Why is our government bailing out Fannie and Freddie? Why do we have to foot the bill for a bunch of Washington cronies who besides making stupid decisions which caused these banks to fail are being paid huge sums of money to leave! (Read at Wall Street Journal).
This is bad public policy for reasons of philosophy, practicality and precedent. And by the way, this is a dumb idea for the car companies too, simply in terms of their own self-interest.
Philosophically, if the Freddie Mac and Fannie Mae debacles teach us any lesson, it is that subsidizing private profits with public risk is a terrible idea. Implicit government backing has led the managements of these two companies to make reckless investments that have backfired badly. Now government backing has become explicit, and under the plan announced by Treasury Secretary Henry Paulson yesterday, taxpayers likely will pay billions to keep Fannie and Freddie solvent -- with the exact amount uncertain.
The Detroit Three got into their current quandary by making decades of bad decisions, with some help from the United Auto Workers union. Yet despite the current crisis, General Motors is still paying dividends to shareholders, the car companies are paying bonuses to executives, and the private-equity billionaires at Cerberus who bought Chrysler are trying to reap enormous rewards from their risky investment. ...
Of course, we can all hope that shareholders do well, that executives reap handsome rewards for work well done, that the Cerberus billionaires make more billions on Chrysler, and that workers get paid on whatever terms the car companies agree. But we taxpayers shouldn't subsidize any of this.
The only reason we should bail out any private company is the risk that its demise would wreak havoc on the entire economy. Bear Stearns conceivably passed the test; its collapse could have threatened the U.S. financial system, and the government didn't make the mistake of bailing out shareholders or management.
But just what calamity are we trying to avoid by subsidizing loans to Detroit? That we'll all be sentenced to the indignities of driving Hondas, Mazdas or BMWs? Toyota and Honda, the current leaders in hybrids and alternative-fuel technology, did their research and development on their own dimes.
Even if Ford, GM and Chrysler were to go out of business -- and it's highly unlikely that all three will simply cease to exist -- there will be plenty of good cars for Americans to buy. And many will be made in America, even if they carry foreign nameplates. Toyota, Nissan, Honda, Hyundai and other foreign car companies have expanded greatly their U.S. manufacturing operations in recent years. They're doing so because Americans are buying their cars.
...And what about the precedent the government would set? If we bail out Detroit, where do we stop? The newspaper industry is in financial trouble because more readers and advertisers are turning to the Internet. Newspapers are good for democracy -- Thomas Jefferson said he would choose newspapers over government, after all -- so shouldn't they get low-interest government loans to help them adjust to the Internet? Of course not, and ditto for Detroit.
If Detroit's auto makers would apply more than knee-jerk analysis to what's being proposed, they would reject it quickly. No matter what their spin, including the patently absurd claim that government-guaranteed, below-market loans aren't a bailout, loan subsidies will paint them in the public mind as corporate welfare recipients that can't compete on their own. That can't be good for sales. (Detroit Blackmail Attempt is Beyond Shameless.)
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