The majority of the budget bill will go to the Pentagon and other national security-related agencies, but in amongst the defense spending lies the automotive industry's long-sought help.
Now that Bush has signed the bill, the Department of Energy will write rules to manage the loan program. The first loans are expected to be available by the middle of next year. Unfortunately the loan package that had previously been seen as a sure boon to the industry may yet prove to be too little help. The crippled financial and credit sector of the U.S. economy is taking down institutions left and right, and absent a bailout scheme for the major lenders, there will be no credit available for consumers to buy the much-improved cars the industry will use the $25 billion to build.
It was the mortgage-induced credit crunch that necessitated the industry's approach to the federal government for the loan package in the first place - the then-weak but still-standing credit industry was refusing to lend money to the high-risk automotive sector. Now that the carmakers have circumvented that problem by going straight to Congress, the bottom has fallen out from under the consumer side of the market as well.
The problem was summed up simply by Rep. Barney Frank, a Democrat from Massachussetts, and chairman of the House Financial Services Committee, when he said, "The greatest threat the auto industry faces right now is this credit crisis, because you buy cars on credit," according to The Detroit News.
On the other hand, the industry's loan issue has been brewing for much longer than the credit crisis. An energy law enacted last December first authorized the $25 billion industry loan package but did not fund it. That same law also mandated the higher fuel economy CAFE standards in the 2011-20 model years. In response, the new loan package has been designed with certain restrictions forcing carmakers to use the money to meet the tougher standards. One of the requirements is that the money can be spent only on retooling factories that leads to vehicles that are 25% more fuel-efficient than current models.
While previously the government has been reluctant to participate in bailout schemes for commercial enterprises, their current attitude recognizes the difficulties that carmakers face in attempting to adhere to new fuel efficiency standards and the cost involved in implementing this across an entire product range.
Hope for a new economic bailout package has already risen despite the original $700 billion plan to save Wall Street having been dashed by the White House yesterday. On Monday, when the original bailout plan was refused, General Motors and Ford stocks plummeted by as much as 13.3%, hitting a 54-year low for GM, but already their share values have rebounded on the news of the reworked deal nearing approval. In fact, Ford's share value has risen 24.7%, more than regaining what was lost on Monday, and GM has similarly climbed back out of its hole.
The next several months will be critical to re-establishing the stability of the U.S. economy, both for the automotive industry and consumer credit agencies alike.