The mantra of the day is frugality and cutback. Rightsize and hunker-down, as tougher economic times are ahead.

But graft hunkering-down on to a U.S. auto sector that has accounted for a disproportionate share of lateral innovation, and you have the makings of an U.S. innovation slump, if not a drought.

The Wall Street Journal points out that the U.S. auto sector has had a kind of dual personality with regard to innovation. The Big 3 have failed to roll-out technologies that would have made their cars more competitive on the global stage, while at the same time pushed their suppliers -- including steel makers and auto parts suppliers -- to improve their parts supplied in order to retain the Big 3's business. Further, that high-performance-bar for suppliers has benefited other industries: one example -- metal parts in cars that last longer has led to metal parts in other applications, and for other industries, that do the same.

General Motors Corp. (NYSE: GM) lost its crown as the world's largest automaker to Toyota Motor Corp. (NYSE: TM) after 77 years. This is hardly a surprise.

As Bloomberg News notes, "GM's 2008 sales fell more than 11 percent to 8.35 million vehicles, according to a company statement today. Toyota posted a 4 percent drop to 8.92 million."

It's not worth crying about 600,000 or so vehicles. The U.S. auto industry has much bigger problems. Consumer spending is still moribund. Credit markets are still frozen so much that otherwise qualified buyers are having difficulty getting their purchases financed.

GM, for its part, continues to hang on by its fingernails. Last month, it received $4 billion in funding from the TARP which is supposed to hold the automaker over through March. It will need tens of billions more. Pimco has quit a bondholders committee set up to negotiate a debt-for-equity deal for GMAC, according to Bloomberg.

Fiat probably hoped to get a 35% share of Chrysler without putting any skin in the game. Why would the Italian auto company expect that? May it is just naive. The US government is unlikely to let a foreign company get a piece of a US company for free, especially if the Treasury is writing the checks to keep the American company afloat.

According to The Wall Street Journal, "Chrysler LLC has found an international partner in Fiat SpA but the auto maker isn't out of the woods, mainly because the deal is contingent on Chrysler getting $3 billion in additional government loans."

Why should Fiat walk in and get a piece of a firm that could be turned around using taxpayer cash? The answer is that it shouldn't. The Treasury should insist that Fiat put at least as much money into Chrysler as it is.

Fiat is really not giving Chrysler much for its 35% in the US car company. It will help retool some plants and use them to build small cars that both companies will sell. Whether that helps Chrysler won't be known for some time. In essence Fiat is getting its stake almost for free.

Treasury may want to tell Fiat that bailout money is in short supply especially with the economy getting worse. Fiat ought to pay its own way if it wants to get a piece of the American car market.

Douglas A. McIntyre is an editor at 24/7 Wall St.

Ford may have to abandon its plan to skip a federal loan, as slumping sales continue to weigh on company revenues.

Ford (NYSE: F) predicted that U.S. light vehicle sales will total 12.2 million vehicles. General Motors (NYSE: GM) expects to sell 10-11 million vehicles, Chrysler, about 11 million.

Economist Richard Felson told BloggingStocks Monday a 2009 U.S. GDP decline of 2% or more "would make it virtually impossible for Ford to sell 12 million light vehicles."

"A combination of layoffs and still constrained credit markets will continue to hurt the auto sector for most of 2009," Felson said. "An optimistic scenario would be a sector recovery in the second half of 2009."

Ford's shares early Monday fell 2 cents to $2.60, GM's fell 3 cents to $3.99. Chrysler is privately held.

What to make of the U.S. Treasury's extension of a $17.4 billion TARP loan to General Motors and Chrysler?

Way to go, inside the beltway gents and ladies!

Indeed, the plan, which contains performance requirements and thresholds that monitor viability, will be castigated by the right and left, by everyone from libertarians to vegetarians, but they won't sway economist Richard Felson into opposing the action.

"Arguably, this is the best economic news we've heard this year, outside of the oil price drop, and that shows you what type of year we've had," Felson said. "With a GM (NYSE: GM) and Chrysler failure, the U.S. economy would have neared a depression, with probably disastrous consequences for the U.S. stock market. Look on this loan not as an auto bailout, but as the first step in the restructuring of the U.S. economy."

Loan / restructuring package buys time

Is it the best use of taxpayer dollars? No. But who's to say this is not a good use of those funds, particularly during a national crisis?

Nouriel Roubini, the once obscure New York University economics professor who two years ago predicted the current global financial crisis and recession, said a bankruptcy filing by two of the Big Three automakers would deepen and lengthen the U.S. recession.

Roubini said if General Motors or Chrysler are forced into bankruptcy without a U.S. government rescue, the U.S. recession will extend well into 2010, Bloomberg News reported

"The economic ramifications of an outright bankruptcy would be severe," Roubini told Bloomberg News, adding that the already-weak U.S. fundamentals mean that a recovery of growth will not occur until 2010.

