Bailout or Depression?

The week of November 17, 2008, has been a big one in the financial industry. The main issue: the bailout of the automotive industry. It is without a doubt one of the quintessential decisions in the economic sector in recent history. The Congress has already approved a $700 billion bailout bill to loan money to financial institutions in hopes of reversing the downward course the U.S. economy has been heading in for years now. There is no doubt that the U.S. economy is n a recession and without immediate changes to the way the system is run will end up in a depression.

When the bailout bill was first passed, financial institutinos such as AIG, Lehman Brothers, Fannie Mae and Freddie Mac were the first ones to receive money in assurance that they would stay afloat. This was an easy choice to make because these banks and lending giants controlled many peoples' finances and bankruptcy would be disastrous. The lending of money to these financial giants went without much debate once the bill had been passed. However there is a much heated debate in Washington right now about whether to loan $25 billion to the big three automakers to hold them over for two years until their new plans and car designs can be put into effect. The last two days have been full of lobbying and speeches by not only the CEOs of the big three but by the United Auto Workers as well. Many members of Congress, mostly republicans but also some democrats, believe that it would be better to let the big three file for bankruptcy to get rid of the credit debt they have accumulated and start anew with new ideas and policies.

First we need to understand why the big three is in such dire circumstances. It is a combination of things really: high labor costs, credit difficulties, poor car development, no policy changes as economy changed, and the economic situation as a whole. It is understandable that many politicians do not want to give out money to businesses that have continually stayed the course of decline and were ignorant in their policies. However, could you not say that AIG and the Lehman Brothers did the same thing? It comes down to this. If the big three went bankrupt it would be a fatal hit to the economy. Nearly 2 million jobs are either directly or indirectly connected to the auto industry. If the auto-industry goes under, the U.S. will lose a projected tax revenue of $100 billion over the next few years. Hundreds of thousands of more citizens will be without healthcare. And if Obama's plan of a type of universal healthcare is put into place, which is expected, taxes will go up because of the extreme amount of un-insured citizens. These congressman would rather have these businesses declare Chapter 11 bankruptcy than get bailed out. Chapter 11 is different from Chapter 7 because they are able to rid themselves of the debt they are in while still performing operations. However, many analysts believe that filing Chapter 11 would lead to having to file Chapter 7 in the future because of the uncertainty of buying from a bankrupt company and not being able to fully rebound.

So we went over what would happen if the loan was not approved. What is the big three's plan for the money they could possibly be receiving? They are asking for 25 billion dollars to hold them over for the next two years. By then, new car concepts and fuel-efficient models will be on the market and cost-saving will take place as was agreed upon in labor agreements with the UAW. The UAW will then begin to pay for pensions of retirees saving money for the auto companies. The big three believe that if they can hold out until 2009, pent up demand and savings from these labor agreements could once again skyrocket the auto industry in the U.S.

I highly doubt this loan will be approved any time in 2008. This is a considerable time to wait and GM might not be able to hold out that long, but I believe that once Obama is in office, the appropriate loans will be agreed upon. The fact is the bailout package has $60 billion unspent and $350 billion held on to until Obama takes office. $25 billion doesn't seem like so much when it could make or break millions of jobs and the economy.