We shouldn't try a trickle-down approach to "saving" the auto industry and especially the auto finance companies; instead, if aid is needed at all, it should be shoveled in at the bottom of the economy from which it is sure to gush up (see a sample plan below).
The New York Times has done a great job of revealing that banks are using their bailout funds not to make more loans but to buy out their competitors. Now Cerberus, the private "capital management" company which owns most of Chrysler and a majority interest in GMAC (GJM), is seeking federal aid for a plan to bail out its badly timed investments in the auto industry. Cerberus and General Motors (GM) have been fairly frank that the aid is needed to finance massive layoffs so that the combination of Chrysler and General Motors can save cash. The question is why would we want to use taxpayer money to do that?
There is no promise that more money will mean more loans to car buyers. There is no promise that a taxpayer bailout will result in cars Americans want to buy even if they can get loans. There is also no recognition that "foreign" car makers are building cars in America with American labor that Americans want to buy. Do we really want to endanger the American jobs at Toyota (TM) in order to finance layoffs at GM and Chrysler?
Trickle-down aid to an economy doesn't work because 1) a trickle is too slow to aid an economy which has seized up; 2) the money tends to stay at the top – eg. be used for buyouts and/or executive salaries rather than flowing out into the broad economy where it's needed.
A Gush Up Proposal
Suppose that, instead of bailing out Cerberus and GM, we use our bailout funds to buy any and all cars and light trucks over ten years old BY THE POUND. Prices should be set so they are higher than the small amounts these cars fetch on the resale market today. All such purchased cars will be scrapped and recycled; in fact the program should be run through the junk dealers – they have much less overhead than banks. To avoid buying already scrapped vehicles, only those cars and trucks which have been registered for the last twelve months should be eligible.
The nice thing about putting money into the bottom of the economy is that it's sure to gush up. The owners of ten year old cars aren't going to stuff the money in their mattresses or finance neighborhood buyouts.
A few will be able to get by with one less car and switch to mass transit and use the money for other necessities. That's all goodness. Most will buy another not-quite-so-used car; there's a very good chance the newer car will use less fuel than the old one, especially since that's what people know they want and because cars get inefficient as they get older; also we're paying more for heavier cars so we're getting them off the road. That's a bonus.
The people who sell the not-so-used-cars to the people who scrapped their junkers will now have more money to spend on a new car. This is true whether the used cars pass through dealer lots or not. The dealers, who are in bad shape, will benefit from a firming of used car prices. Also, the more you get for a trade in, the less financing you need for your next purchase.
Money put in at the top tends to stay at the top; money put in at the bottom flows through the whole economy. The gush-up proposal will put money into the hands of the consumers most likely to spend it instead of the bankers most likely to hoard it. Gush up will also reduce the average size and age of vehicles in the American fleet and further reduce our gas consumption. Let's do something like that if we need more bailouts.
Disclosure: None
Is this not also a bottom up approach?
1. The Board of Directors is replaced by government selected individuals.
2. All management contract are re-negotiated and salary is based on performance.
3. A new company is formed with new (fair) labor agreements
4. The mandate is for an auto to be manufactured for under $10,000 that achieves at least 35mpg.
5. tax incentives for reaching these goals.
6. tax incentives for citizens to purchase these vehicles and selling low mgp vehicles.
7. production of natural gas vehicles
My initial plan as outlined 2 years ago can be enacted as a large infrastructure play:
1. Provide rapid rail service between large cities
2. Provide Smart Car rental at each rail hub at low rates
3. tax incentive to sell the gas guzzler and purchase a high (35-45mpg) vehicle.
Three suggestions:
1. Make this a sliding scale so the heaviest vehicles are bought back at higher rates. Get old gas-guzzling trucks and vans off the roads.
2. Combine this proposal with a credit for purchasing a new hybrid, electric or other alternative vehicle. This would stimulate replacing old gas guzzlers with new technology therefore making the Government's $25 mil in loans to automakers for alternative vehicles that much more viable.
