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Friday, December 19, 2008

A Politically Not Economically Motivated Bailout

Today, the President announced that the Federal Government would extend a short term loan of $17.4 Billion to the automakers.

The federal government will help Detroit's ailing automakers survive at least another few months by offering $17.4 billion in rescue loans in exchange for concessions from carmakers and their workers.

The government will have the option of becoming a stockholder in the companies, much as it has with major banks, in effect partially nationalizing the industry.

At the same time, Treasury Secretary Henry Paulson said Congress should release the last half of the $700 billion from the Wall Street rescue fund that it approved in October to bail out huge financial institutions.

Tapping the fund for the auto industry essentially exhausts the first $350 billion of the fund, he said.

The loan must be paid in three months unless the companies can prove they are "viable", according to the plan.

Of course, this is all nonsense. In three months, the Obama administration will be in office. They are ready to spend trillions and Obama will allow the autos to fail, viability or not. Furthermore, if the companies aren't viable in three months, how does the President expect them to have the money to pay the loan back?

This is the political and economic version of kicking the can down the road. The President doesn't want the autos to fail on his watch. He gives them enough money to survive until the next administration takes over, and he let's the Obama administration deal with the difficult matter of viability.

It is pure idiocy. Politicians are not consultants, venture capitalists, or corporate raiders. They have no idea what a viable automaker is. The Obama administration is obsessed with green technology. As such, they will consider viability an industry that is building all sorts of new fuel efficient vehicles. Whether or not the new business model that Obama will demand can be profitable in the long term will be something that will be "above his pay grade". As such, you can bet that this $17.4 billion is the beginning of hundreds of billions that will be sunk down a black hole of a business with no hope of long term survival.

The worst part about this "bridge loan" is that it is coming from the TARP fund which was meant only for banks. In fact, this is exactly the sort of loan that the federal government was hoping the banks would make with the bailout money. That they haven't speaks about the credibility of the loan.

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