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Automakers Get Bailout, One Last Lifeline

By: Steve Johnson

12/19/2008 - 16 Comments

President Bush announced a rescue plan to give GM and Chrysler $13.4 Billion in U.S. Loans.

The money will be come from the Troubled Asset Relief Program (TARP) set up to bail out financial institutions. An additional $4 billion would be allocated in February. The funds would allow GM and Chrysler to keep operating until March. Without the loans, GM and Chrysler said they would run out of operating funds as soon as this month.

Bush was temped to let the automaker go into bankruptcy where they would be force to restructure.  But, in light of the current financial meltdown, Bush said, “These are not ordinary circumstances.  In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action.”

The rescue plan is not without strings attached.  Under the terms of the plan, if the companies can’t demonstrate financial viability by March 31 the loans will be called. The government’s debt would have priority over any other debts. I wouldn't doubt that the automakers will fail by March 31 and the loans will be recalled.

When Bush was asked about letting the free-market work, he said, “I have abandoned free-market principles to save the free- market system,” Bush said in a CNN interview airing the same day.

Only a Matter of Time

The problem is that this loans will only delay the inevitable.  The only way the automakers will be able to continue operating as they are is if the bubble economy returned to its bubble in 2005/2006 and that is not going to happen.  The automakers will eventually have to reorganize and renegotiate labor contract, resulting in much lower paid auto workers and a major reduction in employment.

Banks are also going to feel the impact from the reduction in auto loans.  The recession has already reduced the sales of new vehicles by 3-4 million in 2008.  The financial bailout has saved many banks, yet there are thousands of banks that are no longer needed in our current economy and will likely be going out of business over the next few years.

The recession is going to get worse in 2009 and these loans are only going to delay the collapsing auto industry. By March, there will likely be other industries begging congress for a bailout. My advice is to 'Get Ready' and prepare to be laid off by getting out of debt and cutting your expences to half your current income.

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