The Detroit Bailout: Unsafe at Any Cost

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Should Washington bail out Detroit? That is the question facing Congress as it reconvenes this week for a special post-election session. Nearly everyone agrees that, with losses piling up, Detroit automakers need to change the way they operate and change soon. The real issue is how best to do that.

The Detroit-based automakers--General Motors, Ford, and Chrysler--argue that they need more money from U.S. taxpayers. That approach, however, is more likely to extend the status quo rather than lead to reform. A far better approach is to restructure the old-fashioned way, through a formal bankruptcy process if necessary. Bankruptcy--and the prospect of it--would provide both the incentive and means for making the hard and painful choices that Detroit needs to make. Lawmakers should turn down pleas for subsidies that would detour that process.

Varying Proposals

Just last month, U.S. automakers won congressional approval of $25 billion in federal loans for manufacturing cleaner cars at an estimated cost to taxpayers of $7.5 billion.[1] Since that time, however, the financial condition of automakers has worsened, with the Big Three reporting losses in the billions. General Motors has the grimmest news, warning that it could run out of cash within months.

Armed with this bad news, the industry went back to Capitol Hill. Pointing out that the recently approved $25 billion dollop of aid would take months to process, the automakers asked for more and faster aid.

President-elect Barack Obama and congressional leaders such as Speaker Nancy Pelosi (D-CA) have broadly supported more subsidies. The leading proposal now seems to be the provision of $25 billion in federal loans--most likely taken from the $700 billion already allocated to address the financial crisis--although the total may be lowered to reduce opposition. The Bush Administration, for it part, has opposed automaker access to the $700 billion but has supported dropping conditions from the $25 billion already allocated.

Read the full article at: The Heritage Foundation

Date published: Nov 16, 2008

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