Should We Hand Detroit a Blank Check?

Despite the fact that Congress intended the $700 billion Troubled Asset Relief Program (TARP) solely for financial institutions, the Bush administration, the Treasury, Members of Congress and the automakers are negotiating a plan to use the last $15 billion to bail out Detroit’s automakers.

I won’t get into the illegality of the issue; my colleagues Andrew Grossman and James Gattuso do a fine job of that here.

The groups are in tough discussions to establish strict conditions for Detroit and establish a plan for the automakers. But is this better than a blank check? Granted, a blank check doesn’t provide the proper incentives for Detroit to restructure and extends the status quo on the taxpayers’ dime. Yet, if the stringent conditions and long-term viability plan are anything like the bill introduced in Congress, we’re looking at a government-run auto business.

Let me remind you of some of the provisions in the bill:

“The program would be overseen by an individual to be designated by the President. This so-called “car czar” would authorize disbursement of money, determine how much goes to each firm, and establish measures for assessing automakers’ progress toward restructuring. This czar would also have extraordinary powers over participating firms, with approval authority over all corporate expenditures over $25 million.

In addition, the car czar would facilitate the development of long-term restructuring plans for each firm and convene negotiations with representatives of “all interested parties,” including unions, suppliers, dealers, and shareholders. If no agreement is reached, Congress itself, according to the legislation, would step in to impose its own restructuring plan on the firm.

The legislation also imposes a raft of specific conditions on automakers. Some track conditions imposed in other recent bailouts: Washington would receive warrants for the purchase of stock in the companies, dividends would be suspended, and executive compensation would be limited.”

President Bush said yesterday on CNN, “I have abandoned free-market principles to save the free- market system.”

I’m not sure how nationalizing Detroit and having Congress make business decisions for the automakers will save the free market system. Washington or a car czar most likely will not know how to draw up a plan to save GM, Chrysler and Ford.

If President Bush and Henry Paulson truly want to save the free market system, maybe they should take a lesson from Hayek’s Fatal Conceit:

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

We’re looking at a lose-lose situation if government takes action.

Found on Heritage Foundation Foundry

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