Monday, January 26, 2009

The Daisy Chain of Bailout Begging

Before Christmas it was the Big Three automakers that headed to Washington, begging bowls in hand. Now, according to the Washington Post, it's the auto supplier industry, the smaller companies that build parts and components for the Big Three and other car companies.

Suppliers are bracing themselves to feel the brunt of the weak U.S. auto market. The auto industry ended 2008 with its worst sales in 16 years. Industry-wide, automakers sold 896,124 new cars, minivans and trucks in December, a drop of 36 percent compared with December 2007.
It's a complex, interwoven predicament: Many automakers and suppliers rely on a trade credit system, in which the supplier provides parts to the automakers under an agreement to be paid at a later date. Suppliers then put up those billings, or receivables, up as collateral for working capital loans.

If the auto suppliers get bail outs, just where is this going to stop? There has to be a clear delineating rationale for bail outs. If the auto industry needs only four companies to produce door handles why not keep the best four alive and let the others close? What is the possible advantage to the United States of burdening taxpayers, present and in generations to come, with the expense of keeping surplus door handle manufacturers alive? It's not going to increase the demand for door handles, is it?

In the United States today, who doesn't want a bail out? Most of the states are asking Washington for bail out money. A lot of cities are heading the same way. Individual homeowners want Washington to come through with foreclosure relief. Everybody can't be lending bail out money to everyone else.

Let's face it. A major factor in today's fiscal mess is that, for years, Americans were so awash in cheap money that they borrowed as though they believed they could defy gravity, that there would be no tomorrow.

Money borrowed to spend on bail outs is money Washington won't have to invest on infrastructure projects. Money handed out to allow a company to buy a little time is money that won't be available to buy a bridge.

It's an ordinary part of business that, when downturns arrive, it's survival of the fittest with the weakest, most poorly managed firms going under. Bail outs should not be used in a futile effort to prop up failed business.

1 comment:

Scruffy Dan said...

"There has to be a clear delineating rationale for bail outs."

You would think (hope?) so, but given what is happening south of the boarder, and what is likely to happen tomorrow here in Canada, apparently there doesn't have to be a clear delineating rationale.

Don't worry I am sure there are absolutely no consequences to reckless spending... yep none at all. This is all going to work out great!