Exploding Cars for Beginners

Mark Thoma does a nice job comparing government purchases, public-private partnerships, and nationalization, and gets the concluding paragraph exactly right. It won’t help you through the complexities of whatever Geithner will announce in the morning, but it explains the basic concepts.

15 thoughts on “Exploding Cars for Beginners

  1. You know how much you can trust a used car dealer?

    And, you know that’s where the money is to be made on cars!

  2. But, who sold the dealership all those exploding cars? Do they get to keep all the money they made?


  3. Hrmph. That article treats the banks’ reserve price as if it were sacred and non-negotiable. It’s nothing of the sort. The banks, at least, that are sitting on these assets are technically insolvent, way, way below their mandatory capital asset ratios. And they are way, way past the usual grace period offered to an insolvent bank to give it a chance to raise new capital. What the government has ALWAYS done, whenever this problem has come up before (roughly every 20 to 30 years since 1870), is when they get to their best and final offer, they then tell the banks take it or leave it. And “leave it” means “surrender your banking license to the FDIC, because you’re insolvent.” Geithner and Summers have plenty of leverage in this, and they won’t use it, because it’s just not acceptable to them for their rich friends and past and future employers to lose money.

  4. Maybe the most important issue for the town isn’t which plans it chooses (e.g. government purchase, private/public partnership, nationalization), but that it choose one and execute it competently. Then, that it deal with the large, politically connected auto manufacturer who created the cars in which some 50% of the engines are “toxic”… maybe hire quality control engineers to ensure that the cars aren’t junk, since the previous mayor’s mantras of caveat emptor and free market failed the town’s need for stability, security and jobs (all of the things that Prof. Thoma rightly recognizes as benefits that must be included in any rightful accounting).

  5. I completely agree with PLB’s view here.

    The on going cost of this financial crisis to all of us is many orders of magnitude larger than whatever potential saving we think we can optimize out of tax payer cost. Just consider how much our household net worth has already fallen. Now, you know we in the US are already the lucky ones. Now consider those that live in the developing countries.

    I am very interested in technical arguments for why a particular solution will work or will it not work. However, if we focus on which solution is a more efficient use of tax payer money than we’ve grossly (or obtusely) misplaced our focus.

  6. The human idea expressed in the concluding paragraph is just right. Obviously a core purpose of society should be to provide Enough material comfort and security for all citizens willing to do a reasonable amount of work. Materially, no one needs more than that, and no one has a right to seek more than that if greed leads to actions beyond the carrying capacity of the earth and of society.

    What creates all our problems is that we have no “society” to speak of, and aggressive sociopaths, greed fundamentalists, are allowed to seek their nihilistic bliss and at the cost of complete destruction.

    Unfortunately, the administration, when wearing its bailout hat, is determined to continue on this path, which is why it rejects the kind of analysis which would even acknowledge job preservation as a value.

    That’s why we had the bizarre spectacle of the bailed-out banks facilitating pharmaceutical mergers which would wipe out thousands of jobs, at the exact moment that Obama was pushing his stimulus as a job-creation vehicle.

    To the best of my recollection, no one from the administration could give a coherent explanation for this schizophrenia, while banks just shrugged and said that has nothing to do with us.

    So they rob Peter to pay Paul to beat up Peter, all the while telling Peter it’s all for his own good.

  7. I liked the example. Like all economic models it clarifies the options a lot. But… like all econoomic models the devil is in the assumptions. Can someone explain why we have to assumes that we cannot know which cars (assets) have the bad engines? Gailbraith argues that we should immediately look at the assets before going any further. Why can’t this be done before purchase? I personally suspect that there is a lot of fraud buried in them. Is that the fear?

  8. It appears more and more that we are in the market for lemons that I described in my blog. Toxic assets are exactly lemon products like used cars. The credit market is a kind of lemon banking…

  9. In the real world, the dealer would go out of business and the assets sold at the market price or taken over by the creditors in an orderly liquidation. Management would be gone and the creditors that made bad loans would lose some money. Fair so far.

    If a well run dealership is a viable business in this town, someone will start one, hire people, provide products and services and make money. If the town is too small or competition is too stiff then no scheme to “save” this dealership makes any sense.

    Mark Thoma ends by saying, ” … the point of these plans is not to make money, the point is to keep the economy of the town going, to keep people employed.” If a car dealership is a viable business, there will be one. If not, propping one up is welfare by another name. Why not cut out the middle man and simply send checks to the newly unemployed?

  10. This example is nice and in a situation like this Geithner’s plan makes sense — but what happens when there are two or more dealers that sell to each other using the government’s money ? The dealers get a free subsidy for pushing garbage around, and this is called a “market”. It’s a giveaway and a sham.

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