Auto Bailout Threatens to be Obama’s First Test

Immediately after winning last week’s election, President-Elect Barack Obama took great pains to let it be known that he would not be jumping into the maelstrom swirling in Washington until after his inauguration slated for January 20th. He even – politely, I’m sure – turned down President Bush’s invitation to attend the G20 meeting opting instead to send a couple of his key advisors to serve as observers.

This hands-off approach now seems to be over however, as Obama – together with other big-name Democrats – has come out firmly on the side of a bailout for the US auto manufactures. House Speaker Nancy Pelosi was the first to veer off-course, saying that the collapse of any of the “Big 3” would have a “devastating impact” on the US economy, calling for at least $50 billion to be made available to the US automakers.

Despite the threat of deep job losses and the death of one or more American icons, there are many who feel that the auto manufacturers, who for years have avoided making the decisions necessary to compete in a changing world, deserve their fate. For the thousands of workers in other areas of the economy who have lost their jobs during this upheaval, with nothing more than meager unemployment benefits to see them through, the thought of billions of tax dollars going to private companies that have mismanaged their affairs for so long is a little tough to take. As the rhetoric heats up, of all the time bombs waiting in the wings to trip up the new President, it could very well be this one that becomes the first crisis to challenge the Obama administration.

So why has Camp Obama strayed from its “wait until it’s official” approach? Quite simply, it is because they have to. With word from GM that they may not have enough cash to survive into the new year and Ford and Chrysler LLC not far behind, there are just too many jobs at stake to allow them to evaporate so early into Obama’s mandate. And the fact that these are union jobs only makes it more difficult for the President-Elect as the labor unions were key to Obama’s recent win.

In response to Pelosi’s suggesting that the money could come from the Troubled Asset Relief Program (TARP), Treasury Secretary Henry Paulson has already made it clear that the $700 billion is for the banking system and not the auto industry.

“The intent of the TARP was to deal with the financial industry,” Paulson stated. “My focus is on the financial sector, getting credit going, getting lending going.”

If the financial system, large insurance companies, and the auto manufacturers are all too important to let wither and die, then what is next? The airlines? The telcos? Somewhere along the way, Obama will have to say no and it is at that point that the honeymoon will be officially over.

About the Author

Scott Boyd has been working in and writing about the financial industry since the early 1990s. As a technical writer and project manager with several of Canada’s leading financial institutions, Scott has produced educational materials for investment system end-users including portfolio managers and traders. Scott now administers and contributes to OANDA FXPedia and regularly provides commentaries for the OANDA FXTrade website.

This article is for general information purposes only. It is not investment advice or a solicitation to buy or sell securities. Opinions are the author’s — not necessarily OANDA’s, its officers or directors. OANDA’s Terms of Use apply.