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Where should bailout dollars go?

Demand for aid is rising but federal funds are limited.

(Page 2 of 2)



A carmaker bankruptcy could cause more unemployment in an already weak job market. So some federal lifeline may be warranted, Mr. Bethune says.

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But a risk is that, as private sector firms angle for possible federal help, normal business decisions in the private sector could be altered or delayed.

Moreover, if jobs are the goal, then Bethune says an equal argument can be made for investing in "winners," rather than firms at risk. "Why wouldn't we take the leading technology companies or solar energy companies or wind turbines, and invest in those?" he asks.

For its part, the Bush administration has been contending that a $700 billion rescue fund, set up in October, should not be extended to industrial firms such as the automakers.

Treasury's change in approach

Even if that program remains focused on supporting the health of financial firms, its approach has become the focus of another debate.

Initially, the program was set up so that the Treasury could buy "troubled assets" such as mortgage securities from banks and other firms. The idea was that by weeding out the bad assets, investor confidence and normal functioning of the financial system would recover.

Facing criticism and complexities regarding this plan, the Treasury shifted gears and has been using the money to invest directly in banks. The government has committed all but $60 billion of an initial $350 billion that Congress has allocated to the program.

Nine large banks have already gotten big capital infusions. Now, many smaller banks are scrambling for their share of the rescue funds. Many filed requests Friday in response to a Treasury deadline.

Bethune says the new approach stands a good chance of working, as the Treasury puts capital to work in the strongest banks – and prods them to buy weaker banks that might otherwise fail. Already, some large mergers have occurred along these lines.

"If they continue with that game plan, I think it'll work," Bethune says.

But others worry that capital infusions alone will not solve the problem. The bad assets remain hidden, whereas transparency and purging of losses is traditionally a step toward ending financial crises.

"The longer it takes you to solve the problem, the more costly it is," says Vincent Reinhart, an economist at the conservative American Enterprise Institute, citing the history of financial crises.

Mr. Duy, the economist in Oregon, argues that the Treasury should still pursue the idea of buying the troubled assets.

The Treasury is also working on plans, outlined last week, to extend help to firms that provide consumer loans such as through credit cards.

Duy says a new and large economic stimulus measure is also warranted. This could encompass aid to cities and states, extended benefits for the unemployed, and investments in infrastructure projects to boost long-term growth.

[Editor's note: The original version misidentified the Chrysler chairman in the second photo.]

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