By on December 6, 2008

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.

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25 Comments on “Editorial: Bailout Watch 257: Now What? (Part One)...”


  • avatar

    They are victims of their own success, in many ways. The subsidized financing put anyone with a job into a car, and destroyed the value of used cars.

    Now, with most folks in a working car, there are 3-5 years of lesser demand, as most cars sold will now be replacements for wrecks or such, which are not “desire” purchases.

    The overcapacity was an issue for years…..

    I always think of the poor guy who makes the egg sandwiches at the deli across from the factory. He’s going down big time, but sadly, the bailout will only prop up the existing system long enough for the eventual flame out to be bigger.

    A prepack bankruptcy is the only viable option. BTW, we have a national history of buying defunct organization “too big to fail”. Check your history of the New York Central RR, Pennsylvania RR, and then Penn Central, finally Amtrak and Conrail.

    The money men stripped the carcass down to the bones, and tossed it to us for the same price as the full Turkey.

    History repeats itself.

  • avatar
    jpcavanaugh

    The auto and financial press has been warning about overcapacity in US vehicle industry for years. For every new factory planted by a world carmaker, demand has to increase by the amount of its output, or someone in the industry loses sales.
    There are two kinds of vehicle producers in the US today. High cost producers and low cost producers. With the correction for the overly hot market (the point starting this thread) as well as general overcapacity and now a recession, high cost producers haven’t a prayer. High cost producers either need to become low cost producers (and then even some of these will have to shed some capacity) or die.
    The Detroit 2.8 are, unfortunately, the high cost producers. Some of it is their fault, some of it is not (the transplants have not been here long enough to accrue 5 retirees for every active worker). A federal bailout will not lower Detroit’s costs one whit, so it will not do a thing to help them compete. The best scenario is that the feds funnel enough cash to the domestics to help at least some of them to hang on until demand rebounds or until some other producers throw in the towel and close plants. This is going to cost a lot more than $34 Billion.
    The Detroit manufacturers think the government is their friend. They are wrong. The government is about politics, not about business. This is a faustian bargain. Think its bad now? Wait till they are in hock to the feds who will eventually start to demand a product mix that sells politically but will not be profitable when gas prices stay low next year.

  • avatar
    amnesia622

    WOW! That article should get an A+, Should be read on CNN, MSNBC, Fox news. ext…. Maybe the public would be more understanding that everything has “its time..”

  • avatar
    Eric_Stepans

    Here’s another way to look at it:

    The state of Alabama spent about $175,000 per job attracting Honda, Hyundai, and Mercedes-Benz to build factories in that state.

    In contrast, if this $34 billion saves even 2 million of the 3 million jobs purportedly at risk, that works out to about $17,000 per job.

    That seems to be a relative bargain.

    Or, maybe, instead of dumping another $350 billion into the banking system, we can give $175,000 each to those 3 million workers (Detroit 2.8 management excepted) and see if that gets the economy moving again.

  • avatar

    I think that Ford is in the best position. With a solid line-up of vehicle coming from the UK that can easily enough be adapted to our market, they have the potential to pick up the slack of Chrysler and GM. Not only is Ford in the best position right now, but it has the most potential in my opinion.

  • avatar
    factotum

    When China stops investing their assets in our T-bills and invests them at home, the Chinese auto market (among others) will explode. They just need some roads and highways to accommodate them (which they are busily mapping out).

    When the world realizes that the dollar is fiat money (not backed by anything of value) we are collectively screwed. Better to invest what assets we have in producing/manufacturing for export because the US market is going to contract for many quarters (trying to be optimistic here).

    Like a blogger wrote recently, why should the US Government force me to pay a company with whom I chose not to do business?

  • avatar
    Eric_Stepans

    I think the comparisons of the auto industry to telegraphs and hat blocking are a bit disingenuous.

    Telegraphs went away because they were replaced by a superior technology: the telephone.

    Hat blocking went away because (for whatever reason), people stopped wearing hats in public.

    Does anyone here really think that there is a transportation solution that will replace the automobile in the near-to-medium term? Or that cars/light trucks will just “go out of fashion”?

    Even in years with recessions, light-vehicle demand has exceeded 10 million units per year since the 1970s. In this ‘fall off the cliff’ sales year, projected sales will approach 11 million vehicles.

    So it boils down to this: the overcapacity in the industry needs to be trimmed. Do you want to do that in an orderly gradual way? Or, do you want to do it through a deflationary spiral?

