Would Failure of the “Big 3″ Cause a Depression?

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Would Failure of the “Big 3″ Cause a Depression?

By JLP | December 3, 2008

Could the failure of the “Big 3″ cause a depression?

That’s what a Chrysler executive claims:

“We’re on the brink with the U.S. auto manufacturing industry,” Press told The Associated Press in an interview. “If we have a catastrophic failure of one of these car companies, in this tender environment for the economy, it’s a huge blow. It could trigger a depression.”

I’m not sure about that but I am sure that it’s in this executive’s best interest to paint as bleak of a picture as possible in order to get his bailout. What do you think?

I’m sure failure would not be good. But, as we’ve talked about before, we can’t just give money to the automakers and allow them to carry on business as usual. Big changes need to be made and now is as good a time as any to make those changes. These changes have needed to be made for years but the current crisis really brought them to light.

Please weigh in with your opinion.

Topics: Question of the Day |

Comments to “Would Failure of the “Big 3″ Cause a Depression?”

Spokane Al Says:
December 3rd, 2008 at 5:38 pm

I personally disagree with giving the automakers money but don’t think it really matters what I think.

Our congressional leaders have made the auto execs jump through a few hoops and will now give them the money. Congress is beholden to the unions and unable to stomach job losses from factory closures in their states/districts.

It is a done deal.

matt @ Thrive Says:
December 3rd, 2008 at 5:51 pm

As with any bailout, the question has to be: what are we getting in return for our money? To the extent that we are purchasing a large share of the Big 3, than we should have some say in directing the policy of their business. Now you could argue that we shouldn’t get involved in private business as a collective country, but by that logic, you have to let them fail.

If they failed, it costs us about 500,000 jobs from what I can tell, not including the ripples in support industries. Is that big? Yes. Is it the end of times? Probably not. So the deciding factor has to be: what are we really buying with our money?

Glinka Says:
December 3rd, 2008 at 6:12 pm

Changes were already being made. By setting up the VEBA for retiree medical coverage and starting the two tier pay scale plenty ofmoney would be saved. The job banks program was being scale down to be eliminated, though not soon enough. As far as complaining about the American autos not being efficient, they are on a par if not ahead in most JD Power ratings. It was a joke to hear congressmen grouse about the CEOs flying in corporate jets. A good many of them have no qualms about flying in corporate jets themselves. A good many of the congressmen that were so critical of GM are the same ones who represent states where Honda and Toyota have been given sweet deals to go there. Also, all this talk about the government getting into the auto design business is old, since they already have been by imposing CAFE standards.

ABCs of Investing Says:
December 3rd, 2008 at 6:56 pm

I don’t really have a problem with a bailout but I think it should only come with some really thick strings - ie a good business plan - which of course would entail new management since the current ones are obviously not up to the task.

I love how the auto makers are emphasizing that the money is for a “loan” - I’d say it’s more of a really expensive call option with a limited upside. The loans won’t get paid back if the companies end up bankrupt.

KC Says:
December 3rd, 2008 at 7:14 pm

I read where they cast aside their private jets this time and took hybrid vehicles to DC. Wonder if they opted for the Toyota Prius or Honda Civic hybrid? LOL!

Anyway, snarky remarks aside, I’ve wondered about the consequences of bailing the big 3 out. Personally I think its going to happen, but I’m not sure its for the best. What I see for their future is similar to the airlines and that’s not good. Perhaps bankruptcy and restructuring without the government’s help is what is needed here. But if the supply line is as big as the execs are saying it is then bankruptcy could be very hard on Americans and the economy.

What would happen to all the car dealerships? Who is going to want to buy a car from those 3 if they can’t be guaranteed they’ll be serviced? There is really a lot here and unfortunately there isn’t one good answer.

Stacey Says:
December 3rd, 2008 at 8:08 pm

(Car/Airline industry/etc.) Execs and Gov’t have been negligent (asleep!) for too long. The fox has been in and out of the hen house and now is going back in to get the last hen…

Lucky for Congress that they will still have their nice perks while the rest of us have to suck it up and quite possibly never retire. Maybe it’s time for them to experience a cut and have a repercussion for their stupidity and lack of leadership…

Jeremy Says:
December 3rd, 2008 at 10:16 pm

A depression? Hardly. If we were to get to a point where we enter a full blown depression, it wouldn’t matter if the auto industry was here or not. The auto industry is big, and important, but it wouldn’t be the tipping point.

The fact remains, if they don’t get their bailout, these three massive companies wouldn’t suddenly vanish, their doors wouldn’t instantly close, and millions of people suddenly be out of work. For one, Ford has already said they don’t really need the money, and probably wouldn’t have to tap it even if offered. While you can’t say as much for the other two, it still isn’t as bleak as they paint it out to be.

There is an argument to be made that if one or more of these companies go bankrupt, it would ultimately fail because people won’t buy products from a company that’s technically bankrupt. Well, that is a valid concern on the surface, in reality, it isn’t as big of an issue. They could use bankruptcy to set up a means to honor warranties or whatever to ease consumer confidence, etc.

