Should GM go Bankrupt? Part 2

Letting General Motors (GM) fail would cost the economy jobs that would probably tip the current recession into a major depression.  The suffering would be severe and could last several years.

On the other hand, bailing them out would just postpone the pain and send the country into a prolonged recession. Japan tried the second path and has been in the doldrums for almost 20 years because of it.

So the question at this point is how do you like your pain? Short and then over, like ripping off a bandage or long and drawn out like Chinese water torture? Of course, if we the choice of neither...  unfortunately the policies of the last 20 years of easy money and massive liquidity to shorten recessions, is finally coming home to roost.  -- Tim McMahon, Editor

a GM bankruptcy is huge. Job losses would go through the roof

November 21, 2008

By Charles Delvalle

It was pretty amazing.

Last Saturday I wrote about GM. Not only did I write about GM, but I also talked about how I felt they should get government assistance.

I only received one bit of reader feedback – someone debating as to exactly how many jobs would be lost if GM went bankrupt. The reader sent a screenshot of Yahoo finance where it said how many employees GM has. Then he wondered how that number could possibly turn into 2.5 million.

The answer is simple.

That employee count in Yahoo doesn’t include those employed by dealerships, suppliers, ad agencies, and mechanic shops that all rely on GM to a heavy degree. If GM goes broke, the flow of money to these companies stops. And then they layoff their workers. After about a year, we’d lose about 2.5 million workers thanks to a GM bankruptcy.

Here’s what gets me furious about all of this, though. If the government was just going to let GM go bankrupt, why did they save the financials? Wasn’t it to prevent a depression? But if GM goes bankrupt, that’s most likely what we’ll encounter – a depression.

Because if GM goes bankrupt, Chrysler will follow suit and Ford will have a hard time building cars when the entire automotive distribution network in the US nearly bankrupts completely.

Together, the big three are responsible for one out of every 10 jobs. So, if they go bankrupt, we’ll have unemployment of 16 – 17 percent within two years. That’s depression territory.

So I don’t understand why the government wouldn’t act on this immediately.

In Congress, the Republicans are holding up the bill. I knew that would happen, after all most Republicans believe in “free markets”. They feel that GM put themselves in this situation, so they deserve to go down. But didn’t the banks do the same damn thing? In fact, I’d venture to say that what the banks did was even worse. They knowingly sold crap to the American public.

The Democrats, on the other hand, want to pass a bailout bill without putting any significant restrictions on it. This I don’t agree with. If GM is going to get bailout money, they need a new plan moving forward to become and stay profitable.

Most importantly, a GM bankruptcy might be ok if the economy weren’t already circling the toilet. My fear is that if GM goes bankrupt, we’ll have another credit squeeze similar to what happened when Lehman went under. But this time, the Fed doesn’t have much ammunition left to try and make things “less bad”.

If GM goes under, banks may wonder who’s holding automotive assets and refuse to lend to each other in the suspicion that someone’s balance sheet is much smaller than it used to be. This would cause the LIBOR rate to spike higher. I also fear that more money will move into treasuries and out of every other asset. The DOW could hit 6,500 in a GM bankruptcy. And if Ford followed suit, a huge part of American manufacturing would go down the drain.

I say this to warn you that a GM bankruptcy is huge. Job losses would go through the roof and more retailers would go broke. Hell, the state of Michigan may enter default, which would be a huge mess. After all, it’s not like they could merge with the state of Illinois to reduce overhead, like banks are doing.

The times ahead are getting darker and even scarier then we could have imagined.

When will it all end? Nobody knows. But we must stay prepared and try to take advantage of any big opportunities we see.

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