The economic crisis seems to be going from bad to worse and the remedies put in place by the Bush Administration are all floundering. The bail out plan for the financial industry was passed, if you remember, only on its second go round only because the Stock Market had plummeted the day after the House had first rejected the Treasury plan to create a seven hundred billion dollar fund to buy up the bad mortgages held by the banks so that banks could open up the credit faucet. The initial excuse offered by the Treasury for not going through with that plan was that no one could figure out how to price the mortgages because if you priced them at their market value, then the banks would be getting very little value, and if you priced them higher than that, even perhaps at their face values, then the banks would be making a killing even if you had succeeded in providing them with capital. The Treasury then developed a second plan, one which liberal economists had been in favor of in the first place. It was to invest money directly in the banks. When that happened, though, the banks used the money to pay dividends, buy up other banks, and sat on the money rather than lend it out, despite the fact that lending money has been a good business ever since there was money, back at least to Egypt and Babylonia, perhaps because previous lenders plied their trade by taking the usual precautions, such as evaluating the individual person to whom the money was to be lent, and creating a schedule of payments, up to the risk of a pound of flesh, that were a mighty incentive for people to pay their debts. Apparently, current practice was to forget the particular lender by bundling up mortgages into securities, and so the industry, as it had been known for three or four thousand years, got destroyed.  

By refusing to do what the government wanted them to do, financial institutions would allow businesses to go bankrupt and mortgagees to lose their homes and students couldn’t take out loans to finance their college attendance and revelers couldn’t buy Christmas presents, all of which leads to further contraction of the economy. It is a good question, though, whether it is a good idea for students to take out loans that will alter their lives rather than give them direct scholarships to cover the cost of their college educations. It is also a good question whether people should treat Christmas shopping as a necessity rather than a luxury in that it’s the thought that counts. The thought provides the blessing, not the amount spent on Christmas, even if retailers would like to make you think otherwise. But that also the way economists think, that spending is a good thing, and they are the ones giving the advice, not social policy analysts who want to know what social function student loans and Christmas shopping satisfy.

All of these events, including the attempt to bail out the auto industry, have taken place in just the last two months. It is 9/11 and Iraq and Katrina and Afghanistan all over again and makes one wonder whether there is some reason that the Bush Administration never catches a break. You would think that sometimes it would just guess right and so sever the correct wire. But no, Bush gets a shoe thrown at him in Baghdad, which is as good an epitaph for his eight years as there is ever likely to be. (We still don’t know if his Administration did indeed keep Al Qaeda from attacking the American homeland again. It would take classified information that won’t be available for decades to decide that.)

Now consider the mess that surrounds the bailout of Detroit’s Big Three. When the automobile executives came to Washington to appear before Congressional committees and so, in effect, take their first set of oral exams as applicants for government largesse, they claimed that they needed federal financing because they were running out of money and too big to fail, given the immense economic and social consequences of such a failure. The initial talk in Congress and in the press was that a bailout would encourage them to do a good job.

The demeanor of the executives at that first set of Congressional hearings, however, suggested that corporate leadership in the industry is so weak that it can’t pick up the message that they have to act with some urgency to correct the course of their industry, as was indicated by the fact that their own public relations people didn’t even advise them to travel coach. The money the executives said they wanted to defray their operating costs was the money that had been put aside for them to develop new hybrid cars. That showed that they are still wedded to the finance end of corporate life rather than to the production end. The executives flunked their orals because the executives made it clear that there was no way to motivate these guys to do what you want them to do by offering them an even fatter carrot, anymore than seemed to be true with bank executives. Auto executives understand their interests well enough to know you can’t touch the way they do business, only that you can humiliate them, in which case they can take their revenge by going bankrupt.

My view after the first set of auto hearings was that the government had to squeeze the auto companies rather than beg them to mend their ways. These same auto companies, remember, had said in the Forties that they couldn’t produce the tanks and jeeps Roosevelt said he needed until it was made in their economic advantage to do so, and then they proved able to convert their assembly lines in mighty quick time. Why can’t you introduce your new Chevy in six months rather than in two years? It is already designed and marketing doesn’t take that long under the present circumstances. The auto executives seem to think themselves being merely circumspect not to rush ahead with innovative cars when the economy may recover quickly and when oil prices may stay low, but that just means these hot shot executives can’t make up their minds quickly enough to accept when a crisis is a crisis, which is the premise under which the government is operating.

My advice after the first set of hearings would have been this: if you think the auto executives are either brain dead or merely short sighted, then don’t hold your nose and say we have to bail them out anyway just because that is what the economists tell us we have to do. Don’t be passive aggressive and throw up your hands and say economics made me do it. Doing that just counsels you to throw good money after bad. The conservative Republicans were onto something, even if they could only offer old platitudes about holding down spending. How much is too much when you are talking about hundreds of billions of dollars. Don’t evaluate the economics of the matter; examine the people asking for credit, just as people who are asked to lend money have been doing, as I say, for thousands of years. The auto execs should have been told right after their first appearances before Congress that they failed their job renewal interview and that their immediate resignation is the price of any bail out plan, take it or leave it. That isn’t revenge or justice; it is just trying to turn the page.

When the big auto people came to Washington the second time, they had corrected the mistakes they had made the first time. This time, they got the idea, or had it suggested to them, that they should not fly to Washington on private jets but drive their own experimental cars, the same ones that won’t go into production for a while, long after the fortunes of their companies are sealed. They had also learned to say they would foreswear any salary and their stockholders any dividends, though we don’t know what benefits they were not foreswearing and we know that there weren’t going to be much in the way of dividends anyway.

