Those who forget history...doomed

In light of all the largesse being doled out to financial and automotive industries--the bailouts--here's an oldie for you.

Remember the bailout of Chrysler and how that worked out for us? Read this paper. Brief summary:

• Chrysler used the federal government to go bankrupt without actually declaring bankruptcy. They reorganized debt, wrote off debt at 30 cents on the dollar because the Act forced their creditors to do so.
• The bailout simply allowed Chrysler to continue bad management practices. To a degree, the rest of Detroit also continued down the same path thinking that they could get a bailout too if it came to it. If Chrysler had failed, maybe Ford & GM would have realized they had a stinking mess on their hands.
• Chrysler repeated tried to renege on their obligations. When the warrants they issued actually became quite valuable, they protested that paying off the warrants amounted to usury. The asked the government to reduce their interest rate from 1% to 0.5%.
• Salaries for top management were adjusted downward as a part of the deal. But as soon as the 2 year term was over, top executives got retroactive raises, despite the $0.5B loss that year.
• Losses accrued during the Act's period were carried forward, meaning Chrysler's tax bill was basically zero for several more years (during which they had record profits).
• Union's forced concessions were nearly totally restored by 1982.

The Conclusions section speaks for itself:

When the loan guarantee program was being considered by Congress, Chrysler's unions and top management constituted the "visible" constituency, pleading its case in Washington and begging to be pulled back from the jaws of bankruptcy. Unrepresented and unheard was a huge "invisible" constituency. They included:

• Current and future laid-off Ford and General Motors workers, who never understood that their tax dollars were being used to destroy their own jobs in order to save jobs at Chrysler

• Small businessmen and private individuals, who never understood that the Chrysler bail-out would squeeze $1.2 billion out of the credit market, making it difficult and more costly for them to raise business capital or finance a mortgage on a new house, all of which would have created new jobs

• Over 60,000 now laid-off Chrysler workers, who expected the bailout to save their jobs

• American car buyers, who never understood that Ford and General Motors would have taken over much of a bankrupt Chrysler's market and produced cars more efficiently, reducing the cost of domestic automobiles.

The problem with the Chrysler bail-out—in fact, the problem with all "industrial policy"—is that it is necessarily political in nature; the loudest interest groups get the greatest reward, while the scattered and fragmented "invisible constituency" is largely ignored. But a free market is a tangled web of infinite and subtle interaction, in which the full impact of intervention is not always recognized until too late. In the case of the Chrysler bail-out, a big chunk of taxpayer money was committed to a shaky and inappropriate venture. Every American became an involuntary and uncompensated partner in a company whose future is still in doubt. The precedent established is extremely dangerous. On top of this, the bail-out even failed in its purpose.