someone emailed me, saying that he thought a gm bankruptcy might be a real catastrophe. i wrote a reply, below, and then thought to post it here for discussion. i'm interested in others' thoughts about how serious the consequences of a gm bankruptcy might be. is the scenario i picture realistic or just doomer porn?

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why do you think a gm bankruptcy, especially if it's mostly prepackaged, will cause catastrophic fallout? or rather than "why," let me ask "how?"

i share your sentiments about how misdirected all the rescue/bailout efforts have been, but i think we are playing out the "it has to get worse before anything serious can be done" scenario. ej predicted 20% unemployment. that's pretty damn bad. so far i think itulip's specific predictions have been overly optimistic, just as they say. they're called doomers, but their predictions are on the bright side when the events come to pass.

i think that the bad news is just hitting main street. so maybe that's the lehman-gm parallel. in bill fleckenstein's terms, this is a triple header- financial disaster, economic disaster, funding crisis. the financial problems perhaps peaked with lehman's failure. it feels like the gov't has made clear now that, after lehman, nobody significant IN THE FINANCIAL SYSTEM will be allowed to collapse.

the heart of the crisis then moves from the financial system into the real economy. perhaps the peak will be gm's bankruptcy, with its attendant job losses at both gm and its suppliers, dealers, and assorted camp followers. i think even a prepackaged bankruptcy will have to include shutting many factories and laying off many workers, and cutting wages and/or benefits for remaining employees. pontiac, gmac and perhaps buick divisions will disappear. i say perhaps for buick because it's big in china. maybe it will only remain as an asian brand.

but this is mere digression from the wider effect of a gm bankruptcy. will e.g. parts suppliers stop trusting their customers for payment? not just in the auto industry, but more broadly. will all deliveries be for cash, not 30 day invoicing? imagine every factory having to be run on cash instead of accrual. will supermarkets have to pay their food suppliers in cash on delivery? that would really screw things up a lot, wouldn't it? that would be analogous to the effect that lehman had in the financial system.

i've got to stop for now. i'm scaring myself.