â€œWe put all our chips on a poker hand called durable goods manufacturing, particularly the autos,â€ said Charles L. Ballard, a professor of economics at Michigan State University. â€œIn the middle of the 20th century, every time we turned over the hand it was four aces, a straight flush. If you have an undiversified economy based on a sector that’s booming, great.â€
~ New Fears Arise in Michigan in Sunday’s New York Times (the old fears weren’t bad enough?)
You can read more about Michigan’s feelings of freefall at that link or (courtesy Blogging for Michigan) pursue the more practical question of why we would bail out Citibank over the auto industry (which seems to be the case) with former Clinton Treasury Secretary Robert Reich:
Viewed from Wall Street, Citi is too big and important to be allowed to fail while GM is simply a big, clunky old manufacturing company that can go into chapter 11 and reorganize itself. The newly conventional wisdom on the Street is that the failure of the Treasury and the Fed to save Lehman Brothers was a grave mistake because Lehman’s demise caused creditors and investors to panic, which turned the sub-prime loan mess into a financial catastrophe — a mistake that must not occur again. So, by this view, the government must do everything and anything to keep Citi alive. But GM? GM is just … jobs and communities.
The Street’s view of the world is fundamentally flawed. Banks are important to the economy because they’re financial “intermediaries.” They connect savers with investors and borrowers. This is a vital function, but there’s nothing magical about it. At any given time the world contains a vast pool of money that can be put to all sorts of uses. Financial intermediaries simply link the pool to the uses.
I don’t think there are too many people who dispute that the looming Carpocalypse is driven in large measure by startlingly inappropriate vehicles that have been advanced by The Big Three over the last few decades. And while foreign automakers are in better shape right now because they don’t have the same health care or pension load, shots of port authorities turned parking lot and diminished sales worldwide say that they may be next off the cliff.
Former Secretary of Transportation and Michigan Senator Spencer Abraham says that For Detroit, Chapter 11 would be the Final Chapter:
Just as financial institutions depend on the confidence of those with whom they do business (as Bear Stearns and Lehman Brothers discovered), automakers depend on the confidence of car buyers. To purchase a car is to make a multiyear commitment: the buyer must have confidence that the manufacturer will survive to provide parts and service under warranty. With a declaration of bankruptcy, that confidence evaporates. Eighty percent of consumers would not even consider buying a car or truck from a bankrupt manufacturer, one recent survey indicates.
One thing is clear: at a time that requires decisiveness, there’s precious little to be found.