I’ve been really peeved about all of the bailout talk that’s been circulating lately, and seeing the auto industry’s “updated proposals” this afternoon just pushed me over the edge! I technically stopped writing Against the Grain (my editorial / commentary column) earlier this spring, but I’ve always considered the idea of doing it every once in a while for issues like this.
Posting here because I don’t really have a website for these yet – behind the cut because it’s almost four pages long…
Nobody is Too Big to Fail
by: Scott Sevener
I don’t know about you, but I’m getting so tired of hearing the word bailout…
Today’s latest addition to Financial Chaos ’08 featured the big three automakers here in the U.S. returning to Washington to elaborate their case as to why they believe they should receive a $25 billion bailout loan from the federal government.
Oh, I have so many problems with this – I simply don’t know where to begin!
In my view, these bailouts have always been and will always be bad news, whether we’re talking about AIG, Freddie and Fannie, Detroit, or whoever. It’s not the government’s role to act as an emergency savings and loan – getting involved in the first place was probably the biggest mistake that’s been made so far, and there have certainly been a dozy of mistakes since! But for some reason, the United States has always lived under this crazy notion that we can just throw money at our problems to make them go away, even if we don’t actually have any, and thus we’re a nation that’s $10 trillion dollars in debt, fighting two separate wars overseas that are running a collective tab of about $12 billion / month, with the average citizen at home also carrying $8000 of consumer credit card debt on his or her shoulders. Seriously, what’s it going to take around here for us to realize that we can’t buy our way out of every problem???
And frankly, I think that for the most part all of this financial crisis that we’re experiencing is something that was bound to happen with the method in which so many of our big corporations chose to conduct business – cut corners, run a super-high risk on your products, and never slow down your spending for fear that the gravy train will get derailed. Well, that’s exactly what did happen to so many of these irresponsible giants, and normally this is simply where the free market would correct itself by scrapping down the failed companies for parts and selling those to smaller, more innovative companies which will rise to take their place. The only problem is, these giants refuse to admit that their dead because somebody went and put the crazy notion in their heads that they’re too big to fail.
Friends, in the world of business, nobody is too big to fail.
Granted, some are so large that it would be very inconvenient if they were to fail – thousands of jobs may be lost and many of us who rely on their services are going to have to figure out a new way to do what they did – but it definitely sets a very bad precedent for a free market when certain companies are deemed too large for failure. I mean, really, where do we draw the line? And who gets to draw that line? How fair is it to say that one company deserves hand-outs from our federal government while another doesn’t, simply because, and this is the really messed up part – they weren’t responsible enough with their business plan to even sustain themselves on their own. What sense does it make to reward a company with an extra chance when time and time again they’ve watched their competition simply die and fade away when the numbers stopped adding up?
One of the big whiners in the auto version of The Great American Bailout is the United Auto Workers union, citing that tens of thousands of union jobs will be lost if these companies don’t receive the money they require, and to that I can only say … sometimes that’s the way the cookie crumbles. Don’t get me wrong – yes, it’s a horrible thing anytime thousands of people lose their jobs, but you know what? Businesses rise and fall around the world every single day – jobs are lost, and families scratch their heads wondering how they’re going to pay the mortgage or put food on the table. And we already have a system to help people when these horrible tragedies happen – it’s called unemployment.
What about less than ten years ago when the tech bubble burst and hundreds of Internet start-ups went belly up? What about when the various airlines hopped in and out of bankruptcy like hopscotch and incurred massive layoffs during the process? What about when companies exercise their option to outsource jobs overseas to cut expenses? In all of these instances, thousands of people have found themselves suddenly without a steady paycheck, and yes – that sucks, but it’s also kind of how business works. If you can’t make enough money to cover your costs and sustain yourselves, much less show a profit to keep your shareholders happy, you don’t get to be in business anymore – it’s that simple. Yeah, the bigger these companies are, they harder they fall and any of the big three automakers in Detroit going out of business is going to hurt, but their size in the industry doesn’t get to dictate which of the basic rules of business still apply to them…
…which is why I thought it was almost comical, if not only because they’re actually serious, when I read of the new proposals that GM, Ford, and Chrysler brought to Congress to persuade them to open the federal coffers to help “keep the auto industry alive.” The CEOs offered to work for $1 / year and make major salary cuts or remove bonuses entirely across their executive staff, corporate jets would be grounded in favor of much cheaper commercial air travel, and operations would be downsized to run more efficiently – nice sentiment until you ask the follow-up question, “Why haven’t these guys been doing this kind of stuff all along?!” Maybe had they run their businesses smarter before – not taken multi-million dollar annual salaries, flown 1st class commercial instead of in multi-million dollar jets that run in the tens of thousands of dollars in fuel per flight, and adjusted their product lines to innovate for tomorrow instead of maximize profits today – maybe had they acted as a company should if it wants to survive, they wouldn’t need a handout in the first place.
