Should The Government Bailout The Auto Companies?

No. The U.S. Government has grown its debt to levels that will strangle this country for many years to come. The U.S. automobile industry has not been competitive for many years as can be seen by its declining market share. The high cost structures led by legacy health care costs, pension plans, and union worker's salaries and benefits have resulted in three extremely weak companies. On top of these high costs is the astronomical debt levels GM, Ford, and Chrysler have on their balance sheets. This leverage is a burden that isn't easily going away any time soon.

The auto companies' responses are to get more loans from the government. The reply should be to force these companies into bankruptcy and let them reorganize their balance sheets. Hard choices need to be made and leverage needs to decline. In bankruptcy, the auto industry could improve its cost structure, keep many workers employed, but in turn, the ownership of the company will pass on to its lenders. This process may need a government loan to facilitate the process. At that time the United States could provide debtor-in possession financing. These loans will be the most senior debt and upon a completed reorganization, the government will get its money back.

The only caveat which the government needs to weigh is how a bankruptcy affects the auto financing companies. These entities are separate companies but tend to rely on the manufacturers. If the government deems a financial crisis would result with negative implications for the economy, then direct loans to these companies may have to be made.