Kudlow’s Money Politics

Stock Markets Ascend with GM Bailout Hopes

After getting creamed yesterday, stocks opened down a couple hundred points this morning in what has become a truly dismal bear-market recession scenario. There were more bad numbers this morning on leading economic indicators that are sinking, a terrible manufacturing report from the Philly Fed index, and a big spike up in jobless claims.

However, by midday share prices started rallying again. Why? Because news coming out of Congress suggests the GM bailout has another shelf-life.

Apparently, key senators Carl Levin (Mich.), Kit Bond (Mo.), and George Voinovich (Ohio) are working out a deal that would shift the $25 billion originally earmarked for retooling auto plants (to accommodate better CAFE mileage standards) to general operating funds for Detroit automakers. On that breaking news stocks rallied sharply, suggesting that the market does not want GM and the others to run out of cash and go under.

The Chapter 7 liquidation scenario is the worst-case, because it would deepen the recession. A much better case is Chapter 11 bankruptcy, which would permit a complete restructuring of the car companies and a reopening of their uncompetitive compensation packages. But there are market worries that a cash-shortage liquidation would absolutely be the worst case for the economy.

We don’t know yet if this new deal to use the $25 billion as a direct bailout rather than its original greenie purpose can pass both houses of Congress today or tomorrow. Clearly, legislators will want strict conditions on the money — perhaps similar to what financial firms face when they accept TARP money.

Attempts by Barney Frank and others to get $25 billion from TARP are dead in the water as of yesterday. And that’s one reason why stocks dropped 6 percent. In other words, despite the obvious industrial policy of bailing out distressed industries, the stock market doesn’t want to risk a worst-case catastrophe right now.

Ironically, many Democrats who want to bailout Detroit do not want to use the greenie CAFE-standards money in the process. To the bitter end these Democrats still want higher mileage standards as the first order of business. That’s why they fought so hard for the second $25 billion injection from TARP.

I say “ironically” because it’s these very CAFE standards that have done so much damage to the auto business. As Holman Jenkins of the WSJ has pointed out, forcing Detroit to make smaller greener cars under outsized union compensation has dragged the carmakers to the brink of liquidation. Yet these Dems still want more CAFE standards, which would inflict more pain on the carmakers. It’s a bizarre story.

In any event, let’s see if Washington can put the new deal together — a deal that presumably will suspend the CAFE standards in order to stop a complete Detroit meltdown. What is interesting to me is that the stock market — which is a barometer of the longer-term health of the economy — has now placed itself firmly on the side of an immediate bailout for GM and the others.

As of this writing, Speaker Nancy Pelosi and other House Dems are calling the Bond-Voinovich-Levin deal a non-starter. Hard to believe, but the Pelosi gang would rather preserve the CAFE fuel-mileage standards than bailout the Detroit carmakers.

Greenies of the world unite.

Larry Kudlow — Larry Kudlow is CNBC’s senior contributor. His new book is JFK and the Reagan Revolution: A Secret History of American Prosperity, written with Brian Domitrovic.

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