    Personally, I’d rather see the Detroit makers become another Amtrak than suffer another Great Depression.

  • avatar
    DweezilSFV

    Mr. Martinek : that summation was absolutely brilliant.

    Explains it all clearly. Bull’s eye.

  • avatar
    DearS

    Personally I feel I have not see a balanced enough answer come up. The companies did not keep up ok, what about their right to not be perfect? The right to be wrong, to make mistakes? The right to exist. Life is not black and white. What about the limitations society is placing on everyone, with the image obsession? What about letting Americans learn from their mistakes? What about letting go of the outcome and accepting another’s ignorance without blame? What about holding another responsible for their consequences without blame or pressure? What about accepting what we do not know, what we cannot predict? What about how sad all this is in some many different ways? What about the betrayed from all sides? What about Americans being unreliable and untrustworthy because of the American Ego?

    I feel those are some of the answers needed to have a more balanced analysis of the situation. I’m tired of getting into an unhealthy cycle with people and their vicious perpetration. I see perpetration on all sides in different degrees, I think I a bit of rage about all this, I’ll see how I deal with that.

    In the big scheme of things, I think some folks being able to keep their jobs for a little longer is helpful to them. The Billions loaned is not really something I ever had control over anyhow. Also the lessons one can learn from all this are priceless. Life is what it is.

  • avatar

    A few years ago, at a General Electric meeting, a great piece of advice/policy was mentioned. Basically, if GE couldnt be #1 or 2 in a particular business segment, that division would be liquidated.

    Now, obviously the auto business is even more competitive today and will become even more so. So it just begs the question…what exactly does Chrysler or any other under-capitalized automaker or line expect in todays “new” reality?

  • avatar
    ihatetrees

    Eric_Stepans:
    Personally, I’d rather see the Detroit makers become another Amtrak than suffer another Great Depression.

    Amtrak? Railroad workers make UAW types look like Chicago school economists. The Amtrak workers contract calls for 2+ years of severance if there’s a layoff. NY State is currently investigating a scam where retired LIRR employees were scamming disabiltiy AND pension payments to almost $100K/year.

    Open taxpayers wallets (most of whom earn less than UAW rate) to theses ingrates? I vote no.

    And please… Until poor people become overwhelmingly skinny, we’re not in another depression. Given the current social safety hammocknet, it’ll take a half dozen years.

  • avatar

    Hey, Michael! Do you have any idea how tough it is to get your hats blocked these days? I know – each year I have my hunting and fishing hats reblocked, and it’s a pain. Have to travel to another city. :-)

    Great article.

    You write: 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… The automobile business poached off the same line of credit.

    Totally agree – and will add another element. We shouldn’t just count the number of vehicles, but the kind and size, as well as how they are spec’d.
    The ridiculous credit lines being offered by unfettered lending allowed the car makers to go completely overboard in the size of the vehicles.

    Some have argued that this was partly due to safety requirements, but that does not begin to touch upon the real explanation. Cheap and instant credit raised the bar – and let manufacturers begin designing overspec’d vehicles – giving them greater margins, all financed through loans.

    Even with bridge loans the car makers are headed for lots of trouble. Their business propositions are going to have to be balanced and make sense, and that’s going to be news for the majority of them.

  • avatar
    npbheights

    it takes hours to build a automobile and a decade to use it up, on average. It takes about 9 months plus 16 to 17 years to make a new driver. Production had caught up and surpassed demand and it took about 100 years or so.

  • avatar
    OldandSlow

    When I saw that GM sold 150k in November and had more than 800,000 vehicles on dealer and company lots around the country, I said to myself –

    “Crikey, that over 150 days worth of inventory. Do they really need to building cars and trucks in December?”

  • avatar
    snabster

    I don’t have any problems with a massive bailout — given the amount of money we’ve thrown at Citi and other banks there is zero argument against giving GM the same deal. And while I’d like to see GM’s senior management turned into meat popsicles that isn’t a useful policy tool.

    jpcavanaugh makes some good points about overcapacity, but where is demand coming back? We’re down from 16 million cars a year to 10 million, and I’ve seen numbers that peg depression-era sales at perhaps 6 million a year. Given the vast number of cars in the US, even replacements (wrecks and new drivers) is pretty low. You don’t need a car from 16 to 21 if you’re in college or not working, and that can defer a lot of demand.

