"How did you go bankrupt?."…"First gradually, then suddenly."
— The Sun Also Rises, by Ernest Hemingway
It would be easy but incorrect to say that Sunday night's announcement, that Washington had forced Rick Wagoner to resign his position as head of General Motors (GM), came as a shock. After all, the American public needed to see some form of justice exacted for the meltdown of the world's financial system. Someone needed to pay for the excess that led to another unsustainable bubble that has since burst and thrown the world's economies into turmoil.
In case you need to update your scorecard, once again the executives that actually were behind our problems are either still sitting in their offices, drawing huge salaries and bonuses, or have safely moved into retirement with obscene riches. Never in American corporate history have we rewarded failure as we do now. Yet GM's Rick Wagoner has been sacrificed, forced to fall on his sword to satisfy the demands that "someone has to pay."
In reality, Detroit is actually one of the victims of the financial mess. Terminating Wagoner with extreme prejudice makes exactly as much sense as shooting the witness to a murder and saying the crime has been avenged.
Detroit's Fall Mirrored the Economy's
For Detroit, this day has been coming for a long time. Yet for virtually the entire decade, at least until the bubbles finally burst, hardly anyone seemed to appreciate that something was seriously wrong with the American economy. But the signs were there, had anyone had bothered to look at and understand what was really happening to the average American family.
In a nutshell, had the real economy—as opposed to what we were told was real—been doing well over the past eight years, we would not have seen such serious downward pressure on automobile prices, marked by suicidal incentives to move the product. And it was that downward price pressure that cost Detroit billions of dollars each year to sell their products. I asked Wagoner this question last summer: "If GM were paying the same level of incentives today that they paid in the late '90s, wouldn't the company have just had the most profitable years in its history?" Wagoner answered with one word, "Yes."
Because we don't keep important information in the forebrain for more than 90 days, this would be a good time to remind everyone that the past nine years have virtually wiped out a great deal of discretionary spending for much of the middle class. Their costs for food, energy, and gasoline all rose to unbelievable heights— and they did so during a period when we were being told that inflation was well under control. Moreover, while all of this was happening the average family's income either fell or remained neutral, depending on which study you prefer. Not surprisingly, then, during the same period the average creditworthiness of many Americans continued a two-decade decline.
Crushing Price Pressures
So, with their customers' disposable income being diverted to day-to-day necessities, and, at one point, $4-a-gallon gasoline, Detroit had to reduce its automobiles' prices each and every year just to entice anyone into their showrooms. There's no better example than that of the Chevrolet Silverado Extended Cab truck, which recently was being offered with a V8 for less than $14,000. In 1995, that same truck listed for over $27,000 and was purchased for more than $25,000. Detroit's inability to realize the proper yields on their vehicles led to further downsizings, closings of more factories, and the two-tiered wage systems for their future employees.
Yet, while everyone in the financial media has cheered those moves, smart economists know that this is an unsustainable series of actions for the future health of our economy. Because once you start reducing incomes, you will only make the pressures on pricing of goods more severe and more widespread.
When GM negotiated a new $14 hourly wage for many future auto workers, ABC Radio chose to use something I said to sum up this situation brutally: "For the first time since before the First World War, we will have auto workers who can't afford to buy the vehicles that they produce." If anyone believes that's a winning strategy for growing our economy, you would be wrong. You cannot improve an economy by making consumers poorer.
Read Before You Write
One possible reason for the country's fallacy-filled financial viewpoint is that so many writing about Detroit's problems have no sense at all about the history of the auto industry in this country.
Yes, everyone remembers GM's legendary chairman, Alfred Sloan, and how he created the modern American corporation. No one points out the fact that Sloan took over during a period in which GM was as close to failure as it is today. Yes, Sloan made all the right moves; but fixing that smaller, simpler organization's problems and creating the fabled GM of our past took him years.
Likewise, many have written about GM's troubled car divisions and how they need to downsize or eliminate unprofitable brands. That makes it clear that not one of these writers and pundits has ever read Sloan's biography. In it he stated flatly that at no time in GM's history did all five of their divisions make money at the same time. That's right, even in GM's Golden Era they couldn't make everything profitable at once.
Think Before You (Don't) Ask
In the numerous recent stories published about Obama's auto task force, one key question that they badly need answered was reportedly: "When could we possibly see an improvement in the overall car market?" This proves that they are not only human but disconcertingly out of their element in forecasting the eventual turnaround. You might as well ask when peace will settle on the Middle East.
Of course, no one with the auto industry can make that forecast either, because the industry came to a dead stop last summer—the public slowed down on buying new cars as gasoline shot past $4 a gallon (unless they were buying the most fuel-efficient vehicles). And then, once the meltdown of our financial system was announced in September, car sales all but collapsed. Until Americans see a light at the end of the tunnel, with might actually be starting to take place right now, there is no answer to when car sales will truly improve.
But the very fact that Japanese auto production has fallen in half— with Toyota (TM) President Katsuaki Watanabe saying last week that he sees no end to the bottom as of yet—means this issue is far more than just a Detroit problem.
Media Not Asking the Right Questions
It should also be noted that making this announcement on the weekend shows the Administration has no clue on how the American public behaves. Because the last 10 days have shown a remarkable improvement in showroom traffic and sales, so why would they announce this before the month was over. Any bets they stopped the last two days of car sales dead in its track?
As for the financial media, it appears they still aren't asking the right questions. To understand why the financial system failed, one needs to ask why the Federal Reserve continued to maintain that inflation was not happening in this past decade, when the prices of homes, food, energy, and gasoline were becoming outrageous. Why did no one challenge them to explain why—if the economy was really doing as well as stated—why then the middle-class incomes, except people over 50, were falling?
Why was everyone so incredibly focused on the cost of auto workers' health care and wages, when Detroit's biggest uncontrollable expense was actually rebates and incentives? And even now, why is the financial media back pointing to the rise in the stock market as proof that things are getting better, when car sales continue to lack any normal sort of recovery? In 1930 the stock market recovered 20% from the October 1929 crash, but as a predictor that told us nothing about what came next for the world.
Scapegoat Understudy, Five Minutes!
I've been around GM since 1973, and most of its CEOs I thought were little more than pretenders to the throne. Wagoner, though he made some truly horrendous mistakes, was a decent, honest person; he was a competent executive, and he thought more like Alfred Sloan and where he wanted GM to be in 20 years than anyone has given him credit for. He brought back styling and quality to the company, he hired the right people to steer GM's ship. But the milieu has changed over this past decade: All of the profits and asset appreciation in America have been wiped out. It's gone. And it was in that environment that Wagoner was trying to save GM.
This entire decade has been one great financial fantasy; if you doubt that, just look at your 401(k) plan today. But in the President's mind, someone had to be publicly crucified—sacrificed to pay for the sins of others. So Rick Wagoner is gone, so no one asks why others, such as Vikram Pandit of Citigroup (C), gets to keep his job, pay, and bonuses.
But GM didn't bring down the American economy last year. The guys that did still have their jobs—or even better ones, working in the Administration.
Ed Wallace is a recipient of the the Gerald R. Loeb Award for business journalism, given by the G. and R. Loeb Foundation, and is a member of the American Historical Society. His column leads the Fort Worth Star-Telegram's "Sunday Drive" section. He reviews new cars every Friday morning at 7:15 on Fox Four's Good Day, contributes articles to BusinessWeek Online, and hosts the top-rated talk show Wheels Saturdays from 8 a.m. to 1 p.m. on 570 KLIF.