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February 19th, 2009

GM and Chrysler’s Failure Starts With The Government’s Solution

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Why has the government adopted such a fundamentally different approach in regards to how they have dealt with the housing crisis as opposed to the auto crisis? Since the inception of the latest housing crisis, strategies intended to deal with the problem have been a bottom-up approach: stimulate demand at the product level. Every solution to date has been designed to deal with the issue’s root causes (i.e. foreclosures, falling home prices, high mortgage rates), and thus stimulate consumer demand in order to correct them.

Why hasn’t this approach been taken with GM and Chrysler? The government’s approach with these automakers has been to pump repeated billions into the top, in hopes that it will trickle down to consumers. Since the automakers’ fundamental problem is that Americans aren’t purchasing their vehicles, why hasn’t the government taken the same approach they’ve taken with the housing industry and provide consumer incentives to purchase their vehicles?

GM and Chrysler received a combined $17.4 billion in Federal aid in December, and petitioned the Obama Administration for another $21.6 billion this week. Public money of what could total nearly $40 billion in aid has resulted only in further downsizing, not increased sales.

Keith Gumbinger, Vice President at HSH Associates shared an interesting calculation with me this morning. If the government scrounged up $16 billion (mere chump change into today’s bailout era), they could provide 1.6 million Americans with a $10,000 voucher to purchase either a GM or Chrysler vehicle. Since the automakers have already been given billions to develop smaller, more fuel-efficient vehicles, consumers could walk out of a dealership with a brand-new vehicle that could cost them only about $5,000.

How is it that no one in Washington has recognized the failed strategy in dealing with the failing U.S. automakers?

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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