GM, Ford and Chrysler

Courtesy of Stormy

Thomas Palley has a good take on the consequences of allowing the Big Three to disappear: Their disappearance not only may end any hopes of our closing our enormous trade deficit, but also may trigger a perfect economic storm.

Moreover, the automakers are essential for closing the trade deficit, and their demise could bring another surge in imports. The automakers are also the backbone of American manufacturing, driving advances in manufacturing technology that will be needed if America is to be a world leader in the coming “green” transportation revolution. Additionally, the Big Three are vital to national security, supplying important military transportation assets. Lastly, bankruptcy will impose massive costs on the government’s Pension Benefit Guaranty Corporation (PBGC), potentially undermining its financial stability.

The Big Three are already "huge debtors"

whose liabilities are held throughout the financial system. If they go bankrupt, the insurance industry, which is likely a large holder of these debts may quickly enter a spiral of collapse. Pension funds will also be hit, imposing further costs on corporations and households at a time when they are already financially stressed.

Furthermore,

…the greatest damage may come from the credit default swaps (CDS) market that brought down AIG. Huge bets have undoubtedly been placed on the bonds of GM, Ford, Chrysler, and GMAC, and bankruptcy will be a CDS triggering event requiring repayment of these bonds. Moreover, a Big Three bankruptcy will bankrupt other companies, risking a cascade of financial damage as their bonds and equities fall in value and further CDS events are triggered. This is the nightmare outcome that risks replicating the Crash of 1929.

There are undoubtedly colossal problems in Detroit, and the bosses of the Big Three automakers could never be convicted of an excess of imagination. Economic policy has also contributed to their current condition as trade agreements and an over-valued dollar promoted auto imports, and incoherent energy and environmental policy stifled innovation.

All of this must be fixed. But sacrificing the Big Three automakers will accomplish nothing while risking a tragic economic depression

There are no easy answers any more. We have undoubtably backed ourselves into a corner, with thoughtless tax policies for the rich, incoherent tax policies that might have guided our economic development,

and a complete disregard for our manufacturing sector as we celebrated our miserable and miserly banking system that has skimmed, scammed, and leveraged its way to disaster.

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