3. Do this for heavy trucks and boats - both industries could also use a lift
The problem is not with the vehicles, it is the workers. The Bail-out should have exacting details for spending. The information available indicates that Cerebrus can infuse enough money into Chrysler to keep them going for well over a year and a half. GM does not have adequate funds to last a year. The economic impact of GM going belly-up reaches beyond the direct employees of GM. Suppliers, Dealerships, and small businesses around these connected businesses would be severly impacted. People will be let go either way. The failure of GM will happen first due to the greater economic requirement, leaving an open market for Chrysler to thrive. This scenario gives the private investor Cerebrus the upper hand. I would rather see the people being let go become part of a training program to encourage personal growth. Don't give the funds to GM or Chrysler (Cerebrus). Instead, form a company to take on the workers pension responsibilities. This would be done in exchange for Stock in GM-Chrysler.
In 2010 GM will no longer be responsible for UAW Health care for retirees. This is due to a three year plan to offload this burdon to the UAW with contributions from GM. After 2010 GM will have adequate funds to develop new products and maybe hire back some of the newly trained people.
Recycle People. . . . .Not Cars!!!
I'm afraid that "W", again, is making an uninformed decision. I assume he is getting some advice from his opinionated staff. Such things are from what his legacy is cast, "in stone.".
Are taxpayers getting what they're paying for?
1) Market values of used vehicles are highly variable, have zero correlation with weight and fluctuate regionally. A 1998 F-150 is worth considerably more in Omaha than Los Angeles. If the price disparity is greater than the transportation costs of shipping the F-150 to Omaha it would most likely be sent there for resale.
2a) The scrap price for a vehicle is very low and is mainly reflective of the value of the remaining working parts of the vehicle and demand for those parts. The crushed metal value is only a small proportion of the price. If there were no older vehicles in disrepair remaining in use there would be no need for these scrap parts. Your proposal for the government to pay an unrecoverable premium above not only the resale value of the vehicle but greatly above what it would receive in return for the scrap value multiplied by the hundreds of millions of eligible vehicles could cost the taxpayers well over half a trillion dollars.
2b) Assumptions: US population 300 million; 80% of driving age (240 million); 90% own a vehicle (216 million); 72% registration percentage of vehicles ten years or older (155.5 million); $3500 Avg value of aforementioned F-150; 10% estimated proposal ‘market value premium’ (+$350); $500 highly generous scrap price: Government outlay would be $3850 - $500 X 155.5 million vehicles = $521 Billion.
3) Providing these monetary incentives to only those with eligible vehicles would exclude the poorest who do not own a vehicle, instantly making them worse off in comparison to the majority of the population.
4) Setting price by the pound would unfairly value similar yet older vehicles equally.
5) The supply of scrap and/or recycled materials would quickly overwhelm any reasonable demand, leading to the limited number of junk dealers suddenly having more overhead than banks due to the need to acquire vacant storage space for the huge influx of vehicles.
6) Many vehicles over ten years old are owned outright and no longer being financed. The Gush Up Proposal would force these owners to purchase newer, more expensive vehicles creating for most the increased expense of a monthly car payment during times of economic uncertainty while greatly enriching the finance companies that helped create the current uncertainty.
7) The main reason taxes are withheld from pay is the inability for many to save and plan. After selling a vehicle to the government, many would treat the newfound money as a windfall and would not necessarily purchase or be able to purchase a newer higher priced replacement, eventually leading to an increase in need for public assistance.
8) The supply of used vehicles available for sale that are less than ten years old is substantially less than the demand that would be created, inflating sales prices and ultimately transferring any money upwards to the owners of these vehicles.
-- The Gush Up Proposal in action: Tax revenue is provided to owners of older vehicles who then use all the funds to help finance the purchase of artificially overpriced ‘newer’ used vehicles. The sellers of these vehicles then use the funds to help finance the purchase of a new vehicle. Winners: Bankers, vehicle dealerships, vacant landowners (Those at the top); Losers: The majority of the population who are now making monthly payments on overpriced replacement vehicles and those who could not afford a replacement vehicle and are forced to find new employment closer to home.
In light of the above, I would like to state that I am hugely in favor of implementing the Gush Up Proposal. I plan to purchase all of the oldest and heaviest vehicles I can locate, re-sell them to the government and buy a few sports franchises and islands with the proceeds…
Stop asking for yours. Get off your ass and make it for yourself. Quit whining about your debt. You shouldn't have taken on so much. Those who paid their houses off and are watching them depreciate....they never really appreciated....it was all smoke and mirrors. Homes are not investments, they are a cost on your personal balance sheet and shoould be treated as such. Let me keep my taxes and decide what I want to do with it for the next five years....that will create the fastest recovery.