A Forex View From Afar

GM and the EconomyGM and the Economy

During his testimony at the House Financial Services Committee, Mr. Paulson rejected the idea of using bailout money in order to secure the balance sheets of the auto-industry.

It is quite interesting how a man who is in charge around $350 billion, refuses to use $25 billion to save the three U.S. car makers. At the same time, it is curious how fast the government came up with a plan to save the financial system, compared to the lethargic response to GM’s (desperate) calls. Who knows, maybe the lobbying party was larger for the financial corporations than for the auto-industry.

All told, the three car manufacturers: GM, Ford and Chrysler, add up to around 3 million jobs throughout the whole U.S. economy, not to mention the branches spread around the world. Earlier this month, GM declared that it might not have the necessary cash to finish the year. Well, the year still has more than a month to finish, meaning that GM is in a very difficult situation. As of 2004, GM losses reached a massive $72 billion.

Allowing GM to fail would be another huge hit for the U.S. economy. Such an action would probably have the same effect on the economy as the Lehman bankruptcy in the financial sector. My view is that the auto-industry must not be allowed to fail, because if it does, the equity markets will post record declines in the period ahead, and the U.S. recession will be much deeper than previously thought

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