General Motor's (NYSE: GM) shares rose 15 cents to $3.81 on Monday at mid-day; Chrysler is privately held. Ford's (NYSE: F) shares rose 13 cents to $3.17.

Economist David H. Wang agreed with Roubini's assessment. "A GM bankruptcy would create a ripple-effect. The steel, aluminum, textile, auto parts supplier, and support sectors would be immediately impacted, resulting in large lay-offs within weeks. The credit market also would be effected, and obviously the stock market would not have a pleasant time," Wang said. "Chrysler would fold, Ford would also be hurt on a deterioration of sector confidence, and the industrial sector would experience its biggest decline in generations."

The dollar plunged to a 13-year low against Japan's yen Friday, as currency traders sensed a further-deteriorating U.S. economy on the heels of the U.S. Senate's rejection of the Big Three rescue package.

The dollar plunged more than 3 yen -- an enormous move in the currency market -- to 88.40 early Friday before recovering slightly to 89.50 yen. The dollar also fell about one-quarter cent versus the euro to $1.3375 and one-half cent versus the Swiss franc to $1.1785.

Currency Trader Andrew Resnick told BloggingStocks Friday traders sense that U.S. stock investments will perform even worse now in 2009, as a disruption / cessation of operations by General Motors (NYSE: GM), Ford (NYSE: F), and Chrysler will further decrease commercial activity, and GDP -- making U.S. investments less attractive.

"Currency traders are running for the hills now. They're running out of U.S. investments, which is bearish for the dollar. The yen is rising primarily as a safe haven and as a risk-aversion play, as it typically has during the financial crisis," Resnick said. "Japan's economy isn't that strong, it's in recession too, but as long as it doesn't contract as much as the U.S., traders will prefer the yen over the dollar," Resnick added that he was presently long with the yen versus the dollar, and long with the yen versus the euro.

Further, Resnick said he expects the dollar to fall to 75 yen, if public policy efforts aren't revived to save the U.S. auto sector.

Well yesterday's operative word was "might" as in the congress might pass a bill to support the auto industry and prevent the potential bankruptcy of General Motors (NYSE: GM), Ford (NYSE: F) and privately held Chrysler. Things have changed and for now might has become won't -- as in nothing doing!

Republicans in the Senate clashed with the UAW, Democrats and the White House over a thinly viable plan to provide a $14 billion aid package to forestall industry collapse and give all sides the opportunity to improve a bad situation in the first quarter of 2009 under certain conditions.

The breaking point was the UAW's refusal to agree to immediate wage cuts. While headlines pronounce the deal dead, I say let's wait and see. After all this is Washington, DC, where any reasonable facsimile of the truth has a high probability of being posturing and pretending.

I have been following this saga all week and three days ago I posted Auto industry bailout: A bloated government to lead a bloated industry, when I did not see an easy solution for such institutionalized problems - on all sides. This was followed by Auto industry bailout: Oil companies should take over!, a very provocative suggestion that brought a multitude of comments from our readers, taking the bait. In a more congenial mood I continued with Auto industry bailout: Can't we all just get along? yesterday hopeful some good might come out of intense negotiations in the Capital. Intense yes, successful no, or at least not yet.

The U.S. Senate's rebuff of the rescue plan for the Big Three has re-shifted the oil equation back in favor of the oil bears.

"The bulls tried to mount a mild charge on the likely large production cut by OPEC and possibly Russia, but a collapsing auto sector in the United States will further sap demand, so it's lower oil prices for the immediate future," Energy Trader Jim Dietz said Friday. "We're likely to see lower auto sales, falling consumer confidence, and of course, ripple effects in the economy. For the auto makers, bankruptcy looms because of some Washington Bo-zos."

Those ripple effects include workforce cutbacks in the steel, aluminum, textiles, auto parts, and auto dealerships sectors, and in collateral sectors, such as service sectors, like food services that benefit from auto manufacturing activity, he said. "All of that means less oil used and a deteriorating business climate. Oil will fall sharply in that kind of climate," Dietz said. Dietz added that he was currently short oil and unleaded gasoline with monthly contracts.

Oil began that selloff late Thursday night as soon as traders received word that a segment of U.S. Senate Republicans opposed the bill and had enough votes to either defeat it or filibuster it to its defeat. Oil had fallen $3.22 to $44.76 per barrel as of Friday morning.

Well, after months of discussions, pleading, begging, negotiating, posturing, threatening, demanding, embarrassing, strong-arming and finally voting, it looks like the Congress might approve a $14 billion auto industry support fund.

I say "might" because the Republican side of the aisle is not yet on board, so there is still more wrangling to be done.

