How can we prevent the next Katrina, General Motors?

[Pat Coyle]

General Motors filed for Chapter 11 bankruptcy protection Monday as part of the Obama administration's plan to shrink the automaker to a sustainable size and give a majority ownership stake to the federal government.

The fallen icon of American industrial might will get $30 billion of additional tax payer money. That's on top of about $20 billion in taxpayer money GM already has received in the form of low-interest loans. The federal government to take a 60 percent ownership stake in the new GM.

How did we come to this? Experts have long known that GM could not sustain its business model under rising costs and declining sales. Predictably, the current economic storm finally brought the car maker to its knees, prompting the Government to take unprecedented measures to bailout the business.

Can you say "preventive maintenance?"

The sad and controversial situation in Detroit is similar in some respects to Katrina, and other tragic Gulf Coast hurricane rescue operations. In New Orleans in particular it had long been known that the existing levy system would not protect the city from a large storm, but sufficient investments in repair and maintenance were not made in advance. Once again, the storm came, and since 2005, the Federal Government has pledged $116 Billion dollars to the region's repair and rebuilding efforts. But the problem isn't really solved.

Question of the day: Is an ounce of prevention worth a pound of cure? Think about our health care system. We know that living healthier lifestyles will reduce the costs, yet we continue subsidizing smoking, drinking and overeating. This is just one more example. Will the United States ever shift towards an emphasis on preventive maintenance in every area of our society? Or are we doomed to see history repeat itself over and over and over? Please share your thoughts here

[Brian Rowe]

This is nothing like Katrina. While the government spending on preparation was an issue with Katrina, government spending can not help GM.

[Steve Stuck]

Addressing your post one by one and not to get off topic:

GM:
The government at no point should have stepped in (Bush/Obama). This money will never be paid back nor will the government even make it viable again. Main reason is government doesn't understand the role of profit. The market place was telling the automaker they were unsustainable through lack of sales. The UAW and GM management failed to react to market conditions.

Katrina:
I have some personal experience with this since my dad lived down in New Orleans for about 25 years and his home was damaged from the storm. Many people I have talked to in New Orleans do not view the hurricane like the media does. Their pissed that lawsuits keep getting in the way of these levee projects. New Orleans tried to fix the levees from the 1960's storms, but of course lawsuits stopped the Army Corp. of Engineers design to fix the system. Then once again in the 90's the levees were to go through a major overhaul, but more lawsuits from environmental groups. The infamous Sierra Club filed these lawsuits and stopped the proposal. Environment over life.....environment first when it comes to these groups.


Question of the Day:
Very flawed statement and a utopian thought process. People will fail and have always failed. They learn from their failures and a body of government officials imposing restrictions/taxes/regulation hardly makes it better. Only makes it worse. People do not overeat, smoke or drink because they think "Wow, government is subsidizing this for us." They do it because they choose too and are now trained by the thought process they know government will be there to take care of them.

[Richard Haynes]

Well the comments posted are good ones, but the major problem is Goverment is going to do what it wants. And with this Socialist President it quit frankly may happen. Which scares me the U.S. Goverment was not made to do this but the old Soviet Union this would not have surprised me but here in the United States it is noting that the founders wanted.

Been listening to this whole agument, all the press forgets to mention Ford that after looking at the goverment proposed solution said no way were out of here and took no goverment money. Guess what they did not get in the situation of GM or Chrysler.

As for Katrina, Local Goverment failed and pushed the blame on to the federal goverment. Look Mississippi did not have near the problems as Louisiana because they asked for help early. Louisana sat on its hands, the federal Goverment need to be asked to help before they can move and it takes 3-4 day to gear up an respond.

Botton line the Goverment in health care would be a disaster any time they are invovlved in industry they distroy it. Goverment has no reason to try to make a profit, which drives inovations and discovery.

[Lori Watson]

I have no hope that the government will be able to "fix" GM. This whole deal was nothing more than a political move by the Obama admin. who has a vested political interest in keeping the union workers happy and voting for him.
Reality is that government has NO business in PRIVATE corporate business management. This deal is unconstitutional from top to bottom. The Obama administartion's meddling in private business should terrify Americans...today they will take over GM, fire the CEO...tomorrow it will be YOUR company!

[David A Wachtel]

Lori:
Great post.
What you have described is what Hugo Chavez often does in Venezuela.

The government can't run itself. Why would it effectively run an auto company?

What you have witnessed is about the same level of competency as you will see in health care.

Think about it.

[Tom Marsh]

I think its funny how alarmed some people are over the firing of these worthless, dead-weight, and/or incompetent CEOs. Isn't "Getting Fired" what's supposed to happen when you do a terrible job in a capitalist society? I am pretty sure that's what's supposed to happen when you're as bad at your job as some of these guys have been.

The larger issue is where were our Anti-trust regulators? How did we end up with so many companies that are demonstrably "Too big to fail"? If there weren't any companies that were "too big to fail" we wouldn't be in a position of having to bail these companies out because it wouldn't matter if they failed--the wider economy would be able to take the hit and move on.

From where I sit, "Too big to fail" means that the company is really "Too big to exist."

[Matthew Wilson]

Preventative maintenance of things is a great idea, however they should be done by the ones in which the preventative maintenance should help, if I develop on a server and don't back up my data as a preventative tactic, if my server fails, Its my own fault and I have to fix the problem myself. It is worth my time to fix the server to backup regularly before the failure happens.
The next thing is, is it preventative maintenance when you're trying to patch a broken dam during the hurricane? The same situation would be similar to this catastrophe, they did nothing to prevent it, but everything to let it fail. To try to fix it now is no longer preventative but just downright maintenance of a system that's not going to withstand the storm.
As many have mentioned, the Government should never have gotten involved, it's a waste of tax payers money, not to mention just downright scary to have the government tell you how to run your own business!
Not to mention they're going to tell you how to run it while at the same time taxing the life out of you. You can't prevent this dam from failing, its to late, every penny put into the company was wasted because of timing.
If the government wants to invest in America's future, they need to invest on having a National product and helping build product building companies that aren't working right! Why invest in a company that's producing 20 miles to the gallon while every non-American based country gets at least 40 miles to the gallon.. 'errrr.. just so much anger built up towards all these non-conservative presidents we've had lately..

