Car Guys vs. Bean Counters - Bob Lutz [79]
Subprime mortgages soon became a growth industry, with banks paying “bounty hunters” to bring in hopelessly unqualified prospects to whom they could grant a mortgage. The mortgage business and, with it, housing starts (the number of privately owned new houses beginning construction in a given period) grew at a phenomenal rate in the early years of the century, and GMAC (GM’s financing arm), with its “ResCap” subsidiary, was a significant participant. I frequently asked at the Automotive Strategy Board meetings why the mortgage arm was suddenly such an amazing generator of profitability, but was easily persuaded that all was on the up and up and “not to worry.” I was more than eager to believe: GMAC (and ResCap in particular) was a welcome contributor to GM’s profitability, so much so that I frequently thanked GMAC’s CEO for subsidizing the North American vehicle business.
It was too good to last. In 2008, ResCap began to show alarming losses with undefined future “exposure” as the bubble began to burst.
Somewhat worried, I asked our in-house economists what the likely effect would be on the U.S. economy and, by derivation, the automotive market. “A minor problem,” they told me. “The financial markets and the U.S. Treasury know how to deal with this sort of thing. It will be a slight shock, resulting in modest reduction of the vehicle market, but it’s not a time to worry.”
I’m not an economist, but I’ve developed good intuition, and I didn’t like what I saw, nor did I believe what I had just heard. “I don’t know, guys,” I said. “Seems like a potential for total economic meltdown.” This was greeted with another torrent of reassuring economist-speak. (About a year later, these same economists came to see me in my office with just one question, the same one I’ve been asked many times and can’t answer: “How did you know?”)
Things rapidly went from bad to worse, with the “black hole” created by ResCap’s seemingly bottomless exposure dragging the company’s performance to ever greater losses. But we might have survived the losses, the write-offs, the retail credit drought, the loss of leasing, the drop in the overall market, if we hadn’t received part two of the “one-two punch.”Already stunned by a sharp left jab to the jaw, we were dumbfounded when the roundhouse right connected in the form of rapidly rising fuel prices. The lights began to dim.
The sudden rise in fuel prices was as alarming as it was unexpected. I have often stated that I am an (often vilified, roundly criticized) advocate of higher fuel prices. Higher fuel taxes would generate many billions in badly needed revenues without the counterproductive rate increases. It would increase consumer demand for fuel efficiency, rather than making efficiency a government mandate. It would encourage the buying public to think carefully about the relative economy of their next automotive purchase, and it would lower the break-even mileage of costly hybrid systems, making them more attractive. It would also encourage the creation and use of mass transit systems.
Were I emperor of the United States, I would call for a twenty-five-cent-per-gallon-per-year increase in pump fuel taxes until the prevailing global level is reached, about six or seven dollars per gallon. This is what all of Europe pays; it’s been inching toward that level for decades. Far from destroying the automobile business and personal transportation there, it has actually helped. The total vehicle market of Europe, at roughly twenty million units, dwarfs our current eleven million, and Europe’s fleet was considerably more efficient than ours even before CO2/fuel economy regulations. The road infrastructure there is incomparably superior to that of the United States, funded as it is by ample gas tax revenue. And so, when U.S. gas prices suddenly shot from about $2.10 per gallon to a peak of $4.50, those who knew my views said, “What are you complaining about? You wanted higher fuel