It has been well chronicled that errors in judgment have led to the current crisis the Big 3 find themselves in. As I watch the hearings unfold on CSPAN I don’t hear much about the government’s involvement in causing the crisis through their actions or lack of action. In my view their lack of action or wrong action is at the core of the problem.
1. A lack of a comprehensive energy policy on the part of the government made it impossible for the Big 3 to respond to the sudden spike in oil prices. With cheap gas prices the driving public just isn’t interested in buying smaller fuel efficient vehicles. As the economy improves and the memory of high gas prices fades, the driving public will tend to go back to what is large, safe, and comfortable. If Detroit is building fuel efficient vehicles there is no guarantee the public will buy them in the event of cheap gas. Of course, Detroit spent millions lobbying for all sorts of waivers and “work arounds” of the CAFE standards which are mostly a joke in my view. But the rest of the industrialized world has used gas taxes as a method of guiding consumer demand. In our case, light trucks, minivans and SUVS were categorized as light trucks so as to avoid the more stringent car CAFE standards. This worked out well for a while as Detroit’s profits were based on these types of vehicles, which the market demanded! Since most of America was driving these types of vehicles it made the country AND the automakers more vulnerable to sudden the sudden spike in gas prices. The Bush administration actually provided a tax incentive to stimulate sales of light trucks over a certain GVW rating and spurred the sales of Navis, Escalades, etc.
2. Regardless of how many dollars are thrown at the auto industry problem by the government, nothing good can happen until the problem of toxic mortgage securities is solved. This is no small issue. Paul Krugman, who has some credentials, simply states that the problem was caused by unregulated “asset-backed securities issuers” and not depository institutions or Fannie and Freddie. Check the link below for a chart of where things went wrong. Notice, by the way, that these were not depository institutions — and therefore not subject to the Community Reinvestment Act.
http://economistsview.typepad.com/.shared/image.html?/photos/uncategorized/2008/09/24/gse.gif
How can the Big 3 be responsible for the sudden financial system meltdown caused by a lack of government oversight?
I’d be very interested to here from others with similar or differing opinions.