What they hadn’t learned was to make a pitch that might convince someone that they meant business, that they were enthusiastic about what they would do with the money they were asking for if they got it, what they would do with the very precious time they would secure. It is as if they were incapable of affect and had the nerve endings that let them smile or show emotion severed. A Congressman who had done some homework noted that the wheel base for large SUV’s was similar to that of moderate sized buses of the sort that might be in demand if the nation’s transportation switched to jitney busses in a big way. Rather than provide or make up on the spot the idea that they were working on this mightily, they responded in a lukewarm fashion: it was something to take into consideration as a possibility. These guys were hopeless. All they did was convince Congress that they would not do anything useful on their own initiative and that trying to force them to do something innovative would run into any number of stone walls.

That is what I think happened over the weekend after the second set of hearings. I infer that Rahm Emanuel called Nancy Pelosi and told her something like this: Obama has no confidence in the auto industry being part of the solution and that Obama does not want to invest too much of his political capital, much less financial capital, in Detroit. Why should he take up the cause of Detroit in a fight with the lame duck Republicans? So give in to the President’s plan, which is to use the money that was designed to be spent on research and development and let part of it go as a bridge loan to cover Detroit’s operating costs until the spring. That is what Nancy did, withdrawing her objection, even though she had said before, quite correctly, that the research and development money was necessary for the long term survival of the Big Three, and so different money had to be found to cover their short term expenses. Barney Frank was quick to praise her for having changed her mind, he citing that it would be devastating for Detroit to go bankrupt.

Well, maybe for now. By March, things will be different. Obama will have signed into law, so the expectation goes, a gigantic spending program that will funnel money to bridges and roads, to city and state governments, to green projects, and to transportation initiatives that will include mass transit. Those programs will become the focus of public attention and will be regarded favorably, at least at the start, because money will be going into the economy on a very timely basis. If the Big Three come back to Washington in March asking for more money, the Congress can ask them the state of their bids on prototype fast rail or light rail or buses. If they can’t bid on those in a competitive fashion, and one rather doubts that they will, then the question will not be whether to bail out the Big Three but whether to spend the money on more worthy projects that will result in deliverables. The conservative argument that you don’t waste money but give it away only for worthwhile projects can be turned against the auto executives and Democrats can tell Michigan that the public’s obligation to the Big Three has been met and that Michigan is about to take off on bigger things, once it gets rid of the corporate baggage of the Big Three, a point Michigan politicians would love to be able to make and will be able to do once they are rid of the Big Three. In other words, do what Kissinger did to end the Vietnam War: get a peace treaty that allows you to get out, and when events not too far in the future catch up with the multiple ailures of American policy during the long war in Vietnam, it is not as traumatic as would have been the case if America had withdrawn its troops before there was a peace treaty. Let the Detroit auto industry fold, but allow it to happen only after March.

The Obama people played it brilliantly. They stood tough for labor and Detroit once it became clear that the Congressional Republicans were fed up with the auto industry. And so the ball was now in the Bush Administration’s court. It did not want to add the failure of this hundred year old signature American industry to its legacy. And so it is talking about using TARP funds, which it had once said could not be used for this purpose, to bail out the auto industry. It turns out that, as expected, the Bush Administration probably will not be able to manage to carry out this or any other plan in its concluding weeks, dithering while Detroit burns. As reported in today’s New York Times, Paulson is acting as his own car czar and going over the Big Three financials and trying to figure out terms on which to give TARP money to the Big Three. It is a week before Christmas. Hadn’t GM said it would be out of business if it didn’t have the money by the end of the month? It seems that Paulson is ready to call that bluff, his people saying that they will shell out the money when they are good and ready—which may be tomorrow, though it doesn’t matter any more, because no one believes that the Big Three will make good use of the time an influx of money will buy.

The significance of the events I have recounted is the following. First, Obama will have a free hand once he ascends to power. He is not committed to anything but the letter of any agreement between Paulson and the Big Three. Second, the Republicans missed an opportunity to carve out a distinctive economic philosophy of letting even such august companies as the Big Three take their dose of bankruptcy so as to preserve some kind of free market discipline, given that everybody else, even the Defense Department, has to think about ways not to spend money needlessly. But the Republicans were too timid, too full of clinches, too lacking in people of intellectual stature to make the case for them, one that could have been made by John McCain if he knew some economics, to articulate a policy contrary to that of the Democrats and the Bush Administration. They could only fulminate.

Third and most important is that Congressional committee meetings are no joke even if the auto executives treated them as press conferences where it just happens that their audience, the congresspeople, is the one that sits in upholstered chairs. Decisions were made as a result of these meetings. Pelosi and Frank came around to the President’s plan just twenty four hours later and not just because it had become clear that Republican congresspeople could not be won over to a bailout plan, whatever the President or even the Vice President wanted. They saw that there was no hope of saving the Big Three under anything resembling its current leadership and so they decided to try to save Detroit and the rest of the American economy in the proper sequence, which is to say, the opposite sequence. The networks and the Sunday talk shows, however, continue to see the decision to provide the Big Three with money as an economic good thing, a bailout, rather than as a final payoff to a hundred year old industry before it folds. We will see by March which is correct: Detroit on the way to recovery or, my view, Detroit in some form or other of receivership, the various plants being dispersed to people who will use them to more effective purposes.