Hank Paulson's Bailout Shift...

Apparently, the US Department of Treasury may be coming gradually to its senses. Earlier today, Hank Paulson announced that the focus of the bailout plan would shift, focusing more on direct capital infusions from the government (in association with private investors) rather than purchasing of toxic assets. Rather than bailing out the bankers, as we have all feared, this welcome move is intended to bolster liquidity in credit markets and insure reliable access to consumer credit, while granting the government direct authority to ensure that banks do their number one job: keep lending. For more on this change, see this article in the Financial Times and this one in the New York Times.

On the other hand, Paulson has maintained that the focus on the bailout should be targeted at the financial sector, rather than giving aid to Detroit auto manufacturers. On the face of things, this might make sense, until you consider the fact that car manufacturers are major financial institutions in their own right. After all, every company-owned dealership extends credit to consumers to facilitate buying cars, and all those loans are kept on the books. It is more than a bit naive to assume that the auto industry, which employs a lot of workers in typically hard-hit "Middle America" (Michigan, Indiana, Ohio especially), can weather a credit crisis when the goods it sells are so dependent on access to consumer credit. Unfortunately, in typically narrow-minded fashion, still-President-for-now Bush has made his approval of any economic stimulus (including for automakers) contingent on Congress dropping opposition to the Colombia Free Trade Deal.

None of this is to argue that cars are a good thing, or that we should continue producing cars. However, even those long-sighted auto manufacturers like Toyota and Honda, with their hybrid marketing and fuel-efficient lines, have taken a sales hit over the past year or so. In the medium-term we need to get off of foreign oil, but real public transport (both local and interstate) takes time to build, and until then we need to keep our auto workers employed. The collapse of any of the Big Three would have a devastating impact on what manufacturing economy this country has left. The private car isn't going away anytime soon, and these companies have been hard-hit by an external shock. Like it or not, they need government assistance to retool (and even to prevent job cuts), and frankly enough of the burden to justify using government funds lies on the American taxpayers' historic aversion to rail and public transit in favor of cars and jets.

As I indicated in my letter to President-Elect Obama, the key here is to capture synergies. We need to provide funds to automakers, but those funds need to be contingent upon a significant retooling of their automobile lines - away from SUVs and towards fuel-efficient city vehicles, hybrids, plug-in hybrids, electric cars (like those being developed by Tesla Motors), and hydrogen fuel cells (Note: I do not include ethanol because it has devastating impact on food prices, particularly in the developing world). Then, when the President-Elect takes office, we can hopefully turn our attention to public transit infrastructure (light rail and high-speed rail, especially), green energy generation, and the supporting infrastructure for alternative fuels (especially hydrogen and public plugs for plug-ins/electrics).