1. The consequences of not bailing them out would be disastrous and probably more expensive than a bailout. Normally this would be a disaster that could be managed with unemployment insurance, with new companies expanding to fill the gap and hiring workers, etc. But this isn't a normal time.
2. It will function as a stimulus. Beyond the non-failure of 3 giant companies along with not losing millions of jobs obviously be a good thing, but maybe even the increase in economic security after a bailout would spur consumer spending. People delaying purchases right now because they don't know whether they'll be fired because of an industry collapse might have enough trust to spend money if a bailout comes through. If 10% of US jobs really depend on the auto industry like Michigan Governor Granholm says, then this could actually be a big impact.
3. Chapter 11 bankruptcy doesn't really seem to be an option right now. Reorganization of giant companies require giant amounts of credit. That credit is currently unavailable. So if you let GM and the rest go bankrupt, it looks like they'd just shut down and nothing would replace them.
4. I don't see any reason why American auto makers can't be profitable again if you take away the legacy health care costs (via universal health care) and replace management (untrained monkeys with dart boards would be an increase in decision quality over the current idiots). It's obvious that labor costs themselves aren't the problem - unions are much stronger in Germany than in the US, and VW, BMW and Mercedes are doing fine.
5. There isn't much of a moral hazard problem, especially with CEOs having their pay cut to $1 a year.
6. They deserve it more than Wall St. They make stuff, which is important. Wall Street doesn't make stuff and they are thus less important. This will obviously require some explaning:
Wall Street created imaginary wealth with financial instruments too complicated for anyone to understand (that was the whole point), and when the whole thing blew up they got $700 billion to try to rebuild a fantasy land. The way I understand it, we need financial institutions for two things: lending and speculation. Lending to provide capital to businesses, and speculation to even out prices. But creating financial instruments so complicated that nobody understands what they are based on isn't speculation, because nobody knows what they are betting on. Information, key in any transaction, isn't there. Then you just get a situation where people buy these things because they think other people will buy them in the future, which creates a bubble underlied by something that nobody knows what it is.
This is the reasoning that tells me that most of what got Wall Street into trouble was useless activity in the first place. Creating super-complicated financial instruments seems like a good way to take money from silly rich people and give it to smart rich people, but it doesn't do anything to grow the economy (via lending to businesses that actually produce things) or stabilize the economy (via speculation).
On top of this, Wall Street steals all the smart people that were urgently needed in Detroit board rooms.
So if Wall Street was judged important enough for a $700 billion bailout for basically adding nothing of value to the economy, shouldn't Detroit autmakers get $701 billion for adding something to the economy (even if that something is mediocre cars)?
Ultimately I think Detroit will get a bailout, but not for any of these reasons. They'll get a bailout because the Democrats control Congress and there would be hell to pay if they didn't back up the Midwest unions. Hopefully all the necessary provisions will be attached - firing management and putting some monkeys with dart boards and typewriters in charge instead, and pushing them towards a 'green' economy.
