GM needs bankruptcy, not a bailout

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General Motors would like some taxpayer cash—a bit more than $10 billion should do—to help it buy Chrysler. As a company spokesman told TIME: “We believe the Federal government should consider all of the tools available to it—some recently enacted—to support industries that are in distress and that are essential to the U.S. economy.” (Update: The Detroit Free Press is reporting today that the Treasury Department said no dice, although of course the last word will be with Congress.)

Now all is fair in love, war and lobbying for government bailouts. But this attempt to align GM with the banks that have recently benefited from Washington’s largesse is quite a stretch. We have a well-developed process for helping companies in distress fend off creditors and prepare themselves for a comeback if in fact they have a comeback in them. It’s called Chapter 11 bankruptcy, and it is one of the most glorious creations of the American political system. Bankruptcy allows for a moderately orderly version of the creative destruction that makes capitalism dynamic. The willingness of American companies to make use of it is one of this country’s great competitive advantages. It’s one key reason why, while the next year or two will certainly be tough, we’re extremely unlikely to land in a decade-long malaise like Japan in the 1990s.

Bankruptcy doesn’t work so well for leveraged financial institutions like banks, because the mere existence of rumors that a previously healthy bank is headed for failure can be enough to drive it under. That’s why we have a separate infrastructure for both preventing and dealing with bank failures, with the FDIC at its center. It was the lack of such an infrastructure for the “shadow banking system” of investment firms, hedge funds, derivatives and the like that has made the past year so scarily and unpredictably eventful. And it was the real fear of a systemic collapse–a run on the entire financial system–that sent Ben Bernanke and Hank Paulson scurrying to Capitol Hill in September to ask for $700-billion bank bailout.

It is true that, as Steven Pearlstein writes today, the half-baked way in which Paulson has sold and implemented the bailout has encouraged other industries to ask for similar help. I can’t see any case for giving it to them, though. A GM bankruptcy would possibly pave the way for a rebirth of the company as a lower-cost, slate-wiped-clean entity with an actual chance of succeeding (I’m not making any guarantees here), and it wouldn’t threaten the systemic collapse of anything. What it would threaten are jobs, dealers and suppliers, and pensions.

Those first two sets of threats are endemic to capitalism. I happen to work in a struggling industry. I feel like my job is threatened. I think what I do is important to the functioning of American society. I think it’s possible to make a case–I’m not gonna make it, but Ezra Klein will–for taxpayer support of journalism. And there’s definitely a case for temporary taxpayer help for workers whose industries have imploded. But there’s really no case that I can conceive of for taxpayer subsidies for the shareholders of media companies or of auto manufacturers.

The issue of pensions is more complicated, because they are promises, and promises should be honored. GM, to its everlasting credit, has not been shortchanging its pension plan. The company’s pension fund was actually overfunded by anywhere between $9 billion and $19 billion (depending on whom you were asking) at the start of the year, and while that’s surely no longer the case, the way the fund’s $100+ billion in assets were allocated (only 26% in equities) would indicate that it has probably survived the market’s carnage better than most. So GM’s retirees wouldn’t suddenly be left in the cold if the company filed for Chapter 11. But even if they would, I think we’d be far off better dealing with that problem explicitly rather than bailing out the company’s shareholders.

Political calculations are political calculations, and the Chrysler bailout of 1979 seems to have worked out okay, in that taxpayers got their money back. But we’ll never know the counterfactual. It’s possible that the U.S. auto companies would be much stronger and more competitive now if Chrysler had been allowed to go bankrupt. Managing our way through business failure is something we’re extremely good at in this country. So why don’t we take this opportunity to show what we’re made of?

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