GM is not Lehman

I’m generally in favor of bailing out the US auto industry, mostly because such a bailout would be a relatively inexpensive form of fiscal stimulus. Compare the cost of bailing out the auto industry to the cost of trying to replace the lost jobs by means of government hiring. (There will be multiplier effects on both sides of the equation, which should roughly balance out.) Bailing out the auto makers, by just lending to them at below-market interest rates, is clearly cheaper. In fact, the interest rates should still represent a positive, or at least neutral, spread to Treasury rates, so there need not be any cost at all to the bailout unless the bailees eventually do default.

However, comparisons between GM and Lehman Bros. are overblown. The lost jobs at GM could be replaced by means of a fiscal stimulus, albeit an expensive one; the financial impact of the Lehman bankruptcy cannot be undone, though the government is doing its best to mitigate that impact.

An industrial company is simply not the same as a financial company. Yes, the auto companies do have creditors, and those creditors will lose out if the auto companies go bankrupt, and this may have significant adverse indirect effects. And yes, such bankruptcies will somewhat reduce confidence in US industrial companies in general and make it a bit harder (though probably not a lot harder) for them to obtain financing.

But a financial company doesn’t just have creditors, it’s in the business of having creditors. The indirect impact of a major failure – by forcing creditors, and creditors of creditors, and so on, to deleverage themselves – is huge. And a loss of confidence in financial companies doesn’t just make it harder for them to find financing; it instigates a chain reaction of additional deleveraging on a grand scale. And as we have seen, this can make it impossible for many companies (and households) to find financing at all, and such tightening of credit can result in many more job losses than the collapse of a few large industrial companies.

So, yes, I do support an auto industry bailout. But let’s not allow the auto companies to bamboozle us by claiming that their failure would be as disastrous as the Lehman failure. The public should not consider itself to be in a terribly bad negotiating position with respect to the auto industry. Bail them out, but bail them out on our terms, not theirs.