Tuesday, May 12, 2009

The Chrysler Traveshammockery

It's been sold to America that Chrysler is of systemic importance. Countless articles have been written about the 40,000 direct job losses or the nearly 300,000 that would be lost systemwide due to job cuts that would occur as dealers, suppliers and suppliers' suppliers lay people off to adjust for lost business. These "facts" have been used as a justification for the Chrysler bailout; a sort of justification that has been used to mislead the public in virtually every bailout in government history (I make some minor exceptions during September of 2008). This is what is seen - the first order effect.

Like lambs to the slaughter, too numbed by all the horrifying governmental actions of the last year and the reasonable desire to believe in "hope" and "change", we have marched unquestioningly alongside our "leadership". However, common sense tells us that these job losses are an absolute sham. I honestly cannot believe that more folks haven't challenged this idiocy, though perhaps if the treatment of Chrysler's secured lenders is a guide, we are learning that challenging this Administration on the basis of legal rights or common sense put you on a fast train to publicity hell.

At The Investment Linebacker (TILB), we are willing to take the engineer's seat on that train: What is unseen are the jobs created and relative financial strength gained by Chrysler's competitors (esp. GM and Ford) if Chrysler had been allowed to perish naturally - the second order effect.

Chrysler, as an auto company, "creates" virtually no new demand. There are very few buyers that say to themselves, "gosh, I really don't need a new car, but I am so inspired by that Chrysler/Jeep/Dodge that I am going to go buy an extra car." As such, all Chrysler does is fulfill an existing demand for new cars. The evaporation of Chrysler would not at all eliminate that already existing demand nor would that demand lie fallow as some poor consumer demands a product that just cannot seem to be supplied. In fact, some other car company would certainly step into the breach and gladly fill that demand. This means that GM and Ford, two of Chrysler's most direct competitors would have been primary beneficiaries of a Chrysler liquidation. For those that don't know, GM and Chrysler themselves are struggling to remain solvent and would be strengthened by this market share opportunity - as would virtually all of Chrysler's competitors, making the entire industry more sound.

Jobs "lost" to Chrysler would have been jobs "created" (or retained that would otherwise go away) by other, stronger auto OEMs. GM, Ford and others would happily have purchased parts to make those incremental autos from suppliers, thus allowing those suppliers to "create" jobs that offset Chrysler suppliers' "losses". Those suppliers would have purchased inputs, materials, etc., etc. down the OEM foodchain. Back up the chain, GM, Ford and others would happily have employed people to assemble cars, trucks and SUVs for shipment to dealers. GM, Ford and other dealers would happily have sold those incremental cars on to end buyers at competitive prices, providing jobs at dealerships. The "loss" of jobs is quite clearly a sham as systemwide, there would not be jobs lost because there would not be a loss of aggregate demand or supply.

In fact, net, net jobs would have been retained and the employers providing those jobs would have been in a healthier position than they are today.

We can state with some certainty, the Chrysler bailout not only is a travesty to the perception of the soundness of contract law and the separation of private enterprise from unneeded public interference, it also weakens the overall automaker industry at precisely the moment they needed a boost. Conspiracy theorists might believe this is intentional as it increases the likelihood that the Administration (and the UAW) will control other domestic OEMs as well.

Since TILB is already engineering this train ride, we have nothing to lose: we will go ahead and note that in the long run, the OEMs that will suffer the most from this intervention are our higher cost-structure domestic OEMs - GM and Ford (see conspiracy theory above). At a moment when GM and Ford desperately need the breathing room afforded by absorbing some of Chrysler's 10% domestic market share, those already weak legends will in fact now be forced to compete with a government, UAW, and foreign (Fiat) owned competitor. A competitor with a questionable profit motive and a bankruptcy-assisted newly reduced cost structure. If AIG, FNM and FRE are any guide, Chrysler's prices will likely be so competitive that it will have the exact opposite impact on GM and Ford that would have occurred if nature had its way with Chrysler. Rather than gaining strength and breathing room, they will be increasingly impaired and short of financial oxygen. I suspect those two American Icons will find themselves stumbling hope-filled into the warm, loving, waiting, open embrace of the government.

Ironically (or perhaps not), this just finished playing out in the realm of life insurance as the government's ownership of AIG (and lack of profit motive in its insurance pricing) prevented a handful of already staggered competitors from raising prices and taking abandoned share in an effort to heal themselves. As such, they've just been welcomed into We The People's loving TARP program.

This whole affair absolutely and honestly saddens me.

The government's intervention makes a mockery of common sense and America.

It is a traveshammockery, but double the rage and minus the humor.


Friday Night said...

An additional consequence is that I for one will never buy another GM or Chrysler; I suspect I'm not alone. Maybe, maybe I'll buy a Ford some day - but while I respect Ford's refusal to tap the Teet, I loathe supporting a cost structure gone wild aka unions. The Market's gotta be free on both ends of the P&L; it can't just have a pretty face, needs a nice caboose too. I refuse to support them twice - once not my choice (already doing via TARP fka my tax dollars); twice, by buying their cars? No thank you. My largesse has limits. Buy American? I'll buy American - and I'll buy Toyota / Honda / BMW / other "foreign" brand built here on American soil by American workers, not American unions. Take that, you zombie propping larcenists.

Terry Tate Buffett said...

I love your rage. Harness that.

I haven't reached the boycott state of mind yet, but, then again, if you asked me to list my top five "most likely to buy" cars, zero of them are made by GM, Chrysler, or Ford, so it's a non-issue.