Detroit's Bailout: Who Really Needs the Money?

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A Slump on Steroids

As the American family's income seemed frozen in time, the nation's savings rate fell into negative numbers; in many years new home equity loans were in the neighborhood of $800 million. In the "old line" way of thinking, the nation's bankers would have required their customers to pay down their outstanding debts in slow times; but in our "new service and financial society," it seemed as if the bankers were asking why the customer didn't want to borrow even more.

But had anyone really been looking for the truth about Main Street's economic squeeze, it was there in plain sight: The continuous suicidal incentives Detroit has offered have been a desperate roller-coaster attempt to lure financially strapped families into its dealers' showrooms, and that alone told the story. In the past, in healthier historical cycles of new car sales, the record-breaking years for the auto industry in 2000 and 2001 should have led to a natural increase in automotive replacement demand by 2005. But no such thing happened; instead, that summer GM had to offer Employee Discounts for Everyone plus rebates to move the market at all.

The same thing happened this summer, only on steroids. Suddenly, between the factory discounts and rebates, one could purchase a new $29,000 Dodge Ram pickup for around $17,000. Ford offered up to $8,100 cash back on certain models of its once-dominant F Series truck, and GM light trucks buyers found out that getting 35% off the list price was no longer something salespeople laughed at when you suggested it. Meanwhile, Toyota (TM) quickly announced it was shutting down production of its truck line at Princeton, Ind., and that its planned Mississippi plant would build the Prius hybrid instead of a crossover SUV.

While it is true the largest incentives went to prop up light trucks, large incentives or subvented interest rates or leases were also offered on many popular models, such as the Toyota Camry. Yet in spite of these moves, new vehicle sales have fallen dramatically.

Detroit's manufacturers believe they have the answer: Not only must they create "must-have" compact and extremely fuel-efficient automobiles, but the U.S. car buyer's perception of fair window-sticker prices for these new cars must be realigned. In a nutshell, buyers must start expecting to pay what Europeans do for compact cars.

Obviously, Japanese automakers would love to get even higher prices for their most basic econoboxes too, but the competitive nature of the U.S. car market might make this more of a fantasy than a possibility. Look at the test cases already in the market, say, for example, the Saturn/Opel Astra. The German-inspired Astra has a base price of $18,480, while the Honda Civic's is $15,402. The predictable result is that in August, Honda (HMC) sold 30,052 Civics, while the Saturn Astra managed a pitiful 1,994 sales.

Is This Another Bad Loan?

So, after publicly pleading poverty owing to the high costs of employee health care, then switching the blame for its downfall to its high costs of labor, suddenly Detroit foresees no problem repaying $25 billion worth of new co-signed debt, just as soon as Congress can get this new financial package moving. And with this money Detroit promises more fuel-efficient vehicles that (it hopes) can bring premium prices, thereby restoring its financial health.

Don't misunderstand me: I want Detroit to recover and succeed. In the same way, I want Honda to come up with exciting new designs, or for that matter any car company to do well: That creates real competition in the market and gives us real innovation, and the car-buying public is best served by having many choices when they go to buy new. But my goodwill and intentions don't alter the real underlying problem.

The average American family's income is virtually the same as it was eight years ago. But their indebtedness has grown, and their expenses for necessities like food, energy, and gas have in some cases doubled. Their net worth is falling with the housing problem, which isn't going away until the subprime mortgage issue is fully resolved—and until we are told the truth about what damage the Alt-A mortgage resets coming our way will cause. (Spoiler alert: Some believe the Alt-A crisis will be much larger than the subprime problem.)

America has had to pry the bad news out of Wall Street about the health of our financial system, and as of today that's still not fully disclosed. Maybe it's time for the automakers to come clean on what they know about the financial health of their buyers. That's what will really determine whether their plan of automotive conquest, using our $25 billion, has even a remote possibility of working.

Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, given by the Anderson School of Business at University of California at Los Angeles, and is a member of the American Historical Society. His column leads the Fort Worth Star-Telegram's "Sunday Drive" section. He reviews new cars every Friday morning at 7:15 on Fox Four's Good Day, contributes articles to BusinessWeek Online, and hosts the top-rated talk show Wheels Saturdays from 8 a.m. to 1 p.m. on 570 KLIF.