The other day, Obama went to the White House for a meeting with George W. Bush. One topic of the meeting was how to help the US auto manufacturers, General Motors (GM), Ford, and Chrysler. In September, Congress passed a loan package worth $25 billion, but there is concern that the money won't get to the manufacturers, especially GM, soon enough to save them from bankruptcy.
I feel that giving the auto manufacturers loans is the wrong approach. Instead, our government should just nationalize (purchase outright) the automakers. I list four reasons why we should nationalize the automakers below.
First, the automakers market capitalization is very low. Currently, the total market value of GM is only $1.65 billion. Similarly, the market value of Ford is only $4.07 billion. Chrysler is not publicly traded, but it can't be worth any more than Ford is. Therefore, the federal government could purchase the automakers outright for under $10 billion. In that case, why are we giving the automakers loans? Why not just buy (nationalize) the automakers, make them build more cost-efficient cars, and then sell the company after we've nursed it to health?
Second, if we take control of the automakers, we have control over the fate of the federal government's loans. The current plan is to give the automakers loans in exchange for certain conditions such as manufacturing more fuel-efficient cars. But why should we trust the bad auto company leadership that got us into this mess? Instead, we should take over the companies, boot the crappy leadership that got us into this mess, and appoint better leadership to lead these companies into the future. Normally I wouldn't suggest that the government run businesses, but could we really do any worse than the current leadership of GM, Ford and Chrysler? These guys kept building gas guzzlers when it was clear that the future would require more fuel-efficient cars! I could have done better than that, and that's really sad. If we nationalize the nearly-bankrupt automakers, we can profit from our investment when the companies survive the current crisis. There really isn't much downside for the government; if the companies go under than we don't lose any more than if the companies couldn't pay back the loans they currently want. And if the companies survive the taxpayers stand to gain.
Third, we can't let the automakers go under. We are in the middle of a recession, and the death of the domestic automakers could cost up to three million jobs. Unemployment will probably rise in 2009 as it is; losing three million jobs (or even a fraction of that) would be devastating. In addition, of the automakers went under, the goverment would have to pay the pension liabilities of the bankrupt automakers. For GM alone, the costs to the government would probably be $31 billion.
Fourth, the automakers won't be able to go bankrupt in this environment. Usually, companies that get into trouble go into Chapter 11 bankruptcy proceedings, like Circuit City did earlier this week. However, GM can't really go bankrupt. No one will want to buy cars from a bankrupt automaker. Cars are long-term investments, and you need to be able to get parts from the automaker (or from a licensed supplier) to keep a car maintained. Also, rental car companies won't want to buy from a bankrupt automaker. In contrast, if the federal government were to take over and guarantee the health of General Motors, people would still purchase cars from them knowing that the company would still exit long-term. The same applies to the other domestic automakers, whose situation is also grave.
So, the Democrats need to nationalize the automakers as soon as they take full control of Washington in January. We'll have to pressure Congress and Obama to do this, but first we need to put nationalization on the agenda. In the meantime, hopefully the Bush Administration will let GM borrow enough cash to survive until an Obama Administation can nationalize it, along with the other nearly bankrupt domestic automakers.