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One of the more pathetic subplots of the past few months has been the American auto industry begging for a bailout and trying to associate itself with the banks. The latest twist is GM asking for $10 billion in taxpayer cash to buy Chrysler -- because GM has proven such an able turnaround artist that what you'd really like to do is entrust them with another failing brand. But as Justin Fox explains, what GM needs isn't a bailout. It's bankruptcy:
We have a well-developed process for helping companies in distress fend off creditors and prepare themselves for a comeback if in fact they have a comeback in them. It's called Chapter 11 bankruptcy, and it is one of the most glorious creations of the American political system. Bankruptcy allows for a moderately orderly version of the creative destruction that makes capitalism dynamic. The willingness of American companies to make use of it is one of this country's great competitive advantages. It's one key reason why, while the next year or two will certainly be tough, we're extremely unlikely to land in a decade-long malaise like Japan in the 1990s.Bankruptcy doesn't work so well for leveraged financial institutions like banks, because the mere existence of rumors that a previously healthy bank is headed for failure can be enough to drive it under. That's why we have a separate infrastructure for both preventing and dealing with bank failures, with the FDIC at its center. It was the lack of such an infrastructure for the "shadow banking system" of investment firms, hedge funds, derivatives and the like that has made the past year so scarily and unpredictably eventful. And it was the real fear of a systemic collapse--a run on the entire financial system--that sent Ben Bernanke and Hank Paulson scurrying to Capitol Hill in September to ask for $700-billion bank bailout.There's an emotional attachment to America's auto industry that I don't totally understand, but that, in any case, should probably not be a primary driver of economic policy. And the idea that GM wants taxpayer dollars so they can export the GM model to Chrysler...well....the mind boggles.
