The Irish Independent reports that Government borrowing could approach €20bn next year, or 10pc of GDP, unless there is a corrective mini-Budget early in 2009, a new economic forecast says.

Friends First chief economist Jim Power based his shock prediction for the public finances on a forecast that output (GDP) will fall 2.5pc in real terms next year. Last month's Budget was based on official forecasts that output will shrink by one per cent.

"Those Budget forecasts look ridiculously optimistic,"Mr Power said."If mine are right, borrowing could be €19bn next year. I don't think they could allow that, and there would have to be a mini-Budget in the first half of the year."

His growth forecasts are not the most pessimistic around, with Goodbody Stockbrokers seeing contraction of 4.5pc next year. This was based on a 3pc fall in personal consumption, whereas Friends First sees a 1.5pc decline.

However, Goodbody's predicted Government borrowing of 8pc of GDP -- around €15bn.

"Some of the other forecasts for growth look a bit pessimistic, but I think there will be big deterioration in the public finances,"Mr Power said.

Presenting his quarterly analysis, he described last month's Budget as "dreadful" and a huge missed opportunity. "It made one very pessimistic about the way the country is being managed," he said.

"Charlie McCreevy, Ray McSharry, Alan Dukes all gave strong leadership when it was required. We haven't got it this time. We need to get it quickly, to get people to believe they have leaders who will do the right thing," Mr Power said.

He said the cost of the benchmarking pay awards was now €1.5bn and "a knife must be taken" to the public sector pay bill. He called for pay cuts of up to 10pc for public sector workers on over €50,000 a year.

"We have got to spread the burden from the fairly savage correction which will take place in the private sector,"he said.

Unemployment

Mr Power predicted that numbers on the Live Register will reach 320,000 by the end of next year -- equivalent to an unemployment rate of 8.8pc, but could go as high as 350,000.

"I hope I'm wrong. On the other hand, if emigration is not as high as I expect -- perhaps because people cannot find work elsewhere -- unemployment could reach 10pc."

Although the economy is forecast to return to growth of 2.3pc in 2010, Mr Power warned that employment will be slower to respond. He sees consumption rising by a paltry 1pc in 2010, and most of the growth comes from better exports and an end to the fall in house building -- neither of which will create many jobs.

The Independent's  Group Business Editor and economist Brendan Keenan says today: I may have observed before that almost everything I was told about economics in college 40 years ago was later almost universally held to be complete rubbish.

Or perhaps it would be better to say, not "economics" but that sadly extinct phrase, "political economy." Political economy is a lot more volatile than the pure stuff. It usually owes more to the exigencies of the time than the hypotheses of the academics. Thus, in those far off days, fixed currencies, credit controls, and government management of wages, prices and economic growth were all considered desirable objectives.

After the collapses of the 1970s, all that was thrown in the policy skip. Currencies floated, collective bargaining on wages was restricted, capital markets were liberated and it was held that governments were incapable of managing demand in the economy. Insofar as it should be done at all, it was a role for central banks and their interest rates.

Now, with the collapses of the 2000s, people have begun, in the words of the Scottish anthem, "tae think again". In particular, there are strident calls from the most unlikely quarters for governments to restore some of the lost demand by borrowing more. And if that does not work, some say, they should print money. Just as my old professors would have recommended.

It is not quite true that all these old ideas disappeared everywhere and at all times. The French never gave up on the ancien regime, as President Sarkozy now clearly demonstrates. The Germans never approved of government borrowing, but do believe in regulated markets, as the Volkswagen shenanigans clearly demonstrate.

But now the Americans and the British have joined those arguing for governments to stimulate demand in their economies by borrowing money for tax cuts and public spending. President-elect Obama intends renewing the Bush tax cuts but, sensibly, switching them more towards lower earners.

British Chancellor Alistair Darling has torn up his fiscal rule book, and could, if he wished, claim to be following the advice of the chairman of the euro area finance ministers, Jean-Claude Juncker. The Germans have abandoned their goal of balancing the budget by 2011.

China, it is said, is showing the way, although it should be pointed out that they are officially communists and, anyway, suffer from excess savings rather than borrowings. In Ireland, though, there has been little serious political pressure for a fiscal stimulus of the kind now being hawked around the globe by the, once, iron chancellor Gordon Brown.

Until now. People have begun to notice that we seem to be a bit alone in raising taxes and, at least, cutting the growth in public spending. Rossa White of Davy Stockbrokers has joined Alan McQuaid of Bloxhams in calling on the Government to introduce a fiscal stimulus package -- tax cuts -- funded by borrowing. At least for Christmas.

I myself am not quite ready to abandon a second set of orthodoxies in a single career. One glaring reason is that we in Ireland tried this new recipe not so long ago -- one of the last countries to do so -- and the result was highly unpalatable. Those recent memories are the major reason why the Government is still concentrating on the state of the public finances, rather than growth, and why, so far, there have been relatively few objections.

