Thursday, 5 March 2009

Auto makers troubles

According to this report in the Washington Post
The steep drop [in sales] puts additional pressure on GM and Chrysler, which are rapidly burning through cash while generating very little income from sales. After receiving $17.4 billion from the government in December, both companies say they will still be on the verge of bankruptcy unless they receive another cash infusion from the Treasury Department on March 31.
Isn't the answer obvious, let them go into bankruptcy.

Later in the Post's report it is noted that
GM, meanwhile, is requesting financial support from the governments of Canada, Germany, Britain, Sweden and Thailand. Yet the Swedish government hasn't granted the request, forcing Saab to reorganize under court protection. And Germany is still evaluating GM's Opel unit.
What is it about auto makers that makes them think that taxpayers, worldwide, want to pay them to produce stuff no one wants? The whole point about falls in profits is that it signals that companies should change what they are doing and how they are doing it, or cut back on production or exit the industry or some combination of these things. Government handouts just delay this necessary adjustment. Removing this market discipline is just bad economics and bailouts by the government gives businesses a reprieve that the market wouldn't give them. Within free markets a firm has to be able to pay the ultimate price for bad decisions or products. But when the government interferes, that discipline is removed. At least it appears that the Swedish government has acted (more) correctly.

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