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GM and Chrysler on the brink

And now the US government may be about to buy into the auto industry:

General Motors Corp and Cerberus Capital Management have asked the U.S. government for roughly $10 billion in an unprecedented rescue package to support a merger between GM and Chrysler LLC, two sources with direct knowledge of the talks said on Monday.

The government funding would include roughly $3 billion in exchange for preferred stock in the merged automaker, according to one of the sources, who was not authorized to discuss the matter publicly.

The sentiment behind saving GM and Chrysler is understandable. It’s also wrong.

The domestic auto industry employs 350,000 and supports roughly another 4.5 million in related industries. But if the government steps in and props up an industry that’s collapsing under its own weight, a zombie is created — a corporation that’s dead but keeps moving in defiance of all known laws of business.

The end result is an economy dragged down by a millstone fashioned from unprofitable companies deemed “too big to fail”, kept alive by strapping them to the backs of taxpayers who are slowly crushed under their weight. If the experience of Japan is any indication, this will drag out the depression — because that’s what we’re in — for a decade or longer.

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