[Peace-discuss] Fw: Senate to Middle [sic] Class

[C. G. Estabrook]

[Another view, from a well-known economist, apparently too radical (it doesn't 
take much) to be in the new administration (altho' he was Naomi Klein's choice 
for Treasury Secretary). --CGE]

	Chapter 11 is the right road for America's carmakers
	By Joseph Stiglitz
	Published: December 12 2008 02:00

The debate about whether or not to bail out the Big Three carmakers has been 
mischaracterised. It has been described as a package to help the undeserving 
dinosaurs of Detroit. In fact, a plan to bail out the carmakers would benefit 
shareholders and bondholders as much as anybody else. These are not the people 
that need help right now. In fact they contributed to the problem.

Financial markets are supposed to allocate capital and monitor that it is used 
to good effect. They are supposed to be rewarded when they do that job well, but 
bear the consequences when they fail. The markets failed. Wall Street's focus on 
quarterly returns encouraged the short-sighted behaviour that contributed to 
their own demise and that of America's manufacturing, including the automotive 
industry. Today, they are asking to escape accountability. We should not allow it.

What needs to be done is to help the automakers get a fresh start and allow them 
to focus on producing good cars rather than trying to juggle their books to meet 
past obligations.

The US car industry will not be shut down, but it does need to be restructured. 
That is what Chapter 11 of America's bankruptcy code is supposed to do. A 
variant of pre-packaged bankruptcy - where all the terms are set before going 
before the bankruptcy court - can allow them to produce better and more 
environmentally sound cars. It can also address legacy retiree obligations. The 
companies may need additional finance. Given the state of financial markets, the 
US government may have to provide that at terms that give the taxpayers a full 
return to compensate them for the risk. Government guarantees can provide 
assurances, as they did two decades ago when Chrysler faced its crisis.

With financial restructuring, the real assets do not disappear. Equity investors 
(who failed to fulfil their responsibility of oversight) lose everything; 
bondholders get converted into equity owners and may lose substantial amounts. 
Freed of the obligation to pay interest, the carmakers will be in a better 
position. Taxpayer dollars will go far further. Moral hazard - the undermining 
of incentives - will be averted: a strong message will be sent.

Some will talk of the pension funds and others that will suffer. Yes, but that 
is true of every investment that has diminished. The government may need to help 
some pension funds but it is better to do so directly, than via massive 
bail-outs hoping that a little of the money trickles down to the "widows and 
orphans". Some will say that bankruptcy will undermine confidence in America's 
cars. It is the cars and carmakers themselves - and the dismal performance of 
their executives - that have undermined confidence. With industry experts saying 
$125bn (€94bn, £84bn) or more will be needed, with bail-out fatigue setting in, 
why should US consumers believe that a $15bn gift will do the trick of a turnround?

It is more plausible that confidence will be restored if the industry is freed 
of the burden of interest payments and is given a fresh start. Modern cars are 
complex technological products and the US has demonstrated its strength in 
advanced technology. US workers, working for Japanese carmakers, have shown 
their hard work can produce cars that are desirable. America's managers too have 
demonstrated their managerial skills in many other areas.

The failure lies with the managers of US carmakers and America's financial 
markets, which failed in their oversight and encouraged short-sighted behaviour. 
The "bridge loan to nowhere" - the down payment on what could be a sinkhole of 
enormous proportions - is another example of the short-sighted behaviour that 
got us into this mess.

As the bail-outs continue, numbers that once looked huge are starting to seem 
almost normal. Hundreds of billons are being given to banks and insurance 
companies. AIG got $150bn. Compared with that $34bn, or even $125bn, for the 
automotive industry seems a modest request. Even so, we should not forget that a 
few months ago, President George W. Bush said there was not enough money for 
health insurance for poor children although it cost just a few billion dollars.

Even if Congress does now give carmakers $15bn as a "stay of execution," 
postponing the hard decisions, before the next multi-billon dollar dose of 
medicine we need to think more carefully about who we are really bailing out and 
why. This should not end up as just another rescue package for bondholders and 
shareholders.

The writer was awarded the Nobel prize in economics in 2001. His latest book is 
the Three Trillion Dollar War, co-written with Linda Bilmes (2008)


Jenifer Cartwright wrote:
> 
> 
> --- On *Fri, 12/12/08, Michael Moore /<maillist at michaelmoore.com>/* wrote:
> 
>     From: Michael Moore <maillist at michaelmoore.com>
>     Subject: Senate to Middle Class: Drop Dead ...a message from Michael
>     Moore
>     To: jencart13 at yahoo.com
>     Date: Friday, December 12, 2008, 2:36 PM
> 
>     Senate to Middle Class: Drop Dead...