So the notion is that the invisible hand of the marketplace will magically fix all things, and thus we should just allow the Big Three automakers to collapse.
Well, there's a number of problems with that notion. First of all, invisible hands, like invisible buddies that bums down at the waterfront talk to as they shuffle around in their bath slippers pushing their carts full of their life's possessions, are just that: Invisible. Imaginary. They don't exist. You might as well expect Casper the Friendly Ghost or Donald Duck to bail us out. So let's start talking about real things, rather than about imaginary friends that will save us all. Praying to your invisible hand will solve our problems about as soon as praying to Casper or to Allah or Jesus will.
Okay, now that we've dismissed invisible friends as our salvation, what now? The first thing to do is to prevent a deflationary spiral. The evaporation of so much wealth in the economy is inherently deflationary. The problem is, capitalism works only when there is a slight level of inflation to "prime the pump" so to speak. We found that out the hard way in 1930-1932, the Federal Reserve refused to expand the money supply because the prevailing ideology of the time said that'd cause runaway inflation a.k.a. Weimar Republic Meltdown, and the whole economy went into a deflationary meltdown as a result because in capitalism, people can't pay their bills during a deflationary period. Paulson dumping all that money into banks is the most effective way of preventing a deflationary spiral and I'm glad Bernanke finally talked him into doing it. Unfortunately, the amount dumped into the banks so far, about $120B, is child's play compared to the $4 *TRILLION* in housing wealth that has disappeared out of our economy. At current reserve requirements, he needs to dump another $280B into the banks to offset the disappearance of that $4 trillion.
Okay, on to the next issue. We're trying to prevent 1930-1932, remember? So what's the next thing that happened in 1930-1932 that we're trying to prevent? Well, that is a collapse in industrial production with resulting massive unemployment. And remember, in the U.S. system healthcare is tied to employment, so moving all those people off the employment rosters also results in a disastrous number of uninsured. GM alone provides health insurance to 1.1 *MILLION* people. If the Big Three automakers collapse, we're talking about the loss of roughly 2 million jobs and roughly 5 million more added to the rolls of those without health insurance.
Now: Just throwing money at the Big 3 isn't going to fix things. When Nissan was in this same situation in 1999, new management was a precondition of accepting the Japanese government bailout. We should probably insist on the same for GM if we bail them out (Chrysler already has new management -- they just kicked the Germans out, remember? -- and Ford will survive with loan guarantees and doesn't need a major bailout). But we can't just let them collapse. Two million unemployed people would send the unemployment rate soaring above 10%, and the current Medicaid system would collapse with 5 million more uninsured thrown into it.
In the long term, you are correct that the market will find jobs for those people and that the economy will recover. But in the long term, we're all dead. In the short term, we're trying to stay alive until we can make it to the long term. Call it socialism if you want. Me, I call it pragmatism. But economically speaking, bailing out the Big Three makes a lot more sense than relying on an invisible hand to bail us out. Because invisible hands are, in the end, imaginary, while the jobs and health insurance provided by the Big Three are real.
-- Badtux the Pragmatic Penguin