Stupidly, US Republican and Democrat politicians are on track for a re-run of the doubt and near terror induced by the failure of the first attempt to pass the $US700 billion Paulson bailout package early last month as they argue over aid to the country’s three troubled domestic car giants.

The situation has been made worse by a surprise switch in the intended use of that fund by lame duck Treasury Secretary Hank Paulson who now wants to emphasise assistance to the frozen credit card, student loan and car loan sectors, instead of buying troubled home mortgages and associated securities.

News of the switch and a gloomy retailing forecast from Best Buy, the biggest electricals retailer in the US (its main competitor, Circuit City, collapsed over the weekend after two years of losses), and more bad news from banking and finance combined to send Wall Street down by more than 4% in another sell-off. That’s a fall of 650 points over the past three days, a rise of 127 points last Friday and the three day post-election plunge of more than 920 points.

The rising temperature over aid to the car companies and that switch in emphasis could very well produce a replay of the terrible week when the original bill was rejected by an unholy alliance of Republicans and Democrats in the House of Representatives.

That’s because the $US700 billion bill was split into two parts: approval was given for the first $US350 billion, but Congressional approval is needed for the second and Democrats are starting to mutter about withholding it if there’s opposition to it from the lame duck Congress and Administration.

Around $US172 billion of that first $US350 billion has already been spent, or committed on bank and other bailouts, but in a major speech at the US Treasury, Secretary Paulson revealed the surprise change in approach. He said the government would broaden the reach of the bailout plan to support non-bank financial institutions that provide consumer credit, such as credit cards and auto loans.

But he ruled out using the fund to help the car companies. That has set him on course for a clash with Congressional Democrats.

It’s not that aid for the non bank sector isn’t justified: without access to funds, these companies have cut their offerings or shut down. As a result, American consumers have founder it harder and harder to obtain car loans, student loans and credit cards. That’s forcing down car sales, hurting the tertiary education sector and damaging retail spending. No wonder US car sales fell 33% last month and 27% in August, helping to push GM to the brink of collapse, and also damaged the prospects of retail chains like Circuit City.

A deal will have to be done with the Democrats: a $US25 billion loan plan was released a few hours ago by a senior house Democrat, Barney Frank. The senior Republican rejected it.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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