Editorial: Bailout Watch 257: Now What? (Part One)

Between 1848 and 1852 telegraph line miles in the US increased by more than 1000 percent. By 1860, most of the companies that laid those lines were gone. The telegraph did not disappear, but the market for cable unraveled. Now that the CEOs of GM, Chrysler and Ford have sent a collective SOS to Congress, its relevant to step back and look not at the now, but the whole. The cycle’s called boom-bubble-bust. Not, bailout. Put another way, what kind of market does Detroit expect to find on the other end of their bridge loans?

As I’ve argued here before, this decade’s early average of 16.9m new vehicles sold per year was the result of cheap and easy credit. From 2001 to 2003, the Federal Reserve cut the funds rate from 3.5 percent to one percent. The lowest since the 1950s. Low-cost, low-security loans flooded the marketplace, inflating the housing market like a rented bouncy house. The automobile business poached off the same line of credit.

For most of the 00s, credit flowed like champagne at a Ritz reception. The car buying climate was the best it had ever been in history. Combined with relatively inexpensive gasoline, the market for cars and trucks grew to full bloom.

Between 2000 and 2006, the number of licensed drivers grew by 1.1 percent. Car sales went up six percent over the same period, outpacing anyone’s expectations. In 1998, there were about 12m more vehicles than drivers. In 2006, we bought 34m extras. During this same period, median household income, adjusted for inflation, inched up only three percent.

So, the population didn’t boom and there wasn’t a huge influx of disposable income. During the first half of this decade, people were not picking-up new rides based on need. That’s called a bubble, as in dot-com bubble or real estate bubble or any of a number of other past pop hits. Yes, there’s always a pop.

“We had above-trend years, some of which was caused by an incredible growth in household net wealth that later we found wasn’t real,” George Pipas, director of sales analysis and reporting for Ford Motor told BusinessWeek.

Bob Schnorbus, chief economist with J.D. Power & Associates added, “It’s going to take us many years to get back to a trend level of sales, let alone the levels you might hope to see.”

The boom-bubble-bust cycle is actually pretty common. It afflicted the telegraph industry, railroads, baseball cards. It’s surprising more auto industry executives didn’t see it coming-– or at least acknowledge its arrival. Even ultra-conservative Toyota ramped-up truck capacity as the bottom was falling out of the market. Still, as long-time TTAC readers know, this downturn isn’t some kind of alien invasion. Lots of people shouted duck and cover.

Michael Mandel, at BusinessWeek, reported on the bubble in 2004. He reminds us on his blog, “Moreover, I also noted that the popping of the auto bubble could have harsher economic consequences than the end of the widely discussed housing bubble.”

Demand for all vehicles has contracted greatly, worldwide, in the last quarter. Current numbers are almost certainly an extreme. To where, exactly, the market may bounce back is not clear. A rough consensus of forcasters puts us at 16 million vehicles by 2012. Maybe.

That leaves the U.S. with excess auto production capacity. It’s that excess capacity they’re asking Congress to prop-up.

It can’t be sustained. A third of the auto industry workers across the country are stuck in a Warner Bros. cartoon. The floor’s been blown out– they just haven’t fallen just yet.

In the end, bailing-out Detroit isn’t so much the issue. What is the market going to look like for the next handful of years? Are GM, Ford and Chrysler prepared for it? Are they, in fact, able to turn, flex and shift with the economy? A market becomes more competitive as it shrinks.

We didn’t bailout the hat-blocking industry back in 1960. There wasn’t much of a point. The market changed. The car market isn’t evaporating, but changes are in the works. If people’s tastes turn resolutely to more efficient vehicles, if people hang on to their iron a lot longer to avoid a financial inquisition (and resulting interest), if people flat-out can’t get a loan and decide to take the bike or bus (transit ridership is up 5.1 percent for the year), then money from Congress is feeding a ghost.

Western Union is still around. They don’t send telegrams. Bubbles can’t be re-blown.