billionaire investor Kirk Kerkorian sold 7.3 million shares of Ford (NYSE:F) and may sell his remaining 133,500,000 shares "depending on market conditions". Kerkorian had originally been buying shares in the $7-$8 range. Shares closed at $2.17.
Apparently the $25 billion federal loan package the government handed the Big Three didn't entice Kerkorian to stick around. Even with government aid, the word seems to be that the Big Three may become the Big Two. Whether the new Big Two is a result of a merger or a failure is still speculation which we will likely have a clear answer on soon.
If the auto makers cannot compete, they must be allowed to fail in order for the free market to self correct. As much as I would hate to see one of these great symbols of capitalism fail, in the long run it is the right economic decision for Detroit and America.
I believe economist Fred Foldvary's conclusion on the auto industry from progress.org should be the policy we take with the auto industry:
There was a bad precedent 25 years ago, when the federal government bailed out the Chrysler Corporation. Now that the whole US automobile industry has failed, declarations of bankruptcy would not be a catastrophe. Other firms would buy the factories, and could start clean with no legacy costs. A bailout would lead to further demands from other industries. It would be best for the American economy to avoid any more bailouts, but also to restructure government policy to stop both the taxes and the subsidies that have distorted the economy.
Government is not allowing prices and profits to do their economic jobs, and further interventions will just make the problem that much worse in the long run.