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The Difference Between a Loan and a Bailout

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Drowned out by the din of Beltway big shots and Wall Street haggling over their financial package this weekend, Congress managed do something constructive. They passed a $25 billion loan package to the Big Three on Saturday. The automakers are going to use the money to retool existing factories for the production of fuel efficient vehicles.

Of course, the bureaucratic red tape involved in such a move may take up to 18 months before any money sees the light of day, especially after the fiasco regarding the Wall Street bailout vote.

Still, the news is a bright ray of hope in an otherwise gloomy landscape that is now southeastern Michigan. In fact, the Detroit City Council thought enough of the impending loan prospect that they voted to give General Motors a $136 million dollar tax break, in return for the company which has promised to upgrade the Hamtramck plant for the manufacture of the Chevrolet Volt, an all-electric car scheduled to roll off the assembly line in 2010. In addition, with the loan, Ford and Chrysler will push forward with their own versions of fuel efficient vehicles.

At first, I was wary of the government giving any money to any large corporations, much less ones in my own backyard. We've all seen the chaos that unchecked greed, mismanagement and corruption engenders, and it's not a pretty picture. In my thinking, if you don't have the foresight to predict trends and if you don't have enough money to expand towards the future, then perhaps you don't have any right to be in business at all. 

However, for the first time in a very long time, I'm excited about GM and the Chevy Volt. And let me be the first to add, "GREAT! What the hell took you so long?"

It's been fairly obvious to me for a long time that gas prices are only going to go up and will never go down or stabilize. Until we drill for oil on our own turf, something I think we can do with minor impact on the environment, this country will forever be a slave to OPEC.

My car of choice for the last three years has been a hybrid Prius. Even though my fuel usage hovers around the 45 mpg mark, I still wince every time I have to fill up at the local gas station. I love my car, and can see driving it until it falls apart. From the looks of things, that's going to be a very, very long time from now. But with news of the Volt finally coming to fruition, I promise to take a look. GM has long built good cars, classy cars, albeit fuel guzzling cars. Pre-Prius, I drove a Monte Carlo, which I also loved for its look and power. Unfortunately, driving it was a costly venture.

On the other side of this weekend's Congressional mess, most of Michigan's members of the House of Representatives voted against the proposed Wall Street bailout. These included both Democrats and Republicans. For the most part, I don't believe the "nay" votes were a matter of political posturing. Local news has reported that the men/women on the Michigan streets were firmly against giving tax dollars to aid the financial markets, and they let their voices be heard by deluging their Congressmen with phone calls and emails that let the opposition be known.

One can say that "Main Street" doesn't understand the complicated underpinnings of Wall Street. The hot shots can argue that the common folk just doesn't get it. After all, we're not Haah-vard graduates, and our share in the world economy doesn't hold a candle to the billions and trillions of dollars traded every day on the NYSE.

However, there's a huge difference between the bill that passed and the one that didn't. One, the automakers are receiving a LOAN, one which will be paid back. While there is some talk of a payback from the "Street," the details are tenuous and there is no guarantee that any of the money will be returned to the government. In fact, the $700 billion dollar figure may be one floated on the low side.

The second difference is that in lending the money to the Big Three, there is a positive change on the horizon, one that includes some jobs and a product that makes sense. True, this is just a baby-step, but it's a step in the right direction. This is a change that is tangible, that the people on Main Street can touch with their hands. Try grabbing the concept of "credit" with both hands these days.

Perhaps if Wall Street had something to show as collateral, or a product to offer in return, the people on Main Street would not be up in arms over what amounts to a give-away.

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About Joanne Huspek

I write. I read. I garden. I cook. I eat. And I love to talk about all of the above.
  • Billi

    sometimes its sickening to find out -on TV no less- where our hard earned tax money goes! GRRR!

  • bliffle

    GM has been handing out generous dividends for about 20 years, without regard to their shrinking market share.

    They could have set aside some retained earnings for the future, or even have invested in new manufacturing lines. But no, they sent out huge sums of money to their shareholders (and themselves).

    So, backing them now represents “Moral Hazard”.

  • Cannonshop

    Big Business and Big Government are kind of two pieces of the same whole, though, kind of an incestuous relationship that just seems to go together. One always seems to generate the other.

  • Sorry, I clicked too fast. I meant to say the Big Three means BIG BUSINESS, not big government.

  • Listen, I’m no fan of the Big Three. Witness the fact that I drive a car that was MADE in Japan, and I live in Detroit, which is a dangerous proposition right there. I can’t tell you how many times my car has been keyed or dinged. To me, the Big Three represents big government and unions who have constantly had their hand out. The sense of entitlement, especially of union members who think just because a car is made in the US ergo every American HAS to buy it, is maddening to say the least.

