$25B Loan, Not Bailout, to Detroit
President Bush signed a spending bill Tuesday that includes $25 billion in low-cost government loans for the auto industry. The idea is to allow automakers to borrow money in order to retool plants to build more advanced technology vehicles—including hybrids, plug-in hybrids, and clean diesel cars—with a goal of boosting fuel efficiency by 25 percent.
The low-cost loans will carry a discounted interest rate of about 5 percent—enough to save Detroit automakers more than $100 million for each $1 billion borrowed. Otherwise, the Detroit Three would face interest rates of 15 percent or more. Congress also approved $7.5 billion to cover the costs of insuring the loans.
“This is not a bailout,” said Walter McManus, auto economist at the University of Michigan. “Investing in new products and technologies takes cash. Without incentives to invest in the fuel-efficient products that consumers are now demanding, Detroit will continue to spend scarce resources to sell yesterday’s products instead of developing tomorrow’s cleaner products.” Automakers have up to 25 years to repay the money.
The bill requires the Energy Department to draft final rules overseeing the loan program within 60 days of it becoming law. It also provides $10 million to hire outside consultants to help them write the rules. That process could take “six to 18 months or more,” according to Energy Secretary Samuel Bodman.
As Congress continues its current debate about the wisdom of a $700 billion bailout of the financial industry, there appears to be widespread support—among auto executives, labor unions, and industry observers—for the $25 billion in loans to auto companies.
“Advanced technologies don’t come for free,” said Rusty Heffner, associate, transportation practice at consulting firm Booz Allen Hamilton. “Advanced technologies lay the groundwork for bigger steps into the future. They lay a technology path.”
Yet, Detroit automakers continue to report record losses, based on decades of investment into previously profitable gas-guzzling large cars and trucks that are now out of step with consumer demand. Should taxpayers be concerned if the government is making a good loan? “I think it’s a safe bet, that is, if we believe in hybrids and plug-in hybrids,” said Heffner. “Don’t we all agree that it’s the direction we should be going?”