Not Overly Compelling

I’m not entirely sure where it is I fall on this proposed bailout of the auto industry. Given that the most compelling case in favor of a bailout is predicated on credit markets rendering Chapter 11 infeasible, I like Ryan Avent’s suggestion here:

And secondly, it seems that a number of defenders of the bail-out are arguing that a rescue is necessary because GM may find itself in Chapter 7 bankruptcy rather than Chapter 11, and facing forced liquidation, which would be bad, rather than orderly reorganization. But this seems like a very simple thing to fix. If Congress can pass a special, tailor-made rescue bill for the automakers, then certainly it can also pass a special, tailor-made bankruptcy bill for them.

Apparently, successfully operating under Chapter 11 requires the cash flow assistance from Debtor-in-Possession (DIP) loans, which, you guessed it, come from currently dry credit markets. There certainly may be some prohibitive aspect I’m unaware of, but why not simply have the government guarantee the DIP loans?

UPDATE: More from Ryan Avent here. I’m beginning to think a bailout, at least without serious conditions, would be a mistake. If Detroit/UAW won’t make adequate concessions, government assisted Chapter 11 seems sensible.


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