    I consider myself a savvy and fussy consumer. If Toyota comes out with an all-electric car, I’m going to look at that too. Just because a car is US built and in my own backyard doesn’t mean I’m going to buy it.

    My point is that if we’re going to start throwing money around, I’d like to see something REAL coming out of Wall Street as a return on an investment. Otherwise, the feds might as well give ALL of us a bailout check.

  • Um, Dave, I think the difference here (and it IS a difference) is that the factory bailout involves a loan,

    The AIG deal is also a loan, but it’s being decried as a bailout. And insurance IS a real product, even if it’s not tangible.

    whereas the Wall-Street bailout involves what amounts to a gift, that factories and such are hard assets with objective values, and that it’s money for Production as opposed to paperwork manipulation. Wall street only makes one thing-lots of little money symbols that, as has now been demonstrated, mostly revolve around the idea of money and can be sabotaged by having the curtain pulled back.

    What Wall Street bailout? The bailout currently being developed is for mortgage banks, not Wall Street per se, which is a much larger and more diverse group. Plus the bailout isn’t even a bailout. It’s a nationalization of both debts and assets, where the government just takes over a portion of the mortgage industry, not really bailing anyone out, just imposing its stabilizing presence on a large part of the market. It’s really far less of a sweetheart deal for the benefit of select companies than the ‘big three’ loan, because it doesn’t save Fannie and Freddie, it eliminates them.


  • Lisa Solod Warren

    I am inclined the share Joanne’s view…. GM has made some big mistakes, but at least they are trying to revamp a product. I am for any kind of help that gets the American public a return for its “investment” even if it’s five years from now. It makes no sense to just give money away without getting something in return. The “bailout” can easily be restructured so that the public gets a stake for its money. And that is what I hope they talk about in their talks today so that this thing passes with some real sense in it.

  • Cannonshop

    Um, Dave, I think the difference here (and it IS a difference) is that the factory bailout involves a loan, whereas the Wall-Street bailout involves what amounts to a gift, that factories and such are hard assets with objective values, and that it’s money for Production as opposed to paperwork manipulation. Wall street only makes one thing-lots of little money symbols that, as has now been demonstrated, mostly revolve around the idea of money and can be sabotaged by having the curtain pulled back.

    The whole Credit “Crisis” amounts to Lenders are Scared, and they’re scared because they hung their hopes on something without verifying its reality (that is, they bought up scam-investments that were overvalued in the manner of the Tulip Bulb, teletubby, and various collectible card game fads). The bubble broke, and now the lenders have had the shit scared out of them.

    On the other hand, the Automakers produce an actual Product, and presumably wish to continue to do so-and in order to do so, need to become competitive. This is a loan they’re going to have to pay back, it’s not an ‘assurance that all is well’ which is what the ‘streeters want. there are tangible results, and tangible penalties involved here. It’s a bit different.

    On the other hand, it would be nice if a small business could get those kind of terms with that much ease, after all, we have a whole “administration” that’s supposed to do that (and doesn’t, unless you’re one of the squeaky-wheel special interests), but perhaps (just perhaps) enough public pressure can be put on the oversight committees to keep the executives mildly honest in the Auto Industry (at least in comparison with their brethren in Aerospace or Wall sTreet.)

  • Cannonshop

    Dead right, Joanne. A Loan requires Collateral, or at the very least, a borrower who has a job, assets, or income, and it comes with a requirement to pay back the loan. not a “Voluntary if you feel like it” payback, but a REQUIRED payback.

    It’s not a gift. The wall=streeters didn’t earn a gift, giveaway, or corporate welfare. They sure as hell didn’t earn the right to a big ass pile of money to cover their bad decisions with, tax-free and no-obligation.

    The automakers are getting something with obligations attached, something enforceable and demanding.

  • Now this is a stunning example of how deep and fundamental the divides are in this country.

    I was considering writing an article about this too. It was going to point out the incredibly irresponsibility of this smaller bailout that the dems snuck through under the cover of the bigger bailout.

    This is the worst possible kind of government pandering. It’s throwing good money after bad. It’s rewarding companies which have proven their incompetence and unwillingness to modernize by giving them money with minimal assurances that they will do anything they’ve promised to do with the money.

    You repeatedly state your hostility towards wall street, yet seem blissfully unaware that these ‘big three’ companies are part of that culture and are the most corrupt and failed examples of it. Because they offer the false hope of jobs in your region of the country you just go all mushy and indulge them with cheap credit. Incredible.

    In my thinking, if you don’t have the foresight to predict trends and if you don’t have enough money to expand towards the future, then perhaps you don’t have any right to be in business at all.

    So true. And yet you give a pass to the companies which are the WORST examples of this kind of short-sightedness.

    But I guess I should have expected it. You don’t even realize that GM makes the crappiest cars in the US, and were it not for Fiat, probably the worst cars in the world.