GM’s a stumper.
Sometimes, despite my wiser instincts, I try to predict the future. This morning I’ve been reading a litany of bad, very bad, and even worse news about General Motors, e.g.,
- Detroit Free Press via USA Today — GM stock spirals after analyst sets target price as zero
- AP via BusinessWeek — GM shares hit 60-year low on cash burn worries
- Wall Street Journal — Deutsche Bank: GM Is Worth Nothing.
From this, I’ve been trying to extrapolate what might happen to GM in the coming months — or years, if the company indeed has years left in it. (The fact that there’s reason for doubt about that is cause enough for alarm.)
As for the big picture, I’m stumped, as much as anything by the Great Unknown of possible intervention by the federal government, especially since the intervention would come either in the waning lame-duck days of the current Administration or the uncertain early days of the next one.
Connections across the economy
When the Feds bailed out AIG recently, they did it on the logic that an AIG failure would have catastrophic effects across the U.S. and world economies because of the many financial pies into which AIG’s fingers are inserted. (Hank Paulson may not have used that exact metaphor, but that was the idea.)
GM is even bigger than AIG in terms of annual sales ($181 billion as against $110 billion), but can’t make the same claim about widely distributed financial assets. But, as the Wall Street Journal item cited above points out, a GM collapse (a real collapse, not just the death by a thousand cuts that we’ve already seen) would also have enormous follow-on effects — for employees, suppliers, company towns, creditors, etc. — that might be enough to “reduce GDP by a full percentage point.”
That’s the point at which my mind reels.
Tough choices
There’s a part of me that wants to say this: “Enough already. They’ve had decades to work out their problems, and they haven’t done it. Let ‘em swing.” As I’ve noted recently on the topic of bailouts, though, there’s a big difference between what “should” happen and what “should” happen, once you get to an economic entity of GM’s size.
So if you’re the federal government, you have this unappetizing set of choices:
Let GM pay the price that it “should” pay for its own mismanagement and blindness, and you might turn a stiff recession into an all-out depression.
OR
Do what you “should” do to stabilize the whole economy, even though it means holding your nose to bail out a mismanaged company.
What would YOU do, if you were Uncle Sam?
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Related links:
- Company of the Day (11/03/2008): General Motors
- “Should” versus “should” in the Wall Street bailout.
- What does the future hold for the Detroit car makers?
- Ford gains on Toyota — the Toyota way.
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Crystal ball photo by Napalm filled tires (!), used under a CC-Share Alike license; Uncle Sam image via the Library of Congress.
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7 Comments so far
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I dunno Tim. I’m beginning to think of the adage “let the chips fall where they will.” I’m not a huge advocate of too much government, despite my liberal leanings, so I think that enough is enough. The bill, to be footed for decades to come, has grown large enough. I hate to see all those lost jobs but we can’t just keep printing money, can we?
This makes me ill.
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Liz — I hear you. If it’s a case of swallowing the bitter pill now or later, I say we swallow it now.
Of course, GM will argue that they need “a little more time.” It works (sometimes) when you’re in school and your term paper is late; I don’t think it works anymore when you’ve piled up the losses that GM has.
Obama has made statements that he will be helping out the auto-industry, or so I’ve read. We’ll see just what exactly that help will be, and how much of it will go towards GM.
Devin — Obama apparently called on Bush for auto-industry help when they met today. We’ll see if Bush bites.
[...] Following up on GM’s a stumper: [...]