It’s extremely popular to denounce the generous bank bailouts, while wondering why the government is forcing the automakers into Ch. 11 with major haircuts for their bondholders. Bondholders in banks have (infamously) not been forced to take a hit (except in a few, early exceptions).
The easiest conclusion to make is that for all the vilification of Wall Street, the financial industry has capture both parties in Washington, who generally look down on dirty, manufacturing work. One problem with this theory is that politicians generally love the blue-collared auto worker and see bankers as easy punching bags. So what gives?
For a different angle, John Hempton examines recent economic history in Japan and Korea:
I argued that the problem in Japan was their ability to keep zombie corporations (not zombie banks) alive for decades. Japan has a “Rip-Van-Winkle” industrial legacy to go along with its absolutely brilliant modern technology industries. This old industry sucks resources which would better be used by the modern industry. It makes sense to keep the old industries alive during a deep recession because the resources would otherwise be unemployed. It makes no sense to keep them alive long term as you wake up 30 years later (as per Rip-Van-Winkle) and lo – you still have the old industrial structure.
Translate this to America – and the standout yesterday industries are Detroit and mortgage broking. The US at peak had about 500 thousand mortgage brokers or one per 60 mortgages outstanding. This was insane – and it has changed. Detroit also (politely) looks as if it will employ about two thirds as many people (or less) after the bad bits of Chrysler and GM are closed as part of the bankruptcy process.
I also argued that the problem with Korea was that the banks became totally illiquid and hence were unable to lend at all. This mattered because not only inefficient Chaebol died – but plenty of good stuff suffered the same fate. A banking system that cannot lend is indiscriminate about who it kills. It will result in the death of dodgy businesses – but will also kill perfectly fine businesses that need cash for short term requirements.
If you want to avoid the really deep malaise that was Korea then keep the banks liquid. Then at least they will lend to the more worthy borrowers – and whilst industry will die banks can be selective about who they kill.
Another difference between banks and car companies is that a new, startup bank will likely have the exact same general business model as the old bank it replaced, if only due to the regulations that define banking in this country. As such, while it sounds nice to talk about creative destruction and the emergence of new startups in the space, there’s not much reason to think the new ones will perform so much better.
On the other hand, the auto business model actually is horrendously broken. A re-emerged auto industry can’t have the same labour policies, size, manufacturing operations, and dealer networks at the Big Three, as they used to be known. Forcing a restructuring with the (faint) hope that the new GMs and Chryslers will be actually different beasts should really be the goal.
Definitely read Hempton’s entire piece. His contrarian take on Japan is a worthy angle on the debate about whether our policies are simply going down that same road.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.