Thursday, May 14, 2009

"That's Not the American Way": Chrysler's Bailout and the Road to Ruin

Chrysler's plan to close about 25% of its dealers is the natural outcome of a series of very unnatural events surrounding its bankruptcy, says an outraged Howard Davidowitz, chairman of Davidowitz & Associates. Specifically, Davidowitz was speaking about how the Chrysler bankruptcy was "hijacked" by the Federal government, which allegedly threaten creditors "if they didn't go along with the fiasco of turning the company over to the unsecured lenders."

Barack Obama's plan is to "sustain the union" in an effort to secure future votes in five key Midwestern states, Davidowitz says, without hesitation. "We the taxpayers are bailing out the union [and] bailing out Chrysler, which is an inefficient company that shouldn't survive and can't survive in the long run, anyway."

More generally, the Chrysler saga is evidence of how "we keep putting more money into hopeless companies," he says. "That's not the American way. We let inefficient companies collapse and be replaced by more efficient companies. That's the only way this economy can work."

By propping up inefficient companies and keeping zombie banks alive, Davidowitz says "we are exactly on the same path as Japan," which is now two decades into its economic malaise.

But there's one key difference between the U.S. and Japan: While they had about $16 trillion in savings and a 19% savings rate when their bubble burst in 1989, the U.S. savings rate was negative a year ago, a now a relatively meager 4.2%.

"That's a big problem for the financial stability of the U.S.," says Davidowitz, who had a hard time envisioning an alternative to a very grim scenario for America: "With big government, mad borrowing, and not letting things fail, there's no way we can have [rising] living standards," he says.

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