What would happen if GM or Chrysler (or Ford) stopped receiving federal bridge loan money to fund their turnaround attempts?  The airline industry declared bankruptcy and came out of it just fine, right?

Buying a car is fundamentally different from buying a plane ticket.  Buying a car is a long-term engagement (I don’t want to say investment because it’s not), with the average person planning to keep a new car for 10 years.  That raises obvious questions about the long-term viability of the company you’re buying the car from.  Will they be around to honor my warranty?  Will I be able to get parts?  Worst-case scenario, you’re resale value takes a huge dive and nobody will repair your transmission under warranty.  You’re out thousands of dollars.

A plane ticket on the other hand is bought a few weeks or a few months in advance, and is a short-term engagement with most flights lasting only a few hours.  Worst-case scenario, you’re out a few hundred dollars and have to buy a new ticket.

In the near-term, a Big 3 bankruptcy would have a devastating impact on the economy.  Hundreds of thousands, if not millions, of jobs would be lost from the manufacturers, the suppliers, the dealers, and everywhere in between.  The unemployment benefits would be a severe cost burden that would likely land on Congress’s shoulders.  With so much unemployment, foreclosures would skyrocket in Michigan and other Mid-West states, driving down the value of homes in those communities, even those untouched by the auto industry.

The ripple effect on the suppliers would cripple domestic production from foreign automakers that could take months or years to fully resolve. (This is the reason that Toyota, BMW, and others supported the bailout of GM and Chrysler.)

I would also predict wide swings in value for used cars.  Gently-used cars from surviving nameplates will increase in value, while the value of cars from defunct brands will plummet.

Vehicle sales represent a huge portion of tax revenue for local governments. Without people buying cars, as they surely wouldn’t for months after the collapse, cities and municipalities will run short on cash and would have to explore raising other taxes to stay afloat.

For these reasons, I would be surprised to see Obama let any of the Big 3 declare bankruptcy.  The logic is we’ll end up paying for it one way or the other, and lending the automakers money while they get their act together will be far less painful for an already rocky economy.

In the long-term though, the bankruptcy picture is much rosier.  Americans still love their cars and enterprising individuals and innovative companies rise to the occasion and fill the void.  They likely use existing facilities and plants, and hire back many of the same workers.  These companies figure out how to profitably build and sell cars that people want and value, without the legacy costs and complex bureaucracies that have bogged down Detroit for years.

Laissez-faire can be a bitch, but in the long run it all works out.  But you know what they say: “In the long run, we’re all dead anyway.”

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