It’s easy to look back from your deathbed and say, “Oh, my gosh – if we had done this, and this, and this, we’d still be able to stay in business!” but why should anyone get that sort of Get Back into Business Free card, especially from a government that frankly doesn’t have the capital to be loaning out by the billions in the first place?! Two of the big three (Ford being the exception) were also sure to tack onto their proposals that without government intervention, they were done. GM’s COO Fritz Henderson put it bluntly, “There isn’t a Plan B. Absent support, frankly, the company just can’t fund its operations.” But where many other companies would turn to bankruptcy and admit defeat, these three stood there nonetheless expecting special treatment because they’re too big to fail. As far as I’m concerned, if a company can’t sustain its operations any longer, it’s already failed – period. The idea that these executives worth millions of dollars even had the nerve to fly to Washington and, with a straight face, request billions of dollars to keep the very companies that made them rich afloat, is deplorable.
Of course, even if we do end up shelling out this cash, who’s to say that it’s actually even going to do any good? We’ve already watched frivolous spending on Wall Street continue with lavish parties and all of the bloated spending that got them into this mess in the first place – why would we expect the auto makers to do any differently? Twenty years of poor business aren’t going to change overnight the moment the check clears in an “Ok, guys – this time we’re playing for keeps!”-kind of attitude. Kind of like that “economic stimulus” that most of us received earlier this spring that was supposed to kick start the economy, but ended up pretty much being handed directly over to the oil companies by most of us when gas “suddenly” broke $3, then $4 / gallon.
I’ve said it before and I’ll say it again – we can’t buy our way out of this problem.
That said, what do I think should happen with this whole mess? Well, it certainly isn’t a fix that will take place overnight – it’s going to hurt, and it’s going to hurt for a while, but I say it’s time for the government to back off entirely and let some of these companies fail, just like thousands of other businesses have failed before 2008 – the year when everyone wanted a bailout instead of taking responsibility for their actions. What happens if these companies fail? A lot of people lose their jobs, yes, but as that happens, other businesses also move in to take up the slack. There are more than three car companies that do business in America – notice how not all of them are flailing their arms in the air begging for money? What are Toyota and KIA and Honda and all of the others doing differently that’s allowed them to stay afloat while their dinosaur brethren are gasping for air?
What’s going to happen if these bailouts do get approved is you’re going to set a very bad precedent for all other businesses in America. Let’s face it – we’re all hurting in our current economy. Does that mean that we should slip up just a little bit more so that Uncle Sam will swoop in and save the day? Just like I shouldn’t get special treatment to help manage my mortgage if I bought into all of the housing industry hype over the last five years and signed up for a loan that I could never actually afford under reasonable circumstances, these companies shouldn’t get special treatment for poor practices that ended up running their businesses into the ground. They should be treated just like any other failing business – call it quits or do your best to restructure under chapter 11 bankruptcy, but don’t walk around in thousand dollar shoes with your hands outstretched expecting us to help you get back on your feet.
Rewarding bad business is only going to buy us a little more time and unless actual change takes place to weed out the blatant corporate greed and get back to good business that earns its money honestly, we’re just going to be in this same boat another 6 – 12 months from now, hoping that just a few more bailouts will slip America’s economy back into check. It can be done, but there’s going to be a lot of hurting along the way and to expect anything less after allowing things to get as messed up as they are is just apathetic.
It is possible for companies to be successful and make money without being excessively greedy, and if an industry as a whole suggests that it can’t make money anymore, then it’s time for the players in that arena to either evolve their business plan or respectfully bow out. They shouldn’t have to look far for examples – thousands of good, successful companies already exist in all sorts of industries across this country and this world, and they’ll continue to stay right where they are and keep making that money as long as they remember that greed has no place in the world of business.
At least long term it doesn’t.