Tuesday, December 9, 2008

This Will Never Happen

More details from the proposed package: the Car Czar (I hate that term already) will have the power to demand immediate repayment of the $15 billion if he or she is not satisfied with the automakers' long term plans, or if they are not submitted by March 31.  This is meant to reassure taxpayers that their money won't be wasted.

In reality, there is almost no conceivable way that the Czar and his ministers, who are a political entity, will be able to demand repayment of the loan. Barring a miracle, calling in this loan would result in the immediate insolvency of both companies. Passively letting one of the Big 3 go bankrupt is politically very difficult; actively moving to cause their collapse will be impossible. 

In fact, denying further requests from Detroit for money will be almost impossible once the government is invested. The political cost of ignoring sunk costs will be far too high to overcome, and we will throw good money after bad.

There are two main components of the current economic crisis. One is a crisis in confidence, and the other is a crisis in misallocation of capital. For the most part, this has been limited to misallocating capital in the housing sector. This bill will exacerbate that by extending it to Detroit.

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