Obama, the Senate, and China ... All Eying the Big 3

Posted by Jane Hamsher, Firedoglake at 11:09 AM on November 21, 2008.

I see the Obama team is already denying this:

"President-Elect Barack Obama's transition team is exploring a swift, prepackaged bankruptcy for automakers as a possible solution to the industry's financial crisis, according to a person familiar with the matter.

Obama's team has already contacted at least one bankruptcy- law firm to say that Daniel Tarullo, a professor at Georgetown University's law school who heads Obama's economic policy working group, would call to discuss the workings of a so-called prepack, according to this person.

Since the election, Team Obama has become "trial balloon central" (if they were genuinely serious about firing the leaker, Rahm Emanuel would hit the Chief Of Staff revolving door post-haste).  They have been strategically using the media to test public opinion, but in this case I'd imagine they also did so with the intent to force the unions, bond holders and other stakeholders in the Big 3 into a more pliant negotiating position.

It was interesting to watch how quickly the chess pieces moved yesterday in the Senate.  As soon as the Senators from Big 3 states called a press conference to announce their bipartisan plan to repurpose the Energy Bill money as a bridge loan, Reid and Pelosi stepped on their press conference and said they were calling a special lame duck session to deal with the problem.  They usurped the cameras and demanded the delivery of a restructuring plan to Dodd and Frank's committees on December 2 -- something Obama had quietly called for in his 60 Minutes appearance only last Sunday.

If I was Waggoner, I'd be on a plane to China right now (probably coach).  The Chinese have announced their desire to buy the Big 3.  Why not?  It would allow all their debts to be paid off so their suppliers and other creditors won't go under in a domino effect, their stockholders won't get shafted (which should make Wall Street happy), and they could easily make both interest payments to bondholders and  the $35 billion payment to the VEBA fund that will take UAW pension and health care legacy costs off their books.

However, there are some long-term implications that could make this less than appealing for the US.  As Ian Welsh has pointed out, there's a reason the Chinese are so keen to buy a US automaker:

The moment when China becomes a consumer driven society is the moment when the US loses its leadership of the world, and when if it's economy isn't in good shape, it crashes out.

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Why?  Because the US needs massive inflows of money from nations like China and Japan in order to finance both the government and private consumption.  China and Japan, and other countries, for that matter, have amassed holdings of US securities, cash and so on, in the many trillions, as a result.  They have been willing to buy assets that they know they will probably not see a full real return on because the US buys their exports, and in China's case, is busily shipping American jobs to China, thus industrializing China.

The world needs the US because the US is the "consumer of last resort".  It buys everyone else's stuff, issues a pile of securities and dollars in exchange, and exports industrialization to China in exchange for deindustrialization and cheap consumer goods at home, which kept down inflation for a very long time.

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At the current time, China is not ready to have a consumer society.  As Stirling points out, it's about 2 economic cycles away from being able to switch to one.  If it gets to buy up a US car company, it's probably one cycle away.  Since the US is in a really really deep hole and currently digging deeper at a ferocious rate (the five trillion spent on the financial crisis will add to the US's outstanding debt) when this happens is a big deal.  Two economic cycles gives America longer to get its house in order and fix things so that when China does take off, it doesn't find itself unarmed with every major nation in the world able to annihilate its economy whenever they feel like and take only minor losses themselves.

I'm supportive of Obama's idea that there needs to be a plan going forward for Big 3 viability before they get a bridge loan, but "viability" may not mean "profitability." If we're serious about converting to a green economy, when gas prices are low people want to buy the gas guzzlers that Toyota and BMW and Mercedes are still making in Richard Shelby's right-to-work state.  You can't demand that the Big 3 be profitable and make fuel efficient cars that people don't want to buy, so you've either got to levy an unpopular gas tax or give people other incentives to make the cars attractive.  

The fact is that the Big 3 and the UAW  have already made a lot of the structural changes and compromises that they need to make going forward, and holding the threat of "organized bankruptcy" over their heads when a buyer is standing there waiting in the wings seems unrealistic.

If we're playing chicken here, let's let Richard Shelby and Jim Inhofe go back to their states and tell their constituents that Chevy is being sold to the Chinese (Inhofe visibly bristled at the very suggestion on CSPAN the other day).

That'll go over well.

Tagged as: china, obama, gm, green economy, economic crisis, the senate, the big 3

Jane Hamsher is the founder of FireDogLake. Her work has also appeared on the Huffington Post, Alternet and The American Prospect.