Wednesday, November 12, 2008

do not pass Go . . .

After the $700 million Wall Street rescue plan--and the promised middle class equivalent--there is an urgent request for a bailout from the Big Three automakers in Detroit. Urgent is something of an understatement: GM is apparently on the edge of bankruptcy absent a substantial infusion of Federal cash, and Ford and Chrysler are probably not far behind. Put more bluntly, without an intervention, there may be no US auto industry by the time Obama takes office.

My wife having been born in Detroit, and my father-in-law being a retired GM executive (they have already eliminated his health benefits), this is not an idle issue for me. Nor can I possibly see how the auto industry is less worthy of Federal assistance than Wall Street or even defaulting homebuyers, who at least have the benefit of being diffused between 50 states and various locales. We are talking here about the economic collapse of an entire region, and violent aftershocks throughout the remaining economy. In this sense, Obama and Pelosi's demand for assistance seems plainly justified.

The problem is that--even as new bailouts are being proposed--the leakiness, even the fraudulent nature, of the original Wall Street plan is rapidly being exposed. As I earlier noted the N.Y. Times has reported that little if any bailout money was being used to make new loans. Now The Times reports that lobbyists are essentially looting the fund on behalf of clients with little if any connection to the underlying mortgage problem. I cannot emphasize what a sleeper political and social issue the misuse of this fund may be. Sarah Palin's populism will seem mild if people discover that the equivalent of a mid-sized European economy is being spent on helping people, most of them well off, with little or no connection to the people who really need it.

So by all means help the auto industry: but let's be smarter, and tougher, about doing it. For all of its limitations, Europe may provide a good model here. Many European companies are partially owned/controlled by governmental or quasi-governmential bodies. But they pay a price for it: the governments receive an equity share together, at times, with disproportionate voting power (the so-called "golden share") and control over major decisions. In particular, a bailout should be accompanied by government veto power over compensation policies and any decisions to invest proceeds outside the U.S. where they are so obviously needed. A bit more adventurously, the Government might exercise pressure on behalf of smaller and more fuel-efficient vehicles (Tom Friedman has a nice, if rather utopian, piece on this today). Any rescue plan should further be tailored so that--when and if the companies finally get back on their feet--the taxpayers share in the profits.

The European example may be helpful in terms of attitude as well as substance. Stopping for my afternoon coffee, I chanced upon the Italian Finance Minister, Giulio Tremonti, discussing his own country's financial rescue plan. His point, if I understood correctly, was that the plan would aim to protect depositors and families rather than the bankers themselves. What would happen to the bankers, he was asked, once this plan was approved? "Vanno a casa o in galera," he said. They will go home or, if the facts merit it, to jail. Sometimes a bit of incivility is just the ticket.


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