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Where should bailout dollars go?

Demand for aid is rising but federal funds are limited.

By Staff writer of The Christian Science Monitor / November 18, 2008

Rescue? Auto workers leave a General Motors plant in Warren, Mich.

Rebecca Cook/Reuters

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At first, the bailouts were only for major financial firms, but a souring economy has created an expanding list of potential recipients for policymakers to consider.

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Assistance for automakers. New mortgage rescues targeted not at lenders but at struggling homeowners. Aid for cities and states that are running short of cash.

Those are some of the sectors where new federal billions could be deployed in coming months. The scope of rescue programs appears likely to widen even as the tab for the core bailout – the one centered on banks and other financial firms – also keeps rising.

But federal resources aren't infinite. With the size and shape of assistance rapidly evolving, how the money is managed could significantly influence the depth and duration of the current slump.

That's one reason why the tone of economic hearings and debates in Congress remains fierce even with Election Day in the rearview mirror.

The challenge ahead: How to make each dollar of intervention go furthest to restore the confidence of private-sector businesses and offset consumer weakness caused by a poor job market and falling home values.

"You have to think big at this point," says Tim Duy, an economist at the University of Oregon in Eugene. "You have to think big stimulus [for the economy], and you have to think big financial restructuring."

But even while arguing for significant new interventions, he's adamant that the next stages of an economic rescue must involve careful choices.

Those choices have become a matter of intense debate on Capitol Hill.

Debate over helping automakers

Exhibit A this week is the auto industry. Many Democratic lawmakers want to extend a $25 billion loan for use by General Motors, Ford, and Chrysler.

GM, which many analysts had considered the strongest of the US automakers, now faces serious risk of bankruptcy, and all three are burning through cash at a dangerous pace. Last month, sales of new cars and trucks in the US sank to their lowest level in more than a quarter century, running at an annualized pace of just 10.5 million vehicles.

But Republicans are wary of expanding the circle of bailouts beyond the financial sector, which is considered special because of its key role as a credit provider to the whole economy. The rift among lawmakers reflects a divide that also exists among economists. Even many who support extending aid to Detroit call for strings to be attached – extreme makeovers to make the carmakers more viable.

"If those contingencies aren't there, then all you do is perpetuate the model ... of an industry that's not structured properly for the modern era," says Brian Bethune, an economist at IHS Global Insight in Lexington, Mass. "That is a recipe for a bigger disaster down the road."

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