The government investment in GM--What is the payback?

Richard Posner:


... As a result of the near collapse of the banking industry, and of financial intermediation generally, last September, lending was severely constrained for some months (it still is severely constrained, though less so). That would have made a reorganization in bankruptcy of the auto manufacturers, as distinct from a liquidation, very difficult to pull off....

That was a liquidity problem, rather than an allocative-efficiency problem. To understand this, one must distinguish between average and marginal cost. The average cost of producing a car is the total cost incurred by the manufacturer, including interest on its debts, divided by the number of cars it produces. That cost exceeded, and still exceeds, the price at which GM can sell an appreciable number of its vehicles. GM's marginal cost, however, is the addition to its total costs of producing one more vehicle. That cost does not include interest on existing debt, because the interest is a fixed amount rather than varying with how many cars GM builds and sells. (It is the fixity of its debt that made GM insolvent when the demand for its vehicles plummeted last fall.) As long as GM's marginal cost is less than the price it can get for its product, it is efficient that it should remain in business. So if it cannot get the cash that it requires to be able to remain in business, then an efficient production process will be shut down, and that is an inefficient result. It therefore made sense, regardless of macroeconomic consequences, for the government to step in and take the place of the temporarily constrained banks, and become GM's (and Chrysler's) banker.

But that was then. Five months later, credit is less constrained, and so GM's inability to obtain debtor in possession financing (if indeed it is unable to do so, as I shall assume) may reflect not a liquidity problem but a judgment by the financial industry that GM has no long-run future and therefore could not repay a debtor-in-possession loan large enough to keep the company going....

While we still don't know the answer to the question in my headline, Posner's reason suggest the payback forecasted for GM is not adequate to attract private investors. That tells me that without a rapid increase in the volume of sales the payback is unlikely to occur during Obama's term of office, if ever. GM is facing the same problems that Toyoto is facing on sales volume, but it will be further hampered by its ownership structure after its bankruptcy.

Shedding dealerships does not appear on its surface to be a way to increase the sales volume needed for profitablility. Add that to the administrations push to make more cars that people don't want and profitability looks impossible at this moment in time.


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