All this talk of bankruptcy and bail-outs in the auto sector (for example an interesting piece on the power of bondholders at the Baseline Scenario here) makes me wonder if there isn’t a way to “throw sand in the eyes of the bull“.
I’m speaking from zero information on this (and so have no idea if it’s a stupid idea or already been debated at length), but how much would it cost the Obama administration to let GM die but simultaneously offer a nice “retraining” package to auto workers below a certain salary? Say, a year’s salary, with a substantial portion to be used specifically in higher education?
The effect would be to let the shareholders, bondholders and top execs bite the bullet of poor business decisions, but recognise the economic costs of frictional unemployment caused by the demise of a major employer and buffer these people with cash.
Pros: targeted, media friendly economic stimulus going to main street in areas which may in fact need it most. Shows industry that Obama isn’t going to be bullied into keeping dying companies or industries alive just because they employ lots of people.
Cons: expectation from employees at other firms in trouble in the economy that they should get the same deal (govt being accused of favouratism), a run on shares of similarly troubled institutions, difficulty determining how much should be given to workers, difficulty determining the cut-off point between execs and workers, a dangerous precedent for the government.
Having said that, it might just be the thing for the government to restore some downside risk to shareholders and decision-makers without making Obama look like a heartless conservative.
Can someone put me out of my misery and explain why this is ludicrous?