    So where do car sales recover after this? What is the “natural” rate – something like 8 million a year? Giving money to GM without dealing with the demand issue is just a waste and defers the problem to the future.

  • avatar
    levi

    Michael Martineck: …what kind of market does Detroit expect to find on the other end of their bridge loans?

    The question itself is pure poignant poetry.

    Again, Michael Martineck: 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.

    Beautiful, Mr Martineck. Excellent article.

    You can’t patch enough sails on a ship with no rudder.

  • avatar
    06M3S54B32

    Ford is the only one in a position to survive. We need to give them (“big 2.8) nothing at all. Let GM and Chrysler go C11. They have no right to be in DC pan-handling for tax payer dollars. They over-pay workers and CEOs and ask too much for their crappy products, so screw them. I don’t even personally know anyone in my circle who owns an American car.

  • avatar
    GS650G

    Like I have posted before, the one thing missing from all these plans are customers. They incorrectly think we have to buy from them or will just blindly turn over 20-40 K for something that drops in value, has bad designs all over it, and isn’t what we want.

    When the gob’ment gets into the car business they will go after the companies they don’t own and tip the playing field their way. Imagine a Toyota Tax or a Honda Fee. The justification will be that by not buying domestic you are making it harder for Uncle Sugar to get his money back. Just like smoking and fatty food campaigns are driven by the alleged health care costs to the government. When it is framed as a reference to “it costs us all” then they get their way. Funny how that doesn’t apply to everything.

  • avatar
    NICKNICK

    Eric_Stepans :
    December 6th, 2008 at 12:01 pm

    “I think the comparisons of the auto industry to telegraphs and hat blocking are a bit disingenuous…

    Does anyone here really think that there is a transportation solution that will replace the automobile in the near-to-medium term? Or that cars/light trucks will just “go out of fashion”?”

    you’re almost right. it’s not a bailout of the auto industry; it’s a bailout of the DOMESTIC auto industry.

    Is there a transportation solution to replace the domestic auto industry? Yes. It’s Honda, Toyota, Nissan, etc, etc…

  • avatar

    As I recall, the supply chain for the hat blockers was not the same as used by defense contractors.

    With only 12% of the economy in manufacturing, most people don’t know what a “supply chain” is any more than they understand what a “credit default swap” is. While only 12% of the economy is manufacturing, manufacturing companies still buy a lot of computers, software, office supplies etc.

    The guy working in IT support for CSC doesn’t understand that he’ll lose his job when automotive vendors who use CSC go under.

    Is there a transportation solution to replace the domestic auto industry? Yes. It’s Honda, Toyota, Nissan, etc, etc…

    Toyota, Honda and Nissan production will be interrupted if Detroit’s supply chain implodes. You know, that 86% US content in Camrys has to come from somewhere, don’t you?

  • avatar
    star_gazer

    @ Dear S
    I disagree with you. Business is ruthless. Mistakes cost business market share, profits, perhaps even solvency. I remember when IBM and Apple owned the personal computer market. Apple innovated. IBM did not. IBM failed to upgrade their microprocessor, because the old processor was “good enough”. Compaq came along, and ate IBM’s lunch.
    Wall Street is brutally efficient. That is why the CEO’s are paid the big bucks. Their jobs are to ensure that their companies thrive in the good times, and survive the bad times. Wall Street is not like a marriage, where mistakes, forgotten birthdays, even infidelities can be forgiven. Wall Street is the mistress who asks “Forget yesterday, what have you done for me today”.
    StarGazer
    P.S. KatieP, where ever you are, I miss you!

  • avatar
    skor

    Here’s the joke in all of this:

    If the Feds do nothing, Chrysler is done. Someone will probably buy Jeep, and the rest will be cut up for scrap.

    GM may be able to reorganize a portion of it’s business. Maybe.

    Ford will, in all likelihood, get a bounce from the Chrysler chapter 7 and GM’s chapter 11. This bounce may be big enough to keep them from drowning in red ink.

    If the Feds cough up the bailout cash, it guarantees that all three will end up dead in a year or two.

  • avatar
    no_slushbox

    Eric_Stepans:

    The big-3 all together employ about 250,000 total in this country.

    $34 Billion divided by 250,000 is $136,000.

    And that is not to create jobs, but simply to delay jobs from being terminated.

    If, like some have predicted, we pour $125,000,000,000 ($125 Billion) into the bailout that will be $500,000 per big-3 worker from the US taxpayers.

