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When people are mentioning the Great Depression, things cannot be going well. Unless you’ve been living under a rock, you know the economy and finance world are a mess. Bailouts are the order, but what about the auto industry?

The big three of the US auto industry – GM, Ford and Chrysler – are all suffering massive financial losses. All are in trouble, but GM is in such bad shape that it may run out of cash before the end of 2008. Frankly, bankruptcy filings seem more than likely unless the federal government ponies up with a bailout package after already giving the companies $25 billion in loan guarantees to build better mileage cars. In total, the industry appears to be seeking a total of $75 billion in taxpayer money.

How did things get to this point? How did GM, a huge company, turn into a flailing business entity? The problem has been brewing for a long time. First and foremost, American cars were simply inferior for a very long time and consumers flocked to other brands. Now that American vehicles are up to snuff, the brands have such a poor reputation from the bad old days that consumers are slow to come back. This general situation has resulted in a contraction of the domestic automakers, but it is not enough to wipe out the companies. Something else had to happen.

The US is a country known for business innovation. Unfortunately, the US automakers lost the right to that claim long ago. While Toyota and Honda were developing and launching hybrid vehicles before gas prices were going up, American car companies were making larger and larger SUVs. When the gas pinch hit, guess who was positioned to dominate the hybrid market? Not the US auto industry. Now throw in an economy that is in recession and consumers who simply are not buying cars and things get critical quickly.

At this point in time, the big three car companies are in dire straits. The question is whether they should be allowed to file bankruptcy or be bailed out. The objective answer is clear – they should file for bankruptcy. Why? Well, the bankruptcy we are talking about here is for reorganization, not liquidation. This means the companies will be able to renegotiate their debts, union contracts and so on to create a more favorable debt environment. At the same time, they will be forced to come up with a plan to become profitable that a bankruptcy judge will find realistic. A competent forward looking plan is something these companies need help with as their current situation suggests.

Emotionally, the idea of the government bailing out the car manufacturers is a very attractive one. Why? Well, we just had a presidential election. Does the President-Elect really want the first thing to happen on his watch be the bankruptcy filing of these companies? More importantly, what will be the emotional impact on consumers if these huge pillars of the US economy go into bankruptcy? Throw in the fact that we have previously bankrolled a bailout for Chrysler with success and we can see a bailout coming.

The biggest issue is whether any of this is going to make a difference. GM, Chrysler and Ford simply have been behind the curve for a very long time. To their credit, they have made huge strides in the last 10 years in everything from quality to design. It may be too little to late, however. If that is the case, then a bailout is only delaying the inevitable.

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