General Motors Creating Auto Bubble

I think General Motors should have gone out of business, rather than spend tax dollars to save a poorly managed company. The taxpayers are extremely unlikely to get their money back, because the company behaved the same way after the bailout as before… which is why it needed a bailout in the first place. Apparently enough people did not want GM cars for the price, which is why the business was not thriving.  But we bailed them out to save the jobs (jobs that would not have disappeared, just migrated) and GM went on doing what it did. So absolutely nothing changed, except that now it was a tax funded “private” company, and who would have guessed, GM cars were still not moving off the lots.

“No problem!” says nameless GM executive who could not be satisfied with running a company into the ground only once, “we will just give out loans to people who cannot afford cars”. Now, at this point, we don’t have to guess what would happen. This same bubble bust cycle has happened before, not because of the free market, but because of the government intervention into the free market.  Remember Fannie and Freddie: “People can’t afford houses? Well just give them loans anyway”. Cue defaults on mortgages, and the 2008 financial crisis.

But now the President of General Motors Canada, Kevin Williams is attempting to talk some sense into his American counterpart. He has warned that subprime loaning of cars will lead to the same sort of bubble as the housing crisis, reports Free Beacon.

“The real question is, are you going to run the business the way you ran it in the past in order to drive market share exclusively. The answer is that’s not our intent because it [led to] a failed company,” Williams said.

Using subprime loans and easy credit to move cars off the lot may not be GM Canada’s goal, but its parent company, bailed-out, Detroit-based General Motors, has been moving in that direction, as the Washington Free Beacon reported in February. Nearly 90 percent of loans issued by GM Financial were subprime.

Last August, when GM started issuing the subprime loans in order to move cars off the lots, I posted about this tactic.

Taxpayers have lost $35 Billion on the bailout to GM, with the government still owning 27% of the company as the stock price plunges. But that hasn’t stopped GM from increasing risky sub prime auto loans in order to boost the “sales”. Although the industry average for sub prime auto loans is about 6% of cars sold, in quarter 1 of 2012 GM sold 8.2% of its cars in this way–up from 4.8% of sales in the last quarter of 2010 when the bankruptcy was still fresh and the company was less likely to gamble with fresh funds from taxpayers. Now that the bailout is in the distant past and voters may not remember, GM decided to try to save face rather than have a safe and effective business plan. It seems all that matters is the company lasting until after the election in November. But the economy would be doing much better if that $35 Billion had stayed in the private sector where it would have been invested in companies that would actually post profits and provide steady jobs. Government cannot create wealth, it can only move it around.

And that pretty much sums up why the free market is better for organizing business and labor. Every time the government gets involved, it wastes time and resources, slowing down the economy, and in this case the recovery. If the government was actually interested in improving the economy, it would keep its hands off.

3 thoughts on “General Motors Creating Auto Bubble

  1. Pingback: America’s Economic Downfall: Abandoning the Free Market | Vigilant Vote

  2. Pingback: Fed Reserve Nominee Loves Government Intervention in Economy | Joe Jarvis

  3. Pingback: America’s Economic Downfall: Abandoning the Free Market | Joe Jarvis

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