Bush signs $25 billion loan guarantee to auto industry postponing their collapse

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October 1, 3:12 PM

by John Ryden, Global Warming Examiner

 

 

AP Photo - House Energy and Commerce
Committee Chairman Rep. John Dingell,
D-Mich., at podium, meets with reporters
on Capitol Hill in Washington on Wednesday
to discuss a House budget plan that
includes funding for $25 billion in loans
for Detroit's automakers.
From left are, Rep. Candice Miller, R-Mich.,
Rep. Sander Levin, D-Mich., Sen. Debbie
Stabenow, D-Mich., Rep. Joseph Knollenberg,
R-Mich., Rep. Michael Rogers, R-Mich.,
Dingelll, Rep. Dale Kildee, D-Mich., Rep.
Dave Camp, R-Mich., and Rep. Fred Upton,
R-Mich.

U.S. Auto companies just reported sales declined by 34 percent at Ford Motor Company and 16 percent at General Motors Corp (GM).  GM sales were not as weak because of aggressive price cutting, which cut into profit margins.

The balance sheets of the auto companies are loaded with debt of dubious quality. Their financing arms are looking forward to huge losses on leases made on large trucks and SUVs that will come due in the next couple of years. Large vehicles used to be the one bright spot for U.S. manufacturers as they produced good profit margins. Leases of these vehicles, however, were based on expected high resale values. The resale value of these vehicles has dropped sharply with the sharp rise in oil prices as consumers have shown a new preference for fuel efficient vehicles. The residual value of these leases is much higher than the resale value of these vehicles they finance. When these vehicles are returned, the difference between the residual value on the lease and the actual sale price of the used vehicle will be a loss to these companies.

More fuel efficient vehicles are going to be required to reduce our dependence on imported oil and to combat global warming. This is going to take a huge amount of new investment. But, U.S. auto companies are loosing money at a very fast rate. They will not be able to finance the new investment required to produce these new fuel efficient vehicles that will be based on new technology like plug-in hybrids.

To give U.S. auto companies and their domestic part suppliers a chance to compete against foreign manufacturers, the U.S. Government is providing low cost loan guarantees. $25 billion might seem like a lot of money, but auto companies are currently burning through cash at rates of more than $1 billion per month. $25 billion is just the first payment to the auto companies. As stated by John Dingell, D-Mich, “As we go forward, we will be starting on the second $25 billion.”

These loan guarantees really don’t address the basic problem in the industry. The basic problem is that their business model just does not work. That is why they are not competitive with foreign manufacturers and have been loosing money for years. When compared to a foreign manufacturer, U.S. auto companies have costs that foreign companies do not have. U.S. auto companies have mandates to pay for health care for their employees. In foreign countries, the government pays for health care. U.S. auto companies pay taxes on wages for Social Security and Medicare. Foreign countries fund these same programs through consumption taxes like the value added tax. When a foreign manufacturer exports a car to this country, the company receives a rebate from the government for the value added taxes paid. When it arrives in this country there are no import taxes. This is like an export subsidy to keep prices low. If a U.S. company were to export a car overseas to that same country, there would be a value added tax imposed when it lands on the dock in that country. All this is perfectly legal under our trade agreements.

The problems with our auto industry are very deep. It is causing the loss of hundreds of thousands of good paying jobs. Housing markets are collapsing in places like Michigan because of the erosion in the job base. I just saw where a home in Michigan was sold on EBay for $1.75. I actually think the seller got the better part of the deal.

The answer to our auto company’s problems and all manufacturers in this country is to change our tax system to a consumption based tax system like other countries. This would level the playing field for American manufacturers, especially our auto industry. We should use the consumption taxes to pay for universal health care for every American. That would make our auto companies competitive again and maybe the loan guarantees would have a chance of working. Without this type of fundamental change, loan guarantees will only prolong the inevitable and will cost U.S. taxpayers a lot of money.

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