9.22.2008

We Need More Failure

I recently argued that the U.S. automakers shouldn’t get the $25 billion in loans they are seeking from the federal government. I suggested that if one of them actually went into bankruptcy, it wouldn’t be the worst thing in the world. And I suggested that times now are different from Chrysler was given a bailout 30 years ago. I didn’t question the value or the success of that bailout.

Maybe I should have. I read recently that some people believe the bailout was a bad idea, and that Chrysler should have been allowed to fail.

But wait a minute: Didn’t Chrysler become a stronger, more successful company as a result of the bailout? Yes. But one school of thought is that the bailout planted some of the seeds leading to the problems the industry has today. And if that is true, it may have implications for the current bailouts of Wall Street firms.

Consider
this, by columnist David Leonhardt of The New York Times:

You can draw a clear line from the Chrysler bailout to the recent attempts to steady Wall Street. Back then, Washington insisted on a few pounds of flesh, like a wage freeze for Chrysler workers, in exchange for aid. Mr. Paulson has done something similar by insisting that shareholders of the Wall Street firms benefit little from any bailout.

In 1979, the government structured the Chrysler deal so that taxpayers might earn a profit from it (which they did). This year, the Fed effectively purchased securities from Bear Stearns that it hopes to sell for a gain when the financial markets calm down. While it’s way too early to know if the strategy will succeed as well as it did three decades ago, it’s certainly conceivable.

But if you take a moment to think through the full Chrysler story, you start to realize that it’s setting a really low bar. The Chrysler bailout may have saved the company, but it did nothing, after all, to stop Detroit’s long, sad decline.

Barry Ritholtz — who runs an equity research firm in New York and writes
The Big Picture, one of the best-read economics blogs — is going to publish a book soon making the case that the bailout actually helped cause the decline. The book is called, “Bailout Nation.” In it, Mr. Ritholtz sketches out an intriguing alternative history of Chrysler and Detroit.

If Chrysler had collapsed, he argues, vulture investors might have swooped in and reconstituted the company as a smaller automaker less tied to the failed strategies of Detroit’s Big Three and their unions. “If Chrysler goes belly up,” he says, “it also might have forced some deep introspection at
Ford and G.M. and might have changed their attitude toward fuel efficiency and manufacturing quality.” Some of the bailout’s opponents — from free-market conservatives to Senator Gary Hart, then a rising Democrat — were making similar arguments three decades ago.

Instead, the bailout and import quotas fooled the automakers into thinking they could keep doing business as usual. In 1980, Detroit sold about 80 percent of all new vehicles in this country, according to Autodata. Today, it sells just 45 percent.

There is a similar chance for us to be fooled about the extent of today’s problems. Some day, house prices will stop falling and the financial markets will calm down. But the underlying problems aren’t going away on their own.

I believe strongly that we often learn more from failure than from success. Maybe we need a little more failure today, to make us stronger in the future.

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