Financial system rescue package necessary; but think twice about politicians running auto industry
December 11, 2008
"There are a number of significant misconceptions about the economic crisis," said George Morgan, the SunTrust Professor of Finance in the Pamplin College of Business at Virginia Tech. These include that deregulation was the cause; that the financial system bailout rescues only financial businesses; and that bankruptcy is necessarily a bad strategy for the auto industry.
"The most important misconception -- repeated by the press over and over -- is that people believe that deregulation of the financial services industry was a cause of the problems when just the opposite is true," said Morgan. "The deregulation that allowed holding companies to own both commercial and investment banks has allowed the more stable banks to rescue the volatile investment banks."
Without the deregulation, the crisis would have been much worse, he said.
"The financial rescue package was necessary to respond to what was a panic in financial markets that threatened not just financial businesses but all businesses from ports to factories to fast food to telephone companies. The financial sector is the heart of the economic corpus in the United States, and we could not allow a "heart attack" to totally debilitate the working body of the economic system."
On the other hand, "Whether the auto manufacturers constitute the same threat is a legitimate subject for debate," said Morgan. "There seems to me to be a misunderstanding of what it means for the company to 'fail.' So called prepackaged bankruptcy is the most likely outcome, and this does not mean that the companies shutter their doors and disappear. Just the opposite, bankruptcy would allow them to continue operating and implement a new plan of action," Morgan said.
"Legally, such a measure is apparently necessary in order to change labor agreements and debt contracts," he said.
"A government intervention could also help in abrogating past agreements and restructuring the business. But one has to ask the question whether the government can run the auto industry any better than the heads of Toyota, GM, or others, who are all facing 30 to 50 percent declines in sales of their product," Morgan said.
"Given the political pressure and demands placed on Freddie Mac and Fannie Mae to expand lending to the less credit worthy – in other words, subprime borrowers, and to increase homeownership proportions to records of over 69 percent, we should think carefully about politicians next imposing requirements on, or even running, the auto industry."