  • avatar
    Eric_Stepans

    One of the problems with a special-interest site like TTAC is that many of the participants don’t see the “bigger picture”

    Amtrak? Railroad workers make UAW types look like Chicago school economists. The Amtrak workers contract calls for 2+ years of severance if there’s a layoff. NY State is currently investigating a scam where retired LIRR employees were scamming disabiltiy AND pension payments to almost $100K/year.

    And how does that scam compare to the scams perpetrated by Enron, Tyco, Global Crossing, Long-Term Capital Management, Citigroup, AIG, the $9 billion+ in cash that was just “misplaced” in Iraq, etc.?

    Is there a transportation solution to replace the domestic auto industry? Yes. It’s Honda, Toyota, Nissan, etc, etc…

    And what happens to them when Denso, Magna, American Axle, etc. all go under because GM/Ford/Chrysler don’t pay their bills?

    What happens to demand for automobiles (and everything else) in the US when another 3 million people end up unemployed?

    What happens to the banking bailout when yet more people can’t pay their mortgages because they no longer have jobs?

    I understand the resentment people have that the Big 2.8724 management have been screw-ups for decades and now come begging to be saved from themselves.

    I understand bailout fatigue.

    I even (kind of) understand the resentment so many have for the UAW (I think it’s horribly misplaced, but I understand it…).

    What I don’t understand is the ‘cut off my nose to spite my face’ attitude people have about making what is already the worst recession the US has had since the Great Depression even worse.

  • avatar
    geeber

    Eric_Stepans: And how does that scam compare to the scams perpetrated by Enron, Tyco, Global Crossing, Long-Term Capital Management, Citigroup, AIG, the $9 billion+ in cash that was just “misplaced” in Iraq, etc.?

    You’re mixing apples, oranges and bananas.

    Enron, Tyco, Global Crossing, Long-Term Capital Management, Citigroup and AIG were all investor-owned corporations.

    Amtrak and the Long Island Railroad (LIRR) are government-owned and operated – the first by the federal government, the second by New York’s Metropolitan Transportation Authority.

    The money “missing” in Iraq was originally a federal government appropriation.

    The “scams” perpetrated by the privately owned corporations ultimately brought their downfall. The free market worked – except when government felt the need to intervene and save someone from a bad decision.

    And please note that having a bad business plan is not synonomous with a scam.

    There will be little, if any, incentive for such correction with Amtrak and the LIRR, because they are guaranteed government support no matter what, and their leadership is appointed by the controlling government authority, which means that it is politically connected.

    And the missing money in Iraq speaks for itself…although, like a lot of people who may disagree with the current administration, you may convince yourself that once your side is in charge, things bill be different.

    Given what I’ve seen of GM’s and Chrysler’s “plans” for recovery, any bailout money we give them is as likely to become as AWOL as that money missing in Iraq.

    Eric_Stepans: And what happens to them when Denso, Magna, American Axle, etc. all go under because GM/Ford/Chrysler don’t pay their bills?

    Then maybe the PROFITABLE companies that rely on them will step in and help them survive if they are so important.

    Eric_Stepans: What happens to demand for automobiles (and everything else) in the US when another 3 million people end up unemployed?

    So….these people will be unemployed forever? They will never get another job? No past recession has ever ended?

    And the 3 million figure is highly suspect…I wouldn’t rely on any estimate from the auto makers and the UAW.

    Eric_Stepans: What I don’t understand is the ‘cut off my nose to spite my face’ attitude people have about making what is already the worst recession the US has had since the Great Depression even worse.

    Study the history of the Great Depression…part of what made it the GREAT Depression was actions by Hoover and then Roosevelt designed to prevent what was inevitable.

    The simple facts are these:

    GM and Chrysler are not sustainable in their current form. Period, end of story.

    They were barely profitable in the artificially inflated market of the 2000s.

    Chrysler needs to go away, with the foreigners picking up the valuable parts (Jeep, Dodge Ram, minivans).

    GM needs to shrink until it can service about 15 percent of the market without relying on heavy fleet sales and hefty incentives. That means dealers, divisions and workers (both white-collar and blue-collar workers) need to be shed.

    Anything that prevents this from happening will only prolong the agony.

    The concern over the bailout is that the money will be used just to do that – prevent what is needed from happening, because what is needed is unacceptable to both the dealer groups and the UAW.


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