Tom Friedman wrote a piece today criticizing Treasury's use of the first $250B of the $700B "bailout" funding to buy equity in banks, saying it will stifle creative lending.  Friedman is apparently naive.

The reason Treasury put money into large banks was not to "stimulate" the banking system.   The reason is so that the banking system can function at all and so large banks can buy smaller banks.  The reason Treasury wants large banks to be able to buy smaller ones (really, mid-sized ones) is that they want an insurance policy against the public panicking about the safety of their deposits in some mid-sized or small banks.  Public distrust could cause a run on a bank which could then escalate into a run on many banks and then could force Treasury to declare a bank holiday as had to be done during the depression.  The reason Treasury wants such an insurance policy is that they know a hell of a lot more about the condition of banks around the country and given that information they think that a public banking panic is sufficiently likely that an expensive insurance policy is warranted.

Now insurance companies and car companies are asking Treasury for similar funding.   Let's hope that Treasury concludes that no more insurance companies need an insurance policy against an insurance panic - beyond the existing AIG (AIG) policy.  If they decide otherwise we will have to conclude that things are a lot worse in the financial arena than people are thinking they are right now.

As for the car companies, let's hope the government has the guts and wisdom to let them go bankrupt.  The car companies need a cleansing of their legacy labor contracts and some of their brain-dead management in order to re-organize into a healthy and much smaller industry.  The nature of demand for cars has morphed very largely from a basic need for transportation to a discretionary need for entertainment and luxury.  Few people buy a new car any longer because they "need" it .  They buy a new car every two or three years - aided by cheap financing that is now being eliminated - because they are bored and want a new toy.  During a deep recession such discretionary demand will drop (is dropping) like a rock.   And it still has plenty of room to drop a lot further.

There is little difference between G.M. (GM), Ford (F), and Chrysler.   They all make adequate products that are almost up to the standards of Japanese and German makers.  And they all have terrible dealer networks that are difficult and depressing for consumers to utilize.  I won't go into detail about my heroic but ultimately unsuccessful attempt to buy a Ford recently.  I bought a Toyota, no problem.  The three companies should be consolidated into one U.S. car company - after they all go bankrupt.

I will say one thing in defense of U.S. car companies.  The Koreans have been selling their cars in the U.S. at what I believe are less than full cost prices in order to jump start their manufacturers by helping to cover the overhead without providing a profit.  I think that is unfair competition and that a tariff may be warranted in this instance.