Even with his inauguration still a couple of months off, President-elect Barack Obama faces a problem that is growing like The Blob.  No, not the economy, but the ineptitude with the way the Federal response to the economy is shaping up.  The mess will not retreat with the departure of the Bush team.

With each passing day, the carrying out of the bailout law mutates another generation from its original form.  The Troubled Asset Relief Plan, or TARP, was enacted to let the Federal government buy the mortgage-backed securities dragging down the financial institutions that hold them.  Now it has melted into a general relief fund for industries in trouble who are lining up for a handout.

 

In recent days, Treasury Secretary Henry Paulson has become hot under the collar trying to explain repeated restarts of the bailout plan.  Paulson has two problems.  First, the program has changed from buying the troubled assets held by financial institutions in the hopes of reselling them later, to buying everything but the assets for which TARP was originally named.  Now the Treasury is buying preferred stock.  Second, the credit and finance markets that were supposed to loosen up under the bailout have barely done so.  The result?  Many Americans, to say nothing of members of Congress, ask why their tax dollars are being spent at all.

 

A third problem is mechanics of the program itself.  The staff and processes to execute the rescue are hardly in place.

 

Now comes the General Motors (GM)/Ford Motor bailout gambit.  GM chairman Rick Wagoner keeps saying bankruptcy is not an option.  Insiders say what he means is Chapter 11, under which the company could reorganize and conceivably have a chance of surviving in a properly-scaled way.  So he is telling lawmakers that, should GM run out of cash before it receives money from the government, it would go bankrupt under Chapter 7, meaning liquidation and the long-tentacled implications of that.  Estimates run to $350 billion in lost tax revenues from GM itself, its employees, and the taxes generated by the company’s vast supply and dealer chain.

 

GM is in effect threatening the nuclear option as an alternative to a Federal bailout.

 

For Obama, this all means he’ll have some ‘splainin’ to do come January 21.

 

To be sure, the Bush administration has done an abysmal job of explaining the reasons for the rescue plan.  For that matter, it failed to make the plausible case that the whole financial emergency has its roots in Democratic housing policy.

 

Whatever.  It will be Obama’s burden to sell continuation of the rescue.  And will be his job to stand up to blackmail from the domestic auto industry.

 

Obama faces an even knottier problem.  His dilemma will be this:  demanding that GM reorganize with new management under Chapter 11 as a condition of government-backed loans will mean the older, heavily unionized factories will be the ones to close, and union contracts will have to be abrogated.  There is no other way.

 

Obama, though, is beholden to no one more than the unions, which raised hundred of millions of dollars for his campaign.  So the GM policy which would be best for the United States (U.S.) would also be the worst for the United Auto Workers (UAW).

 

To take this a step further, the union agenda under the new Democratic majorities and presidency is anathema to the rest of the U.S. auto industry, the relatively healthy part.  GM, Ford, and Chrysler have been sick for a long time.  But the market for cars in the U.S. has been just fine until this economic reversal.  Toyota and Honda, for example, build in the U.S. most of the cars they sell here.  They do so in mostly non-union plants outside of Michigan—the most heavily unionized, most heavily taxed, and most fiscally dire state.

 

Topping unions’ agenda is elimination of secret balloting for establishing union representation, coupled with sharp limits on companies’ rights to counter union appeals.

 

No doubt the non-unionized auto plants are among the targets of unions planning for a restoration to, say, 1937.  What effect might that have on the auto plants if the goal is pay and benefits that now exist in UAW contracts?