The tale of two national bailout plans

Published 3:25 am Monday, November 17, 2008

By By Tray Smith
Wednesday, the Treasury Department announced that the Troubled Asset Relief Program (TARP), established to implement the financial relief package Congress enacted last month, will not, in fact, relieve banks of their troubled assets. The mechanisms the government needed to systemically buy up the properties responsible for the credit crunch were determined to be too complicated for the plan to be executed efficiently. The main factor in this determination was the difficulty of setting prices for properties whose mortgages surpass their values.
Prices in the housing market, currently locked into the doldrums of our economic downturn, cannot be determined because buyers are not surfacing to purchase property, which means properties have not yet reached their floor. Many properties are, however, worth less than their mortgage, meaning any troubled assets purchased by the government at a fixed price would either subsidize banks against losses they would encounter if they sold foreclosed property at market rates or force banks to incur greater losses than they would have to assume should they decide to sell foreclosed property after the housing market recovers.
The complications arising from price setting aside, private enterprises offering distressed home owners the option of renegotiating or refinancing their mortgage have undermined the central justification for the rescue program: that the government is alone in having the resources needed to relieve the financial industry. Therefore, Congress should not approve the second $350 billion installment to the rescue package, which was once deemed a necessity but is now clearly unneeded.
Congress should also avoid repeating the mistake it made authorizing one unnecessary bailout by passing another unnecessary, perhaps even counterproductive, rescue plan for the automotive industry. General Motors is already predicting it could be forced into bankruptcy without government assistance, and Chrysler and Ford would likely follow suit. Well, so be it.
Politicians clamoring to aid the ailing auto manufacturers are not interested in saving the companies; all three of them could survive in bankruptcy. Politicians are clamoring to bailout the unions who have monopolized the auto industries’ labor force, because the lucrative arrangements the unions have secured for their members would most certainly be threatened by a bankruptcy filing. However, these overly generous union contracts are responsible for many of the problems confronting the industry and therefore need to be reviewed. A bankruptcy filing would allow companies an opportunity to conduct such a review and restructure their labor force to remain competitive over the long-term.
Bankruptcy would also enable the companies to undertake more fundamental reforms by eliminating duplicative brands and the dealers selling them, replacing incompetent management, and reducing production. Without such changes, the underlying problems confronting the auto industry would remain, eventually forcing its burdens back onto taxpayers.
Obviously, the failure of any, much less all, of the auto makers would be a cataclysmic blow to the American economy already reeling from economic contraction. The government has an interest in preventing such a scenario from developing. However, bankruptcy does not necessarily preclude extinction, and the federal government should not expend taxpayer resources until all other options have been exhausted and extinction is inevitable. Only such tough love will motivate car companies to get back on track.
That’s the bottom line.
Tray Smith is a political columnist for the Atmore Advance. He is a student at Escambia County High School and can be reached at tsmith_90@

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