As an aside, Lewis is the author of Money Ball, a book about how the cash strapped A's managed to stay competitive in baseball by being smarter and applying math, reason, and an outsiders perspective. Another good read.
Back to the story, here is an excerpt from the article about how obvious it was that the housing bubble couldn't last.
At the end of 2004, Eisman, Moses, and Daniel shared a sense that unhealthy things were going on in the U.S. housing market: Lots of firms were lending money to people who shouldn’t have been borrowing it. They thought Alan Greenspan’s decision after the internet bust to lower interest rates to 1 percent was a travesty that would lead to some terrible day of reckoning. Neither of these insights was entirely original. Ivy Zelman, at the time the housing-market analyst at Credit Suisse, had seen the bubble forming very early on. There’s a simple measure of sanity in housing prices: the ratio of median home price to income. Historically, it runs around 3 to 1; by late 2004, it had risen nationally to 4 to 1. “All these people were saying it was nearly as high in some other countries,” Zelman says. “But the problem wasn’t just that it was 4 to 1. In Los Angeles, it was 10 to 1, and in Miami, 8.5 to 1. And then you coupled that with the buyers. They weren’t real buyers. They were speculators.” Zelman alienated clients with her pessimism, but she couldn’t pretend everything was good. “It wasn’t that hard in hindsight to see it,” she says. “It was very hard to know when it would stop.” Zelman spoke occasionally with Eisman and always left these conversations feeling better about her views and worse about the world. “You needed the occasional assurance that you weren’t nuts,” she says. She wasn’t nuts. The world was.Sometimes the facts are right in your face and you choose to ignore them. I hope we can learn this lesson from the housing/financial crisis and apply it to the auto industry. I've come to the conclusion that we don't want to give the auto companies $25 billion dollars.
At first I saw the hundreds of thousands (or possibly millions) of jobs that relied on the auto companies and thought that they justified saving the companies. However, American car companies don't have a business model that can turn that into profit. They are fundamentally flawed and giving them $25 billion dollars would be like feeding the habit of a drug addict. Even if they switched to making small, fuel efficient cars they are still saddled by enormous contracts and liabilities to the unions that make them uncompetitive with the foreign car companies. It should be plain to see that the car companies can't succeed when they are paying thousands of dollars per car extra to cover union liabilities that their competitors don't. Giving the auto industry the money would be like buying a house in the fall of 2006 (Sorry Tim and Ross - at least you guys can afford it!)
So what to do? Let's them file for bankruptcy, reorganize, re-negotiate with the unions, fire the current managers, and take advantage of the large infrastructure that they have, but apply a feasible business model. It's not that simple, but anything will be better than prolonging their incompetence at the tax payer's expense. At some point you have to pull the band-aid off. Hopefully it can be done in a responsible way that will save most of the jobs. Here is a post on the Freakonomics blog about that issue.
Last point. The problem with the automakers also parallels the financial/housing crisis in one other area: greed. If the car companies want to succeed without going under they need to renegotiate with the unions. Of course, the unions will balk at this because they won't give up the sweet deals they already have. Instead, they'll decline to negotiate and both sides will lose when the company goes into bankruptcy. Then again, it's hard to fault the unions when you know the car companies would be selfish too, if they could. Just another reason I want to see someone else take over these companies and start fresh.
BONUS FUN FACT:
GM employees 123,000 people. If the gov't shut GM down and gave each worker $50,000 dollars to cover costs and find a new job it would cost about $6 billion. This would probably be money better spent than the $25 billion GM is asking for. Got the idea from here.
Here is Michael Lewis on The Colber Report:
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