GM announced on Friday that the company will close 20 of its North American plants and is considering filing for Chapter 11. Chrysler LLC is slated to close 29 plants and lay off 53,000 workers effective immediately. And, though Ford Motor Company CEO Allan Mullaly told a Congressional committee that his company does not face what he called “near-term liquidity issues” which have slammed GM and Chrysler, he still has his cap in hand for $9 billion of Treasury-sponsored credit, should the industry worsen.

Detroit’s cognoscenti maintain that allowing the Big Three to fail could put more than half-a-million unemployed factory workers on the streets and disrupt other industries that supply or benefit from the auto industry. Nobody wants to see unemployment rates climb beyond 6.7 percent. But the automakers seriously overestimate their importance to the American economy.

The auto industry did not just get the stuffing kicked out of it overnight: it’s been unraveling for years. In an interview with the Wall Street Journal, Patrick Anderson, chief executive of East Lansing, MI-based Anderson Economic Group, said that “Michigan has been in a seven-straight year recession. The state’s unemployment rate for non-farm jobs is at 9.7 percent.  Even Michigan’s health care industry has begun to show signs of slowing.

And, amazingly enough, the sky has not caved in.

Detroit’s automakers say that it is unfair for Treasury to bail out the banks on one hand while it leaves the auto industry to suffer. And they have a point. But while it is true that many of the major players in the mortgage fallout did receive a Treasury-sponsored bailout through TARP, there was at least the possibility that, somewhere down the road, the toxic assets that have ruined their balance sheets would have been worth something one day. But Ford Motor Company and GM, which have long since been overshadowed by Japanese automakers such as Honda, at least in terms of popularity, have been poorly managed for decades. And there is no sign from Detroit that management will magically improve.

It would take something at least as revolutionary as the invention of the wheel to turn Detroit around. And, certainly any money that they receive will only be used to cover expenses such as payroll, not for research or development of new technology.

Detroit will suffer greatly if the Big Three do not get an immediate capital infusion. And, frankly, suppliers around the country will most likely go out of business if these companies are allowed to fail. But there’s an aspect of common sense that, so far, only Senator Mitch McConnell has touched on: Throwing money at a bad investment does not make it a good one.

“Very few of us had anything to do with the dilemma that they have created for themselves,” McConnell said of Detroit’s automakers. “We simply cannot ask the American taxpayer to subsidize failure.”

The government rescue of an entire industry felled by greed and poor leadership, however, becomes an expensive quagmire, which is what TARP is proving to be.

After LTCM’s rescue, the Cleveland Fed reviewed the Federal Reserve’s action.  The number one lesson learned:  Context matters.  Large losses at a financial firm do not by themselves create a need for Federal Reserve action; the losses must have a systemic component.

While one could argue that the failure of the big three would worsen the unemployment significantly and cause a spate of follow-on bankruptcies, the orderly unwinding of the auto manufacturers still does not pose the same kind of systemic risk that failure of the major U.S. commercial banks would have.

A bailout for the Big Three also would not force the kind of changes that domestic auto manufactures need but which a pre-packaged bankruptcy plan created outside a courtroom might.  More importantly, it would prevent the obvious scenario a few months from now when the auto industry comes back for an even bigger handout.

The financial services bailout is exhorbitant, messy and rife with moral hazard.   It was also necessary to avoid a meltdown of world financial markets.  Unpalatable as a bailout for financial services is for the country, replicating it for the automakers makes no sense.

It is getting harder lately for companies to reemerge from Chapter 11, true. For example, this year Circuit City and Linen N’ Things were forced to liquidate when they couldn’t find a white knight.  Such a Chapter 11-is-the-new-9-scenario could be especially disastrous if the autos went under, and would drag their suppliers under the bus too. We can and should avoid this.

But giving a company like GM a blank check just because its CEO Rick Wagoner has ditched his jet and gone to Quiznos, well that’s a recipe for disaster as well.

There is another way. The government could sponsor the automaker’s bankruptcy. This way they win more concessions than with a bailout. Andrew Ross Sorkin lays out the plan.

“Taxpayers shouldn’t fork over a cent until shareholders are wiped out, management is tossed out and the industry is completely reorganized,” he wrote.

What say you all?

The problem with Capitalism is that when it doesn’t work, everybody expects a quick fix.

My original thought in September was that the U.S. government should never bail out financial institutions, especially using taxpayer money.

But the Treasury can’t undo what’s been done, they can only consider what TARP is actually doing to relieve a one-year-old recession and a tumorous financial crisis.

If you ask me — and I’m sure if asked Adam Smith — Corporate America needs to lean from its mistakes and accept that a free-market economy has its pros and cons. The more we soften the collapse of embattled corporations, the less likely those business will ever make genuine changes in how they run their operations or how they cut corners to make a bigger profit.

And the more our government tries to clean up the mess, the more likely future generations of American consumers, businesses, banks and investors will make the same mistakes.

The intervention between JP Morgan and Bear Sterns was tolerable. It was less a bailout in my view than an aggressive push. But it also flipped open a Pandora’s Box.

TARP is becoming a well-recognized mistake and any similar initiatives given to the auto industry would show equally lame results. Yet the Big Three have their open palms out now.

Goldman is sinking. Citi is imploding. And U.S. taxpayers are out $700 billion. Why would Ford, GM and Chrysler prove any different?

Here’s a solution: Take all that bailout money, put it towards education and start teaching finance and economics to kids in elementary school. Make it part of the core curricculum in all public and private schools all the way up to high school.

A bit of an understatement on the day that the Dow dropped another 733 points, eh?

Peter Goodman at The Times noted Mr. Bernanke also made this curious observation at his Economic Club of NY appearance:

The real concern that we have is that we have got and developed, in this country, a very serious ‘too big to fail’ problem. And that problem, we’ve just recognized now in the current situation, how severe it is.

Just recognized? That’s right. I forgot the banks just kinda merged themselves.

Or has this all just been a red scare?

These cartoons of Comrades Paulson and Bernanke come courtesy of Bill Perkins, 39, a Houston-based venture capitalist at Small Ventures USA who has run all three as full page ads in the New York Times and other media recently.

Sez Stephen Colbert: “Garfield, the bar has been raised.”

The story goes that Perkins had made $1.25 million betting that Goldman Sachs had better fundamentals than its peers. He cashed out after Paulson announced the bailout plan and pledged to use his gain to campaign against the bailout.

“The stock did OK because the government came in and said, ‘No one can fail,’” he told the Journal. “It’s capitalism on the way up and communism on the way down.”

He commissioned an art collective called Otabenga Jones & Associates to draw cartoons for the campaign.

Why cartoons?

“I felt like a bunch of words on a piece of paper – people wouldn’t read, but with a picture, people get it right away,” he said.

Of course, the bailout passed anyway. And the government could yet commit hundreds of billions more to banks.

In an email, Perkin’s assistant said that they are considering the possibility of running more ads, but haven’t finalized anything at this time.

I hope they do. I’m fed up with the NY Times not having a comics page.