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Monday, March 30, 2009

The Government Plays Venture Capitalists II

To say that yesterday's announcement that GM CEO, Rick Wagoner, was forced out by the president himself was chilling is the understatement of all understatements. On some levels, this is a fairly natural act. Very few people would say that Wagoner deserved his job. After all, that he needed to take tax payer's money just to keep the company running speaks for itself. Furthermore, if the company is going to take tax payer money, then this cannot be with no strings attached. In this case, the president speaks for the tax payers. If GM is to get anymore money, then step one is the removal of the CEO.

Yet, it is chilling to the bone that we have come to a place where the president of the United States tells a private company exactly who their CEO can't be. Today, the president pronounced that he doesn't want to run GM. Yet, that's exactly what he is doing. He has just made a significant staffing decision. Furthermore, he has pronounced that their restructuring plan is not good enough. Furthermore, he has formed an auto task force to figure out a way forward.

This is exactly the sort of things that venture capitalists do. They often find companies that are struggling. They infuse them with cash and then they begin to make managerial, staffing, and management decisions. In essence, these venture capitalists run companies, at least until they are turned around.

For the president to now say he doesn't want to run GM is the height of duplicity. You can't on the one hand demand the CEO fired and proclaim a restructuring plan unacceptable, and then say you don't want to run a company. You are running the company.

Worse than that is this. If GM is to take government money, then, in fact, this is the prudent thing to do. After all, isn't this behavior significantly more prudent, then simply authorizing a series of endless checks and credit lines to the tune of more than a hundred billion dollars? In fact, on one level, the president is acting very responsibly. The problem is that this behavior exposes just how irresponsible the idea of bailouts is altogether.

These companies all came to Congress exactly because traditional venture capitalists wouldn't fund them. The private market wouldn't allow these companies to continue. That should have been all the Congress needed to know. Yet, instead, they deemed these companies too vital to fail and gave them a lifeline. The Congress, along with the president (both current and prior), also gave them a warning that they wanted a plan. Once the politicians did this, they immediately took on the role of venture capitalists.

This was in fact a major step toward a more centrally planned economy. The minute that the federal government, in any way shape or form, decides business plans, hiring decisions, and firing decisions, we have crossed a very slipppery slope toward a centrally planned economy. In fact, bailouts go hand in hand with centrally planned economies. Once governments decide which companies succeed and which companies fail we have a centrally planned economy. We have taken a very dangerous step toward a centrally planned economy with this move.


Anonymous said...

The bailouts for car companies are happening because of the precarious state of the economy right now. It is just too many jobs lost.

Obama is not freelty giving them money.
Chysler has been rejected as not viable and is must merge with Fiat and GM must present a better restructuring plan
No mention of that in your article though
Wagoner has been fired because he is rubbish. - absolute rubbish

Centrally planned economy????
Got anymore ridiculous phrases? May I suggest - "Slippery slope to socialism"

mike volpe said...

I said that Obama is doing the prudent thing. Giving failed companies hundreds of billions in any economy is not a good spending of money. Basically, by your view, almost no company can fail because all failing companies would cost a lot of jobs.

Anonymous said...

I've finally decided that for my next car, I ought to buy a hybrid, and I ought to buy American if I can. I want a midsize sedan. You know, a normal car, like normal people drive. I'd love to buy a Ford or Chrysler or Buick or Pontiac or maybe even a Saturn (not a Chevrolet; I have my limits) hybrid midsize sedan.

You'd think they'd be rushing such models out, wouldn't you? But in fact, astonishingly, they hardly exist.

Ford is coming out right now with a Fusion hybrid (the Mercury-badged version is called the Milan). Saturn has something called the Aura, whose availability is extremely limited. Chrysler, Buick, and Pontiac have nothing as far as I can see.

And yet, most of these manufacturers are making ... SUV hybrids! I went to the Cadillac website, on the assumption that if Cadillac had any brains, they'd be making a hybrid sedan that someone like me (far from right but doing okay) could maybe afford. The only hybrid Cadillac is pushing is - get this - the Escalade hybrid.

An Escalade hybrid? That's like taking one strip of bacon off of your Wendy's triple bacon-cheeseburger and calling it a diet.

Cohn makes a fair point that Detroit would make here. Hybrid SUVs are selling. There's no great demand yet for midsize hybrid sedans. Well, fine, make some hybrid SUVs, but: create the market for sedans, you idiots. Markets are created all the time in capitalist society.

Once upon a time no one knew they needed a car with radio. Now no one would buy a car without at least a single CD player and more likely a six-CD changer and all kinds of MP3 and satellite technology. A decade ago, no one had any problem listening to songs in the running order artists intended them to be heard. But a new invention changed all that. And so on and so on.

They're so unimaginative in Detroit. You create a market with a sizzling ad campaign, one that sells an idea of the future as bound up in the new line of vehicles, and in hard incentives or disincentives. A pollution tax is one idea in the latter category. In the former, read this, about what Germany is doing:

The German government is paying people who junk old cars a bonus of $3,250 toward a new, environmentally cleaner vehicle, as part of a $67 billion government stimulus plan ...

... Additionally, Volkswagen AG on Monday unveiled an "Environment Premium Plus" program to provide additional incentives such as price reductions and cheaper financing to customers taking advantage of the government bonus. With the added VW incentives, Kamand said he would be able to knock $6,000 off the $26,800 sticker price.
Owners of cars that are at least nine years old and registered in Germany for at least a year can take advantage through the end of the year.

The goal is to help Europe's largest economy — struggling with a recession and a rising unemployment rate of 8.3 percent — by promoting big-ticket consumer purchases and newer, lower-emissions vehicles.

God forbid Detroit come up with something like this. They're dopes. It infuriates me that thousands of union workers who are just doing what they're told are going to have to suffer for their dumb bosses' lack of imagination. But if they can't think beyond "Gee, our customers like SUVs, so let's just make hybrid SUVs" then they deserve what they get, sad to say.

Anonymous said...

I cant find your original idea on this. But..
What do you think of this.

mike volpe said...

I will write a piece on this later, however in fact, here is my piece calling for the exact same thing.