How to Cover Wall Street

The American auto industry is like a lame horse: The only way to fix it is to let it die.

GM announced on Friday that the company will close 20 of its North American plants and is considering filing for Chapter 11. Chrysler LLC is slated to close 29 plants and lay off 53,000 workers effective immediately. And, though Ford Motor Company CEO Allan Mullaly told a Congressional committee that his company does not face what he called “near-term liquidity issues” which have slammed GM and Chrysler, he still has his cap in hand for $9 billion of Treasury-sponsored credit, should the industry worsen.

Detroit’s cognoscenti maintain that allowing the Big Three to fail could put more than half-a-million unemployed factory workers on the streets and disrupt other industries that supply or benefit from the auto industry. Nobody wants to see unemployment rates climb beyond 6.7 percent. But the automakers seriously overestimate their importance to the American economy.

The auto industry did not just get the stuffing kicked out of it overnight: it’s been unraveling for years. In an interview with the Wall Street Journal, Patrick Anderson, chief executive of East Lansing, MI-based Anderson Economic Group, said that “Michigan has been in a seven-straight year recession. The state’s unemployment rate for non-farm jobs is at 9.7 percent.  Even Michigan’s health care industry has begun to show signs of slowing.

And, amazingly enough, the sky has not caved in.

Detroit’s automakers say that it is unfair for Treasury to bail out the banks on one hand while it leaves the auto industry to suffer. And they have a point. But while it is true that many of the major players in the mortgage fallout did receive a Treasury-sponsored bailout through TARP, there was at least the possibility that, somewhere down the road, the toxic assets that have ruined their balance sheets would have been worth something one day. But Ford Motor Company and GM, which have long since been overshadowed by Japanese automakers such as Honda, at least in terms of popularity, have been poorly managed for decades. And there is no sign from Detroit that management will magically improve.

It would take something at least as revolutionary as the invention of the wheel to turn Detroit around. And, certainly any money that they receive will only be used to cover expenses such as payroll, not for research or development of new technology.

Detroit will suffer greatly if the Big Three do not get an immediate capital infusion. And, frankly, suppliers around the country will most likely go out of business if these companies are allowed to fail. But there’s an aspect of common sense that, so far, only Senator Mitch McConnell has touched on: Throwing money at a bad investment does not make it a good one.

“Very few of us had anything to do with the dilemma that they have created for themselves,” McConnell said of Detroit’s automakers. “We simply cannot ask the American taxpayer to subsidize failure.”