Lehman failed in the middle of September last and much water has flowed under the bridge since then. But failure of Lehman was a watershed event for the financial services industry. AIG was rescued with an infusion of $ 180 billion in its aftermath and later on Citigroup was extended a loan of $45 b and guarantees to the tune of $ 300 b, by the free-market government of George W Bush. That is when the libertarians had to take a deep breath before repeating their shibboleths – the government should have let these banks fail; this is constructive destruction and such. How I wish I had kept track of the number of times the phrase “After Lehman failed” or its variants appeared in papers, magazines, interviews, indeed wherever one looked. That would have been a measure of how deep that deep breath was for the libertarians.
This June, the process of government help in stabilizing an industry was set in motion by the ostensibly less free-market government of Obama. First Chrysler and then GM. Fiat was forced to take on the onus of Chrysler. To GM, the government basically made an offer that the company could not refuse. Who could, with a gun to his head? Obama’s whiz kids devised a tentative plan to make GM soft land into bankruptcy instead of free fall into nothingness. The classic scene of horse head in the bed in The Godfather comes to mind.
What would have happened had the government allowed “creative destruction”? That will be speculation and I am not in the mood for it. But, we can extrapolate from what is happening without the free fall. Let us read what Andrew Clark says in an article in The Guardian. Main Street Pawn Shop in Pontiac Michigan, the city which gave its name to a brand of GM, gets a “steady trickle of gold rings bearing the letters ‘GM’” to be pawned by people in “distress or disgust”. Oh, yes, GM is selling its Pontiac brand to re-make itself into a lean company. These rings fetch upwards of $ 200/- each! This pawn shop is “one of the only (my emphasis) prospering businesses” in the city! This is soft landing – there is at least one business prospering!
What are the household items and personal effects that find their way to the pawn shops? “[E]lectric guitars, refrigerators, jewellery, American football jerseys, bicycles, chainsaws and DVD collections.” Protectively wrapped iPods serving as security for a $50 loan. You want to put gas in your car? Turn in a single compact disc and get an advance of $5, about 2 gallons. It is not just the line workers on the shop floor but also the suit-and-tie workers from the industry who line up at the pawn shop. This is indeed heart wrenching.
How did this sorry state affairs come to pass, from the heydays of claiming ”[w]hat’s good for General Motors is good for the country”? There is enough blame to go around, building up at least over the past three to four decades, the New York Times says. Not anticipating the demand for fuel efficient cars, inappropriate cost-cutting measures that undermined brand distinction, underestimating the Japanese industrial invasion, the “greed” of the workers leading to bloated legacy costs, government regulators (CAFE standards that hurt technological dinosaurs), even the news media. Add to all this the focus on profits, to the exclusion of corporate image that cannot be measured. We may call this Excelitis. It was not just the government. Indeed, it was more the others.
Had the government let GM go the way of Lehman, we may have written of 1% of the US economy, so goes an estimate. “Industry will collapse if GM collapses.” Doomsday prediction? Probably, but not likely. But could the US government have taken the risk? No. Hence government intervention to achieve a soft landing, “surgical” bankruptcy, ignoring all the rhetoric of the libertarians.
Where are the libertarians now? They are still there, preaching from their cocoons. You see, they live within their comfortable fortresses, and “creative destruction” and all that are only for the masses. Government still wears the black hat, in their opinion.
It is only because Lehman failed, indeed allowed to fail, GM has been rescued. If this is creative destruction, I am all for it. A few filthy rich bankers for a lot of line workers in the automobile industry. Utilitarian calculus holds good.
Raghuram Ekambaram
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