pic--Robert Reich @ Lesley University
Crisis for car makers
This diary is all about moral hazard, "Too big to fail" and the auto industry... and what we should do.
The auto industry in the U.S. is in trouble. People aren't buying their products, aren't likely to start buying them en-masse any time soon, and the industry is now running out of cash.
The government is quite happy to designate them as "systemically critical"... for different reasons than the banks and insurers, but critical none the less. For very political reasons we will do whatever is necessary to keep these unwieldy and archaic companies afloat.
This is, in many ways, extraordinary. The auto industry is extraordinary, in that it manufactures a physical consumer product but, as an industry, has been designated outside of the normal free market by the government.
Moral Hazard
"Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk."
Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions."
Too Big to fail
Robert Reich is a very smart guy... perhaps someone that should be considered for a financial position in the upcoming cabinet. He wrote in his blog, this October:
According to Treasury Secretary Hank Paulson, the biggest Wall Street banks now getting money from the government are just "too big to fail." Fed Chairman Ben Bernanke uses a different euphemism – he calls them "systemically critical." The point is that if any of them goes down, it could take the whole financial system with it. So we taxpayers have to keep them up.
We’re hearing the same argument elsewhere in Washington for saving General Motors. It’s just "too big to fail." So Congress is considering a bailout that would keep GM afloat and sweeten a merger between GM and Chrysler.
Pardon me for asking, but if a company is too big to fail, maybe – just maybe – it’s too big, period.
We used to have public policies to prevent companies from getting too big. Does anyone remember antitrust laws? Somewhere along the line policymakers decided that antitrust would only be used where there was evidence a company had so much market power it could keep prices higher than otherwise.
(...)
...If They're Too Big To Fail, They're Too Big Period--robertreich.blogspot.com
The U.S. auto industry makes stupid decisions
With Hummer dealers going out of business left and right, GM decides the smart thing to do is push ahead with its obscene "Hummer extreme", the H3T. Rather than see the writing on the wall regarding gas guzzlers, the auto giant is living in a century where oil is king and bigger is always better (these vehicles feature plus sized profit margins.)
The Chevy Volt electric car is being developed almost under duress. The same company that's developing the car has been undermining efforts to encourage its adoption. The EV-1 electric car was a success from a consumer view point, but GM just doesn't want to build them.
What we SHOULD do, but likely WON'T
We're likely going to be spending tax payer money on this whole situation. It's either going to be in the form of direct investment, loan guarantees, tax breaks or other government relief.
We're going to be paying for, in my opinion, the auto industries stupid and backward looking choices.
There should be consequences for these failures. A "hazard" that lessens the moral hazard... the auto industry should not be allowed to lobby government, for changes that effect the auto industry while they are receiving benefit from that same government.
Specifically, we should not see auto makers lobbying against any new auto standards, either in congress or at the state level, until they are entirely self-sufficient.