And in the worst case, do you really think if one of these companies had to completely shut down, that all would be lost? I doubt one of the other domestic automakers, or even toyota, honda, etc wouldn’t be willing to snatch up their technology, their existing plants, and even displaced talent to bolster what they already have going.

The bottom line is that any sort of bailout, or bridge loan, or whatever you want to call it will only prolong the ultimate fate, whether that is success or failure. The big three have been losing money for years, so it isn’t like this suddenly happened over night. A few billion dollars of cash won’t make the existing pensions go away. It won’t make the health care benefits go away. This isn’t a magic bullet to suddenly allow these companies to turn a greater profit on the same cars your competitors are selling. As long as you are forced to keep paying your employees more and provide unsustainable benefits compared to your competitors, it will be nearly impossible to magically make more money than them.

It really sucks living in michigan with your whole family in michigan basically employed by, or dependent on the auto industry, but these are the realities of the situation. My parents have already been told they won’t have a job in a few months, bailout or not. my in-laws lost their entire supplier business a few years ago thanks to the weak auto industry. You can’t undo decades of mismanagement by throwing some money at the problem. The writing has been on the wall for a long time, and the current economic crisis is just a good excuse to beg for money to prolong the pain.

Tim Says:
December 4th, 2008 at 4:04 am

it’s all scare. chapter 11 they should go. there won’t be 500k jobs lost under chapter 11, contrary to all the scare out there. chapter 11 is the best thing for them, because it gets rid of UAW which is the biggest barrier to restructuring. you can see UAW is scrambling now, because they know chapter 11 will make them irrelevant. the lesson is, be a part of the solution not part of the problem. if any of the auto makers seriously think they are going to be profitable in a couple of months let alone in 2009, they are blowing smoke up congresses and our asses. seriously, how can Ford state that. on one side they are taking an apocalyptic stance if they don’t get the bailout, while on another they are giving rosy picture if they get the bailout. it takes far longer than a couple of months for them to restructure and then become profitable again. the quickest, easiest way to restructure is under chapter 11.

no one should believe any money given to the big 3 would be a bridge loan, it would be simply giving money away for them to burn.

i also like how the ceo’s are saying they will work for $1. ok, steve jobs works for $1, too, but what he won’t say nor will the big 3 ceo’s say is their total executive compensation package which includes stocks and bonuses. nice try. we aren’t that stupid to think $1 salary is all executives would get.

why the heck would be bailout chrysler again? it’s a private company now, so screw them.

BDO Says:
December 4th, 2008 at 9:56 am

To answer the question: “Would failure of the ‘Big 3′ cause a depression?” - I think it would contribute significantly towards it, especially if all 3 did in fact fail. However, there are many other problems in play such as the collapse of the housing market and the credit crisis. So which problem gets the credit for “causing” the depression should one occur?
I still don’t understand all 3 automakers claiming that if one of them fails they would all fail - where’s the logic in that? I say let the markets decide. Also, for their argument that consumers won’t buy a car if the company is in bankruptcy - I will make it a point to NOT BUY a car from any company that receives a government bailout!

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December 4th, 2008 at 10:26 am

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rubin pham Says:
December 4th, 2008 at 10:34 am

bankcrupcy will allow them to reorganize and get better concession from the unions.
let the chips fall where they may.

rubin pham Says:
December 4th, 2008 at 10:35 am

and yes they need to make electric and hybrid cars as well.
now that a toyota prius is not selling for 10k over the sticker price, i will look seriously at that car today.

Eileen Says:
December 5th, 2008 at 9:40 am

I believe that The bail-out is a very bad idea, let ford stay around and let the big 3 file bankcruptcy, Chapter 11, would get rid of the crazy, and I do mean crazy idea of 95% pay for NO work done(for unemployed UAW employees) and $5500 on top of a new car’s sticker price to pay for retirees to golf? I am a union employee, proudly so, but my package is more than ample at approximately $50/hour with decent benefits, etc. I think that the UAW is the demise of our auto industry. I think it’s a shame, really a shame. I love American cars. My favorite cars WERE the Chrysler Pacifica and the Cadillac CTS, whew! If GM and Chrysler would have concentrated on better gas mileage and dependability even 10 years ago I think we’d be in a better position today. And why oh why can’t we have our cake and eat it too? Why can’t we let them fall, let them restructure with Chapter 11, and let them get thier act together to give us SIZE, comfort, speed and make these cars gas sippers? Why? Aren’t there any decent automotive engineers out there? Talk to me!

Harry Dowless Says:
December 12th, 2008 at 8:38 am

Why should the big three not get their 500 billion buyout, the banks got 900 billion! The only difference that I see here is that with the banks the big CEOs got all of the money. With the big three, the unions/middleclass people will get half of the money.
We the people are the real losers in the money game. Maybe France had the real solution to the problem with the guilotine locked away in the Bastile. As we can see in our current example, the French people were right in what they did back then. We in America would be right to do so now!

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Would Failure of the “Big 3″ Cause a Depression?