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  • Stiglitz: 'Chapter 11 Is the Right Road for U.S. Carmakers'

    There is not a ton of common ground between the Heritage Foundation and Neo-Keynsian Joseph Stiglitz. But it appears we do see eye to eye on the auto bailout. Yesterday we explained why Bankruptcy Is the Best Way to Save the Auto Industry. Today Stiglitz writes in the Financial Times:

    What needs to be done is to help the automakers get a fresh start and allow them to focus on producing good cars rather than trying to juggle their books to meet past obligations.

    The US car industry will not be shut down, but it does need to be restructured. That is what Chapter 11 of America’s bankruptcy code is supposed to do. A variant of pre-packaged bankruptcy – where all the terms are set before going before the bankruptcy court – can allow them to produce better and more environmentally sound cars. It can also address legacy retiree obligations. The companies may need additional finance. Given the state of financial markets, the US government may have to provide that at terms that give the taxpayers a full return to compensate them for the risk. Government guarantees can provide assurances, as they did two decades ago when Chrysler faced its crisis.

    With financial restructuring, the real assets do not disappear. Equity investors (who failed to fulfil their responsibility of oversight) lose everything; bondholders get converted into equity owners and may lose substantial amounts. Freed of the obligation to pay interest, the carmakers will be in a better position. Taxpayer dollars will go far further. Moral hazard – the undermining of incentives – will be averted: a strong message will be sent.

    We couldn’t agree more.

    Posted in Economics [slideshow_deploy]

    2 Responses to Stiglitz: 'Chapter 11 Is the Right Road for U.S. Carmakers'

    1. Pingback: Stiglitz: “Chapter 11 is the right road for US carmakers” « Conservative Thoughts and Profundity

    2. Bank of Canada Curre says:

      Unlike Chapter 11, simulated results do not represent the obligation. The taxpayers can use them both. This is the obligation unless you have substantial amounts to trade with.

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