Thursday, April 2, 2009

Is there a difference between car manufacturers and banks?


In exchange for additional financial help for General Motors, the administration demanded and got Rick Wagoner's resignation. It seems reasonable for the government to attach some conditions to making more loans to GM, and asking for Rick Wagoner's head seems like a small price for GM to pay in return for billions in federal help. After all, this is the man who first killed the electric car, and then decided to revive another version of it at enormous additional expense. Yet from the right all you hear is that the government is now interfering unduly with business prerogatives, and we are one step further down the path to socialism. The right's alternative plans would be either to send General Motors to bankruptcy court, or to loan GM whatever it needs with no strings attached. Neither of these appear to be realistic alternatives.

From the left you hear complaints that it is unfair to demand the resignation of the head of GM without also calling for the heads of some of the bankers who are also receiving government help. Maybe this is a fair criticism. I'm not really in a position to judge which bank CEOs should go and which should stay. But I do think there are some differences between banks and car manufacturers. We clearly need more visionary leaders of auto manufacturing companies. Even in the best of times, a car manufacturer must be able to look ahead a few years to anticipate what the market will be demanding. They cannot keep churning out the same product year after year and expect to retain market share.

On the other hand, we expect bankers to be conservative. A lot of banks got in trouble because they expected market conditions to continue as they had in the past. So they lent too much at the peak of the market, and they are not lending enough at the bottom. But that is what we expect from banks, and most bank managers would probably act the same way. Other banks got in trouble because they invested in flashy products that they did not quite understand. In the future, we probably want them to stick to what they know. So other than asking for symbolic change, it is not as clear what purpose would be served by demanding that a lot of heads roll at these banks.

4 comments:

  1. Uh... the head of GM at the time of the EV1 was Roger Smith, not Rick Wagoner... and it was done for sound financial and legal reasons, too.

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  2. Actually, Roger Smith stepped down as CEO in 1990. The EV1 program at GM lasted from 1996 to 2002. Rick Wagoner has been quoted as saying that his worst decision at GM was killing the EV1. So I guess even he did not think it was a sound business decision.

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  4. Good call on the EV1. Thanks for correcting me. Still, they pumped about $2 billion into it and lost more and all they got out of it was bad PR. They are taking the same chance with the Volt... when will they ever learn?

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