More on Bailouts, Autos and Banks

Yesterday, I analyzed the differential treatment of the banking and automobile industry. Liberal websites like Daily Kos, however, have pointed out that CEOs at AIG, Fannie Mae and Freddie Mac were forced to leave their jobs as a condition of the companies they managed receiving federal assistance. But the government essentially "took over" these companies and has been running them since that time. The situation with the automobile industry is vastly different.

Today, Eugene Robinson of the Washington Post has joined others who have criticized the disparate treatment. The fact that Robinson has criticized President Obama is far more important than the substance of his criticism, because Robinson has been one of the most loyal supporters of Obama among journalists at major media outlets. As Robinson observes, the automobile industry certainly requires a tough love approach, but so does the banking industry.

The Editors of the Detroit News have also come out swinging against the disparity. The newspaper argues that the ouster of General Motors CEO Rick Wagoner was a political ploy designed to make the President appear tough on bailouts, given the public's anger over Wall Street. According to the Detroit News, the automobile industry is simply the scapegoat in a political game:

Obama has been banged around the last couple of weeks because of the bonus scandal at AIG. His administration, with the help of Congress, botched the aid package to the failed insurance giant, allowing the indefensible bonuses to be paid and triggering public outrage that is increasingly focused on the White House.

Dumping Wagoner lets Obama deflect attention away from Wall Street, where his Treasury Department is still moving through quicksand, and turn it on Detroit.

He can portray himself as being tough on the corporate executives who are ruining America, without having to draw blood from the bankers.

The White House's approach to Detroit, as opposed to the financial industry, applies a clear double-standard. The existence of a double-standard, however, does not mean that automobile manufacturers deserve leniency. Instead, both industries should face restructuring and greater controls.

The banking industry in fact deserves more scrutiny because its reckless behavior was the leading cause of the global financial crisis, and it has received far more federal assistance than any other business sector. Other than the relative political and economic power of Wall Street, it is difficult to understand why the government continues to coddle the banks and pay off their investors, while providing very little direct assistance to consumers and other commercial sectors.

Discriminatory Bailouts? $2 Trillion for Wall Street, Tough Love for Detroit

According to the Associated Press, the White House has demanded that Chrysler and General Motors restructure before the companies can receive additional financial assistance from the government. General Motors CEO Rick Wagoner resigned Sunday at the request of the White House, and federal officials are reportedly pressuring Chrysler to accept a partnership agreement with Fiat SpA. Ford, the third United States car manufacturer, has not received federal assistance and is not subject to White House plans.

Here is a clip from the story:

The White House says neither General Motors nor Chrysler submitted acceptable plans to receive more bailout money, setting the stage for a crisis in Detroit that would dramatically reshape the nation's auto industry.

President Barack Obama and his top advisers have determined that neither company is viable and that taxpayers will not spend untold billions more to keep the pair of automakers open forever. In a last-ditch effort, the administration gave each company a brief deadline to try one last time to convince Washington it is worth saving, said senior administration officials who spoke on the condition of anonymity to more bluntly discuss the decision. . . .

Question: Why Does Detroit Receive Tough Love, While Banks Are Waiting for the Next Trillion-Dollar Installment?
The White House approach to domestic automobile manufacturers seems rooted in an understanding that market forces have seriously eroded demand for their products and that management has not adequately responded to this reality. With respect to banks, however, the government has proposed tossing another trillion dollars into the very industry that is largely responsible for the global financial and economic collapse.

Based on the banks' culpability in the economic crisis, the better argument would have the White House make stricter demands on banks than automobile manufacturers. The fact that the banking bailouts dwarf the magnitude of federal assistance for Detroit warrants even greater caution regarding the financial sector.

Experts ranging from Nobel Prize winning economist Paul Krugman to famed Merrill Lynch analyst Richard Bernstein have argued that the government should abandon its heavy subsidization of financial institutions and their investors. They believe that the government should instead offer financial institutions a healthy dose of tough love in the form of either nationalization and restructuring (Krugman) or promotion of greater consolidation within the sector, rather than artificially inflating the price of and purchasing toxic assets (Bernstein). Even former Federal Reserve Chairman Alan Greenspan recently promoted the idea that "It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring.”

Final Thoughts
The reality that the United Autoworkers union is a leading supporter of President Obama could potentially make the White House approach politically difficult. With that in mind, perhaps this is Obama's way of indirectly pressuring UAW to accept concessions. A tough public stance towards management could likely conceal the government's desire that UAW relent on issues such as compensation and benefits. On the other hand, a public standoff between the White House and labor would be politically damaging.

The cost-cutting and restructuring that the White House has demanded of the automobile manufacturers, however, would likely necessitate sacrifices by labor. Offering tough love to management could send a message to union leaders that they should approach negotiations with greater flexibility. Banks deserve the same type of treatment.

PS: I wrote a related article on this subject after Senator Dodd called for the resignation of automobile industry management earlier this year. Also, it seems others are making similar observations: CEO Change Begs Question About Banks.

Update: Some auto workers believe they are being punished because the public is upset with the banking bailout.