Editorial -- The costly contradictions in bailing out GMAC

Saturday, January 3, 2009

ARECESSION of unknown severity and duration now grips the United States and the rest of the world. In response, the Federal Reserve and the Treasury have thrown out the free-market rulebook, pumping massive amounts of taxpayer money into the financial sector and the auto industry. This year, there will probably be more federal intervention, in the form of spending on public infrastructure and perhaps a new infusion for the car companies as well. The argument for breaking all the capitalist taboos is that the alternative would be worse; once the economy has stabilized, the government will retreat, and both businesses and households will submit once again to the usual market discipline.

Fair enough. But it's still wise to reflect, every so often, on the insidious costs of all bailouts, lest emergency measures evolve into standard operating procedure. Today's lesson in moral hazard has to do with the recent federal rescue of GMAC, the financial arm of General Motors -- which officially closed on the first $4 billion of a separate $13.4 billion bailout on New Year's Eve.

The Federal Reserve has allowed GMAC to convert itself into a bank, and Treasury promptly infused $5 billion -- plus another $1 billion to GM itself to buy more equity in GMAC. Grateful, GM has begun offering car buyers five-year, interest-free financing deals through GMAC.

Sounds great, until you consider which models GM seeks to move off its lots courtesy of this federal largess. For the most part, they are unpopular, gas-guzzling sport-utility vehicles, such as the 2008 Chevrolet TrailBlazer, GMC Envoy and Saab 9-7X. None of these cars gets better than 16 miles per gallon in city driving or 21 mpg on the highway. The biggest TrailBlazer model emits 14.1 tons of greenhouse gases per year (about twice as much as a Toyota Camry). And car reviewers have given all of these vehicles poor marks for performance and reliability. With a price tag ranging from about $28,000 to $38,000, it's little wonder that annual TrailBlazer sales were down 42 percent through November or that Envoy ($31,000 to $36,000 apiece) sales were off 49 percent.

In short, through the GMAC bailout, the U.S. government is enabling GM to overcome (or try to overcome) the market's resistance to its inferior merchandise -- and it is doing so in a way that directly clashes with public goals such as conserving energy and fighting global warming. Perhaps this will indeed be, as GM has vaguely promised, the last hurrah for the second-rate, U.S.-built SUV -- or perhaps the government has purchased GM a chance to fail at something new. Either way, it's another reason to look forward to the recession's end and to the swiftest possible decoupling of government and big business.

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