The Bankruptcy Paradox

Am I the only one whose funny bone is tickled when Rick Wagoner frets that consumers will not buy cars from a car manufacturer in Chapter 11? If the Detroit Three have proven one thing, it is that no one will buy their cars period. Unless I am missing a significant part of the story, years of retrograde sales and flawed strategic plans have resulted in dealer lots crammed with vehicles nobody wants at any sensible price (i.e. a price that leaves the manufacturer with the slightest profit). Filing for Chapter 11 will likely have no influence on consumer decisions, whatsoever. The relatively short, profitable, but ultimately fatal run of SUVs aside, the US auto manufacturers have a decades-long history of building mainly vehicles that miss the consumer mark - and building them poorly, at that. The reluctance of the auto makers to reorganize under Chapter 11 is analogous to a terminal patient refusing a course of medication with a 50% success rate. Under three possible scenarios, the outcome is certain failure, leaving a 25% likelihood of recovery. That might not sound great, but it beats the certainty of pushing up daisies in the short term.

The government should force Chapter 11 on Detroit. There is overcapacity in US auto manufacturing, and it needs to be dealt with through a severe rationalization of the domestic auto industry. The auto manufacturers insist on making their individual survival the issue before Congress (I suppose that is what they are paid for). But it is the survival of the domestic auto industry as a whole that is at stake more than that of the individual corporate entities. The entire landscape in the auto industry needs to be reshaped. When airlines have faltered, they have been left to fail, reorganize or merge. This process ultimately has safeguarded the continued existence of the airline industry. No economy is large enough to support the de facto nationalization of all failing manufacturers and service providers. Attempting such a feat ultimately will lead to downgrades of sovereign debt ratings, a depletion of public coffers and economic mayhem. $25 billion is not enough to save the Detroit Three. Chances are, $250 billion would also be insufficient. Public money should flow only if:
1. There is a significant public interest at stake; and
2. The funds have at least a 50% chance of leading to a positive turnaround for the recipients

That the first condition is satisfied is clear beyond a reasonable doubt. The second condition can only be met if the auto manufacturers face the reality of the situation and realize that their industry is hopelessly mired in a culture of failure. They should take advantage of this once-in-a-lifetime opportunity to make the tough decisions that will allow the US auto industry to position itself for profitable operations for the years to come. From the labor perspective, the survival of GM, Ford or Chrysler is much less crucial than the continued existence of a healthy domestic auto industry in some other form.