[Rick Sparks]

This is a very flawed attempt to create analogies between very dissimilar situations. Comparing the results of a natural disaster complicated by human actions with the failure of a giant coporate entity is ludicrous. It sounds like the author is simply stirring up controversy for its own sake as opposed to creating intelligent thoughtfull dialogue. The responses I have read so far simply reflect immediate reaction to hot-button issues.

[Jeff Bowe]

Having just come off two weeks of doctoral classes, one in management where we studied GM from the 1920's to today, and economics, where we looked at both micro issues of industry supply and demand and macro issues of tax policy...here's a few thoughts.

GM was destined to fail due to the ever increasing liability put in place by the union in the 1940-1960's with retiree benefits adding to the cost of today's production force. The math doesn't work. Had the auto market never gone international--which was not possible once transportation and communication and technology skills become portable--then GM would have survived another 10-15 maybe 20 years. At some point, too many retirees to active workers was going to be a problem.

The government is way too involved. The media finally said it today--what is going to happen when GM wants to close a plant and as the shareholders' representatives, congressman and representatives feel compelled to voice (uninformed) opinion on which plant to close? It will happen and it will probably happen before the end of summer. A whole new round of pork is opening up when they decide where to put the next new model line.

The U.S. has several problems coming together, now at a boiling point.
Cars now last longer than they did 20 and even 10 years ago. This causes big problems with supply when the natural demand curve drops.
We as a country don't save enough, so there was not enough capital in the banking system.
The banking system was forced to loan mortgage money to a class of borrowers who would not qualify under normal terms but the banks were not allowed to charge adequate risk premium for them.
We have a government run by attorneys, not business people and certainly not peers to the electorate. They don't live by our rules, they don't live in our neighborhoods and they don't drive our cars. Nor do they share our medical insurance, and their retirement plan is better than anyone reading this (well, I can't guarantee that, but it's a safe statement.)
The same government is now telling us what we must drive instead of what we want to drive. Since when is it their business if I want to drive a 15 mpg vehicle and pay the price in fuel (but be safer in a wreck) than a 35 mpg tin can? Physics...it's pretty simple. When cars get smaller, they are not as safe. Oh, did I forget that the same gov't is adding about $1300 to the cost of that 35mpg car? Gee..thanks.
We have a tax system that allows millions to escape paying taxes--and here I mean both the very high income and the illegals who have moved to our country and failed to legitimize their stay. I have no problem with immigration--just get a legit tax paying job and contribute.

It is time to take the country back. We have too much regulation, government too involved in our daily life, and it is going to get worse unless we send a united and unwavering message to both parties in Washington and to BHO who is currently turning our capitalistic state with socialism overtones into a fascist/socialistic state.

[Brian Rowe]

Its clear to me Jeff, that you did not put enough time and thought into this. The brevity of your response demands you rethink your position so that your creditability is in no way damage in this social community.
On second thought, you might have a point.

[Jeff Bowe]

hey, it was a great way to avoid working for a few minutes :-)

[Tom Marsh]

Your teacher seems to have ignored what I'd call the most important fact in the mortgage equation, which led to outright fraud: The boneheaded repeal of the Glass-Steagall act's barrier between consumer and investment banks, and the subsequent orgy of greed and fraud (that may yet ruin us all,) which then ensued. No part of the regulations encouraging low-income lending required the making of liar-loans--Yet most of the "big banks" that are now in trouble were involved in making loans as part of a wink-and-nod fraud, and it is this fraud which I think will ultimately shake-out as "the root of it all" when the dust settles.

If you're not familiar, the banks made "loans" to borrowers based solely on FICO score and their statement of their income. The mortgage bank would then quickly sell the risk for that note to numerous other banks--effectively passing the buck to other banks. In effect, it wasn't really a loan so much as a bet that the bank (be it Countrywide, Citigroup, BoA, whoever) could sell this risky mortgage as a "security" to other banks before it defaulted. If they could, they would get their money back. If not, they lost their bet and foreclosed on the house. This is how we ended up with $400,000 homes bought by people earning $35,000 per year.

What is most amazing (and simultaneously galling) is that while all of these banks' mortgage businesses were making these loans, the investment arms of some the SAME banks were buying these junk securities from other banks. In other words, many banks were defrauding other banks out one door and BEING defrauded (by some of the same people) through another.

I admit I am neither a forensic accountant, nor an IRS agent, but that sounds like a crime to me. It sounds like Enterprise Corruption--it sounds like the employees were looting the company... Making huge bonuses and receiving lavish salaries for themselves as a reward for their ongoing scheme to essentially destroy the bank. By making market in these securities, a variety of corrupt organizations essentially aided other concurrent conspiracies in other corrupted-organizations by giving them a market into which they could unload their own fraudulent loans. No ethical banker could look at that picture and see anything but a slow-motion train-wreck--and a few spoke out.

They were promptly fired.

Government regulators were either incompetent, complicit, or both, and did nothing to stop this fraud. The excuse I've heard is that this was because the securities markets where junk-mortgages were traded weren't regulated. I think that speaks for itself in terms of an argument for or against bank regulations. As for the liars-loans, those were within the government's oversight, but nothing serious ended up happening until it was much, much too late.