The more I think about it, the more I'm intrigued by something I said on this issue yesterday. In short, the problem with Detroit can't be fixed with a bailout or with loans or with infusions of capital, because Detroit's biggest problem is the UAW and absurdly high labor costs. The unions seem determined to cling to these high costs, even as the Big 3 slide towards irrelevance. But this doesn't mean that the Detroit auto industry has to go down a black hole. They could all declare bankruptcy, sell their assets to some Japanese automaker, and the plants could reopen in days and rehire everyone at a competitive wage.
This is very similar to the housing/subprime crisis. Houses are worth less than their owners owe, so eventually a lot of those owners will stop paying and their homes will be sold in foreclosure, or if they are lucky their banks will reduce the amount they owe so that once again they have an incentive to pay. The painful part of all this is that someone has to eat the losses. In the case of Detroit the auto workers are going to eventually have to accept lower wages. In the case of the housing market, lenders will have to accept losses on the loans they hold (a process that is well underway). But once these losses have been accepted, the assets are effectively redeployed. New owners can buy homes they can afford, while those who get debt relief can continue to live in their house and have hopes of building equity again. Most importantly, life can go on. No homes are destroyed, and no jobs are destroyed. Some wealth is destroyed, but even if the losses on homes with subprime mortgages in the US total $1 trillion, that is a drop in the bucket compared to the $50 trillion or so of households' net worth.
Please leave comments if this piques your interest.