Why rent when you can own a car company?

The car companies are busy on both sides of the border hard selling the idea of direct financial support from government.  Not being someone who is ideologically disposed against state intervention in the markets but who is pragmatically disposed against throwing money at problems without solving the underlying problem the question of an auto bailout causes me some discomfort.

The fact is the auto companies were in trouble well before the financial crisis and the root of that problem was, in the main, the car companies’ failure to make fuel efficient cars that people wanted and could afford to buy.  The business model of selling large cars, mini-van, trucks and SUVs was predicated on low oil prices: Clearly a bad bet.  But more than a bad bet it was environmentally irresponsible. And as with previous bad decisions the car companies have turned to government for financial help and unions for concessions to make up for bad management.

To my mind if the auto sector is to receive government aid two minimum requirements should be met.  The first is that auto companies should agree to radically increase their fleet of fuel efficient and alternative fuel vehicles.  And this agreement should be made in law not in a wimpy letter of intent.

Second and equally important, management and existing owners should be punished for their poor business model.  And the way to achieve this is simply by diluting the existing shares by issuing new preferred stocks to their respective governments to raise the cash they need to service their commitments.  From the citizen’s point of view they get both a potential dividend payment and the possibility of realizing a capital gain when the proffered shares are sold back to the auto companies.  From the POV of the auto companies they get a defacto loan that can essentially be paid back in better economic times.

I agree that the sector should be helped if only to help preserve, what is, after all, a shrinking manufacturing base and good paying manufacturing jobs.  But there are much better options than simply throwing money at car companies without (a) fixing the problem and (b) holding existing management and ownership accountable for their dismal business model.


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