Everyone in business these days seems to be turning to government for a bailout or better put, a handout to keep their businesses viable.The US Government has all but nationalized its banking system and there are rumblings in Congress that they should finish the job.Two of the big 3 automakers are looking for increasing amounts of cash for their operations.The insurance and other financial industries have received their share as well.
The logical argument from the taxpayer is that why should their tax dollar be used to support failing businesses; many of whom have abused their profitability during good times.This argument has its merit but is also short sighted.Every taxpayer should be concerned how their money is being spent but it is not the here and now that is important, it is the future.These companies need bridge financing until they get back on their feet.It is that simple.Why bail them out?Here is why.
Each of the automakers have hundreds of suppliers.These suppliers are often well managed and very solvent companies.Their only problem is that they are dependent on the automakers for their survival.The traditional estimate is that for every job at an assembly plant, there are 6 more that are directly dependent.So with restructuring and downsizing many jobs are being lost as it is.So let’s assume that governments let the automakers fall into bankruptcy.The consequences of that for Ontario will be devastating.
Assuming that the Big 3 employ 500,000 people in Ontario if 2/3 of that workforce goes, leaving 200,000 workers those 300,000 displaced workers are now looking to the social system for assistance.Assuming an average claim of $400 per week, that is $120 million dollars being put out every week.Multiply that times 50 weeks and you have 6 Billion dollars spent.
Now, lets not forget those other workers who lost their jobs as suppliers.They represent approximately another 1.8 million people.From a financial standpoint alone, a bailout is good business.It will continue to provide employment while these companies restructure.
The other big argument is that they have been mismanaged.Absolutely true and government assistance should include demands that prove effective management as contingent to any loans or guarantees.Money given should not be a free ride.It should also include demands for minimum dollar percentage of domestic procurement in the supply chain.This will assist in the recovery of the economy.
However, the danger here is that the efforts have to be joint between the Canadian and American governments.They must present a united front in their approach.Anything less leaves the pasture gate open and surely someone will try to take advantage.
It is a win-win situation for everyone; the automakers, their suppliers, the banks and governments.The real winners though are you and I because we will see an economic recovery and that cannot be ignored.
So the banks will have to open up their wallets and provide the necessary bridge financing to these companies.Every other sector of the economy is affected and cannot be ignored.The turnaround wont happen overnight but it will happen as long as business starts using its head as a guide instead of its Profit and Loss Statements.The days of massive profit taking are coming to an end and rightly so.