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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

May 29, 2009 at 9:28 AM

GM bankruptcy: An undiscovered — and perilous — landscape

Top of the News: The economic elites and much of business journalism tend to discount the potential for a General Motors bankruptcy, which could come as early as this weekend. After all, the American economy is all about financial plays at its worst, and shimmering technology at its best.

This may be premature complacency. While it’s difficult for Northwesterners to appreciate the vast economic footprint of GM, consider this scenario: Boeing, diminished by years of job cuts and factory closings, seeks Chapter 11 and will come out smaller and perhaps still uncompetitive.

Even that doesn’t get at the role of GM in the Midwest, with a still vast network of suppliers from steel to machine tools to parts. Together, they provide the bulk of jobs that provide wages with high multipliers. They prop up municipal budgets. GMAC, while somewhat detached from GM now, is continuing sore in the financial crisis.

Many of these players will simply shut down. We’re already seeing this in the supply chain of much smaller Chrysler. In other words, this will not be the same as airlines landing and taking off from bankruptcy court every few years.

Meanwhile, the federal government could be on the line for $50 billion — that’s nearly fifty times the Amtrak budget (imagine the 21st century transportation system that could build). And it’s unclear how much return taxpayers will ever see. The entire auto industry is in reset, and a reborn GM has no history to show it would be much different from the GM that dug itself into this hole.

So if GM seeks bankruptcy protection it will be more than the largest industrial bankruptcy in American history. It could open a box of unpredictable, unintended consequences — “unknown unknowns,” as Donald Rumsfeld would say. The coming weeks could see a high degree of instability in the market — but the real repercussions may not be known for years.

The Back Story: RGE Monitor offers some zowie perspective on the real-estate crash as it shambles along in its fourth year. Housing starts are down 80 percent since January 2006. Single-family house starts are down 74 percent since their peak in July 2005. Vacant houses for sale totaled 2.12 million in the first quarter. That compares with 1 million on average from 1985-1995, and 1.3 million from 2001 to 2005.

“While the supply side might have bottomed out, it is likely to move sideways for a long period of time, absent a substantial rebound on the demand side.” And: “A significant recovery in demand is likely to be impaired by weakness in the labor market and uncertainty around future income. Moreover, deflation in the housing sector, though slower than in the past months, is likely to continue to push buyers to postpone purchase activity.”

It’s also a worldwide phenomenon, with some European nations badly hurt by a real-estate slump. And their recovery could significantly lag behind the U.S., further slowing global growth.

Today’s Econ Haiku:

This Bing ain’t Crosby

Still, the bigs at Microsoft

Hope that it will sing

Check in at noon and vote on today’s Econ Haiku poll — and write your own in the comments section.

Comments | More in Auto industry, Housing, Real estate

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