"Mitch McConnell's Finest Hour; The Same Can't Be Said For President Bush On The Auto Bailout."

Mitch McConnell's Finest Hour
The same can't be said for President Bush on the auto bailout.

In the Senate's Thursday night automobile showdown, the United Auto Workers said "No thanks" to a bailout with strings attached. Most Senate Republicans took them at their word and voted to block the bill. But within hours, President Bush blinked and Treasury is now scrambling to use money from the Troubled Asset Relief Program, or TARP. Who'd have thought Mr. Bush would want to join the long line of Detroit executives in caving to the UAW?

Senate Republicans had more gumption. Led by Tennessee Senator Bob Corker, they asked the auto workers to show they were serious about making Detroit competitive again. In exchange for a lifeline from Washington, Mr. Corker wanted the union to set a "date certain" in 2009 for lowering the Detroit Three's hourly labor costs to the average of foreign-owned auto makers in the U.S. He also wanted creditors to bring down Detroit's total debt by two-thirds through an equity swap, making sure debtholders share the cost of restructuring.

The union's counteroffer was that it would bring down labor costs in 2011, when its current contracts run out. Maybe we missed something, but we thought GM and Chrysler were facing bankruptcy now, not in three years. As Minority Leader Mitch McConnell said on the Senate floor, that sounds like "taxpayer money today for reforms that may or may not come tomorrow."

Thursday's showdown marked an important political moment for the Republican Party. By refusing to write a blank check to Detroit, Senate Republicans have started to reclaim some credibility on fiscal policy and the role of government in the economy. They did so standing up to a Republican President who doesn't want any more bad headlines, as well as to Democrats who will blame the GOP if the auto makers collapse.

They also stood up for the right reasons. No bailout will ever restore the car companies to profitability without a restructuring. Yet an explicit UAW goal is to use the bailout to avoid any such thing. The union and their Democratic protectors want to avoid the discipline that a bankruptcy could impose under Chapter 11. A government-directed salvation would also give environmentalists huge leverage over the cars Detroit builds, a power they and Democrats have wanted for decades.

Sorry to say, within hours Friday morning the White House was saying that it would be "irresponsible" to let the companies fail. If the Administration believes that, it would be equally irresponsible not to insist on the same commitments that Mr. Corker couldn't get. If the Treasury gives GM and Chrysler bridge loans without strict conditions, Democrats will pocket that precedent and avoid any serious changes when they work out a long-term deal in January.

The TARP wasn't designed and was never intended to bail out industrial firms. The moral hazard inherent in TARP was substantial even when it was limited to financial companies. If it becomes a pot of gold for any industry needing a hand, it will become a real monster. Treasury has already run through the TARP's first $335 billion, with just $15 billion left before he has to seek further authorization from Congress. That $15 billion might tide GM and Chrysler over until the new Congress convenes, but it will leave him with little running room to help out the banking system. As the recession deepens, more banks are likely to fail, and preventing a systemic financial collapse was the justification for giving Treasury the authority it enjoys under the TARP.

The bailout's backers argue that a GM bankruptcy would hold as much systemic risk for the real economy as a huge bank failure, but those risks are overstated. Chapter 11 is a well-established tool for financial restructuring. It is not tantamount to collapse or liquidation. If White House economist Ed Lazear is worried that no one will accept a car warranty from a bankrupt company, then Congress can address that specific problem rather than write an open-ended check. Chapter 11 could well offer a speedier resolution to the auto makers' plight than a slow-motion, politically infected catastrophe that could easily cost $125 billion or more.

President Bush is on a valedictory tour talking up his accomplishments, but he'd do more for his legacy if he refused to offer Detroit, Democrats, unions and the greens a taxpayer E-Z pass. At least the rest of his party has figured out what's really going on.