This morning we offered five of the strongest arguments in favour of an auto bailout, but now we’d like to hone in on a specific issue: the question of a bailout vs. some kind of pre-packaged bankruptcy. Notice there’s virtually nobody really arguing for a Chapter 7 liquidation bankruptcy, which is odd: If your argument rests on the free market, and the idea that GM (GM), Ford (F) and Chrysler need to fail, then why should the government intervene with a pre-packaged bankruptcy or some kind of Chapter 11 with the government providing the DIP financing?
Few people want to face the abyss, where we just let the companies go. Why then is a “prepack” better? Does anyone really think it would be more efficient for the government to make arrangements with the myriad creditors and suppliers out there?
As for this idea that the government could step in and guarantee auto warranties during the bankruptcy. Ah yes, the pinnacle of market-based schemes: a gigantic government-backed auto warranty corporation.
Another argument in favour of bankruptcy is that it would allow the automakers to get rid of the unions. Sure, maybe if they went into a real bankruptcy that might happen, but there’s no way a government-led bankruptcy, with some kind of car czar answering to Obama would rescue the automakers but screw over the workers.
Bottom line: If ideological consistency is your thing, then it makes sense to support a Chapter 7 liquidation. But it’s bizarre to argue against a bailout, but then also argue that government money should be used in a “prepack” with very little reason to think operations will turn out better than a bridge loan.