Market Lows: Where Detroit Fits in the Picture

Economist Robert Brusca helped put himself through school on the same automobile assembly lines his father and grandfather worked. With Wednesday's market decline putting the Dow Jones Industrial Average below 8,000 for the first time since March 2003, the chief of Fact and Opinion Economics says the government needs to get serious about finding a way to rescue Detroit -- and fast. Why? Because the fates of the Big Three and the stock market are intimately linked right now.

The heads of General Motors (GM), Ford Motor (F) and Chrysler testified on Tuesday that direct government intervention was the only way to stave off collapse, but many members of Congress have been cool to a proposed $25 billion bailout package to be siphoned off from the $700 billion set aside for the Troubled Assets Relief Program (TARP), established for the financial-services industry. Brusca says that despite the many sins of auto executives, a vital pillar of the U.S. economy is in danger of collapse, and the political battle over a bailout is heightening the dangers.

Brusca spoke with SmartMoney.com on Wednesday after the Dow slipped to its lowest close in nearly six years to explain why rescuing car manufacturers and rescuing the stock market are intertwined.

SmartMoney.com: In your view, what's at the root of today's market plunge, and how does it compare to the last time the Dow closed below 8,000?

Robert Brusca: There's not a lot that's parallel. Last time we were going up, this time we're going down. This is about the concerns people have about the economy and about the auto makers. They're starting to worry that maybe they aren't going to get the kind of relief we thought they were going to get. If they get bailed out in some way, they're still going to be there afterward. If you subject [the auto makers] to Chapter 11 or Chapter 7 bankruptcy, there's obviously a lot more risk to the economy. There's a draconian risk to the economy.

SM: How do Detroit's problems become the problems of the entire economy?

RB: A lot of consumer financing and auto receivables wind up in the securitization market, so that's hurting the financial sector. And since credit has dried up, and people don't buy cars for cash, you can't get financing, and sales have gone down to 10.5 million units. This lack of financing puts [everyone] in financial jeopardy. If you let those auto makers go down you don't have Detroit anymore, and it essentially exports cars to the rest of the world. There aren't any other jobs people can go to there. It'll be like Louisiana, only it wouldn't be because the water came in, but because the money didn't.

SM: How have the many parties in this complex saga -- the auto makers' management, the unions, the politicians on either side of the bailout -- made things better or worse?

RB: What I saw in that testimony Tuesday was that among the heads of the three auto makers, and a [United Autoworkers of America] union guy, and an outside economist who was there as a skeptical observer, so to speak, what I saw was that except for the economist, they were all on the same page. [GM CEO] Rick Wagoner and the union have this big-wink deal that they aren't going to bash one another. It's a great example of what happens when you don't bite the bullet.

People think if they declare bankruptcy, a bankruptcy court judge can come in and make hard decisions that GM management hasn't made. A judge can take a look at contracts that no longer make sense and can modify them -- he can decide to close a plant -- all of these existing agreements would be up in the air. If GM wants to reorganize, this would be a great way to do it but they don't want to go through it. And in a sense I think the unions have helped to destroy the company. There's a lot of anger out there the they've been able to keep wages so high when lots of other people around Detroit work just as hard for nowhere near the same money.

SM: What about the political side of this? This clearly isn't an issue that will be resolved in the markets any longer, but with the coming changeover to a Democratic administration it seems this is more of a political battle at this point.

RB: The political changeover is coming at the worst possible time. You can see that from the way [Secretary of the Treasury] Hank Paulson just shut down half of TARP. He's got two months left. Suppose the Titanic was sinking and they knew a rescue boat was coming -- in a while -- would you stop bailing for a couple of hours? Part of the problem is that Treasury has decided to assist banks and recapitalize them -- but how could you not spend $25 billion to keep key manufacturing industries alive?

When times are hard, you have to go to the government. The central bank is the lender of last resort. I was at a meeting of economists today -- they call it the Forecasters' Club -- and someone said, "If you didn't understand it before, this is what [economist John Maynard] Keynes was talking about." Government is the only place you're going to get financing at this point. It's probably true that government needs to be more intrusive. The Democrats need to get in there and they need to call the union into a side room and give them a couple of black eyes; they need to tell 'em, "You have to give something up."

SM: So what needs to happen to find a way out of this grim situation?

RB: I do think government has to show that it can be depended on to stabilize things. In some sense this idea of Ayn Randism -- that which doesn't kill me only makes me stronger -- doesn't mean an economy should endure all risks. Ideology is getting in the way of making good policy.

We have stepped out of the capitalism model with what's happened. We're at a time in the business cycle where pragmatism is called for. If the auto lobby was as powerful as the financial lobby, they'd have had their money last week. They'd probably have doubled it.

SM: So will a bailout, or some sort of palliative measure for the auto makers, be the key to reversing this market slide? What does Wednesday's Dow drop mean?

RB: I think it's a signal that the degrees of risk are very stepped up. We're going from markets where we had renegade cowboy capitalists, where regulators decided it was their job to sit on the sides and watch the rodeo. Some would get stomped by the bulls, but it wasn't their job to pick them up. After what happened to Lehman Brothers, how could you even consider that now? If you don't save the Big Three, who do you not save next?