The term bailout that I and others have grown so accustomed to using is not actually a very accurate term. No one is getting bailed out, and nothing as of yet has actually been solved.

Two days ago when I posted Auto industry bailout: A bloated government to lead a bloated industry, I was thinking that this is one big mess and there was not a clear path to solving the institutionalized problems on all sides.

Yesterday I wrote: The truth is that General Motors (NYSE: GM), Ford (NYSE: F) and privately held Chrysler are led by bloated egos, with cars being built by bloated unions that are now begging to be saved by a bloated government. See: Auto industry bailout: A bloated government to lead a bloated industry

Among the comments that I received yesterday Duane wrote, "Hey I got an Idea, let the oil companies bail out the auto makers...they are in bed together anyway!"

Before I could respond to Duane that his idea was not entirely mischievous and that some variation of this might have merit, someone else beat me to it, as Jerry followed with, "Right on! Bloated egos, bloated unions, poor quality, shoddy workmanship, inferior products, lack of vision, arrogance extraordinaire. BANKRUPTCY will offer a cure. bailout will foster bad behaviors. I like the idea of letting the oil companies bail out the gas guzzling car industry."

This got me thinking about the fact that the government is not likely to be any better at guiding the car companies then they have been themselves for all of the same reasons. So what else can we do? The answer is that Treasury Secretary Hank Paulson should force the auto companies into bankruptcy instead of saving them and then sell them to Exxon Mobil (NYSE: XOM), Conoco Phillips (NYSE: COP), and Chevron Corp (NYSE: CVX).

Can the U.S. auto sector re-claim technological supremacy in the global auto market?

True, innovation, breakthrough technology, and supremacy are not exactly words that come to mind when one currently hears the corporate names 'General Motors,' 'Ford,' and 'Chrysler.'

The auto sector as an asset, even now?

But Columbia University Prof. Jeffrey Sachs forecasts that the U.S. auto industry can return to greatness, in the nation that's championed innovation and ingenuity during the modern era -- if Congress passes a comprehensive rescue package for the Big Three, C-SPAN reported.

Sachs is doing what academics do best: looking down the field -- to what macroeconomic conditions and global commerce -- and auto demand -- will look like 5, 10, 20 years from now.

General Motors Corporation (NYSE: GM) rose 69 cents to $4.77, while Ford Motor Company (NYSE: F) added 53 cents to $3.25 per share in Monday afternoon trading. Chrysler is privately held.

Here comes a really bad idea -- creating a government oversight board for the automobile industry as a condition of receiving aid. Why is this bad? Because government officials who are trying to stay in power have very different incentives than business executives who should be trying to maximize shareholder value. The problem here is that the CEOs running the automobile industry have been able to keep their jobs despite destroying shareholder value.

Let's look at what Washington is proposing to do. The idea is to create an oversight board (OB) made up of five cabinet secretaries -- Commerce, Energy, Labor, Transportation, and Treasury -- and the head of the EPA and led by an independent chairman -- dubbed the car czar. The OB would direct the drastic reorganization of the automobile industry required as a condition of getting government money.

This proposal is troubling because it's not clear to me that the OB will be able to make decisions about corporate strategy as well as a team of outstanding business executives would. None of the incoming secretaries have experience managing an automobile company so they would have to depend on the car czar for such expertise. And if the car czar came from the automobile industry, he or she would likely be biased towards a former employer.

Over the past few months, as election rhetoric heated up and the economy has cooled, one of Barack Obama's recurring themes has been that the secret to America's future will be the development of an alternative-energy economy. To a populace that has grown increasingly weary of the lackadaisical government approach to economic disaster, this has been particularly galvanizing, and was undoubtedly a major influence on the election. Now that Obama has won, however, the next question is how he will transform those exciting New Deal-esque words into concrete action.

John Podesta, co-chairman of the Obama/Biden transition team, may provide a useful insight into this question. In his day job, Podesta is president of the Center for American Progress (CAP), a liberal think tank that is based in Washington D.C. CAP has already drafted a green-energy stimulus plan; with several programs that are ready to go, it would create 2 million jobs, and would cost a relatively meager $50 billion. While there is no guarantee that CAP's plan will be adopted, given Podesta's proximity to the presidency, it seems likely that at least part of it will become reality within the next year. For a savvy investor, this could be a blueprint for industries that are, potentially, poised to explode with a massive influx of new funds.

Green Autos: Obama has made it very clear that he intends to directly tie any automotive bailout to the development of green technologies. CAP's plan calls for a 4% per year increase in fuel-efficiency standards, as well as investment in new battery technology for plug-in hybrids. With this in mind, it's worth seriously considering which automakers are best poised to go forth with more fuel-efficient models. Furthermore, programs like CAP's "Cash for Clunkers" could be a major boon for companies that process or deal in recycled metals.