GM: What To Do? (Part 1)

TW: The latest must solve issue amidst this financial crisis has become the fate of GM. I have little respect for our auto industry although many of the problems relate to horrible decisions and policies emanating from over fifty years ago when the current labor agreements were initially devised. These agreements provided pension and health benefits which have become toxic as the industry has shrunk over the past 35 years. Since 1973 the industry has made serially poor decisions chasing lost market share and trying to create a structure capable of carrying the unsustainable commitments made over decades to its employees. I have made many investment mistakes but have never invested a cent in an auto or related company, they are money pits.

So here we are, everyone realizes that every $ of "bail-out" provided to the auto industry will likely be lost yet most believe letting them fry would be even worse. What to do?

From Economist:
"DURING any other crisis, any other time, I would say the American government must let General Motors fail. It desperately needs the restructuring only bankruptcy can offer. We also cannot set a precedent for bailing out manufacturing industries as they lose the ability to compete in the global market. Doing so only undermines the ability to compete, in any industry, over the long run. And as Megan McArdle eloquently points out, unlike the financial sector, we do not need the auto industry for the economy to survive.
Any other time that would be true. But in this rare case it may not be. None of the best fiscal policies or bail-out packages work absent sufficient confidence in the economy. Antiquated or not, many Americans see the auto industry as the backbone of the economy. I worry over what GM's collapse would do to investor and consumer confidence at this stage. It could confirm for many people that we have indeed begun the next Great Depression. Aggregate demand could free-fall and a long, painful recession might become a self-fulfilling prophecy.
James Surowiecki wonders if letting Lehman fail brought us to this stage. Lehman’s failure terrified Wall Street, freezing credit markets. The public and government now associate a large firm failing with market chaos. Ultimately letting Lehman fail might have created more instead of less moral hazard, by making the government terrified of large bankruptcies.

Alternately, unlike Lehman, which might have eventually thrived if rescued, a bail-out of GM merely prolongs the inevitable. The Economist this week calls it “pouring cash into basket cases with no end in sight”. With deficits soaring, does it make sense to throw taxpayer money at a company we will either have to prop up indefinitely or simply let fail at a more convenient time?
Letting Lehman fail showed, according to the Economist, “the dangers of doing the right thing at the wrong time”. I wonder if the same can be said of a GM failure.
http://www.economist.com/blogs/freeexchange/2008/11/life_support.cfm