Other countries might like to consider the Irish experience before rushing headlong into fiscal stimulus. In his speech to the City of London this week, Mr Brown repeated the old mantra that a "temporary and affordable" increase in borrowing is justified to support economic growth.

The difficult word there is not "affordable" -- we can figure out roughly what that means -- but "temporary". We do not know how long these difficulties will last. And once the borrowing tap is turned on, it is very difficult to turn it off until recovery comes.

In Ireland's case, the second oil shock in 1979 turned the "temporary" borrowing after 1972 into a 10-year stimulus, with disastrous results. Japan's depression lasted 10 years and public debt ended up at 180pc of GDP. Only the huge private savings of the Japanese people keep the country solvent.

Timing presents other difficulties. This is an exceptional crisis, and exceptional measures may be needed to prevent it turning into a global depression. But there is little evidence that such policies can restore normal economic growth before conditions are right. Again, no-one can foretell when that will be, but it is almost certainly not yet.

We also have plenty of other exceptional measures. Interest rates are being slashed. Banks are being flooded with cash by central banks, and with capital by governments. In Ireland's case, there is a dangerously unquantifiable blanket guarantee for a banking system whose exact solvency is unknown.

Should any of those guarantees be called in, the money to cover them would have to be borrowed. Even if they are not, the odds are that large sums will have to be borrowed to re-capitalise chunks of the banking system. Borrowing even more to try to reignite the economy looks every bit as risky as it did in the 1970s.

There is also the unpleasant fact that the rise in Irish government borrowing will be among the fastest anywhere, even without any fiscal stimulus. For the proximate cause of that, blame the 45pc rise in current government spending over the past four years.

To fund that level of public spending, the Government plans to borrow over €13bn next year; of which almost €5bn will be for current spending. But the actual figure is likely to be higher -- perhaps around 9pc of national income (GNP).

The Budget plans also see the national debt reaching 47pc of output (GDP) by 2010. Again, it is probable that it will be well over 50pc, and perhaps around 60pc of GNP.

Admittedly, the way things are going, that could still leave us among the least indebted countries in the EU, but the way things are going, that could be one of the few selling points we have left.

Ireland faces a credibility crisis as well as an economic one. The last thing it needs is any suggestion of a public debt problem to add to the country's serious private debt problem.

Besides, if fiscal stimulus works elsewhere, our small open economy will share in the benefits. If it doesn't, we would be wasting our money by joining in.

The Irish Times reports that Irish Life & Permanent (ILP) has said it will not pay shareholders a final dividend this year.

Moreover, it expects the year's operating profit to be 30 per cent lower as it is writing off €92 million on investments in three state-rescued Icelandic banks and setting aside additional funds for rising bad debts.

The company's share price fell 7.7 per cent to €1.91 yesterday.

ILP said in a trading statement that, excluding exposure to Icelandic debt, operating profit would be 15 per cent lower - worse than the 10 per cent decline forecast by the company in August.

The firm is forecasting a tier one capital ratio, a measure of financial health, of about 10 per cent at the end of the year.

ILP chief executive Denis Casey said:"Our banking business is certainly being more challenged, particularly because the cost of funds has risen, but our life and pensions business is performing relatively well."

The company said its bad debt charge would be 11 basis points, or 0.11 per cent, of loans this year.

ILP added that its "stress models", which account for the recession, higher unemployment and house price declines, point to a bad debt charge of 60 to 80 basis points combined over three years.

The company said that it could "accommodate" rising bad debts without"requiring access to external capital support".

The firm has started accessing surplus capital from its life assurance business in a bid to strengthen the company further. Mr Casey said it could draw capital of more than €1 billion from its life business.

The company is finalising a reinsurance deal where it will sell on insurance risk which will release about €100 million in capital and reduce future needs over two to three years by between €100 million and €150 million.

No final dividend will be paid in a bid to save capital. This will conserve about €140 million and follows a similar move by AIB last week.

"It is clear that the one thing financial markets are valuing above everything else in the current environment is capital strength. We have that in spades,"said Mr Casey.

He declined to say whether the dividends would be paid next year.

"Banks will be mindful of the responsibilities that the guarantee imposes on them and on their capital strength to ensure there are no circumstances where the bank guarantee would be called upon."

ILP will pay a "high single digit" million euro charge in this quarter for the guarantee, said Mr Casey, meaning a fee of between €7 million and €9 million.

On Tuesday 30 employees of Permanent TSB signed up to the bank's offer of paid career breaks, Mr Casey said. The bank is offering staff up to €35,000 to take a three-year career break in a bid to reduce the company's costs.

Mortgages of more than a month in arrears rose to 6,600 at the end of September from 5,700 in December 2007 from a total of more than 195,000 mortgages.

ILP expects gross new lending to fall about 45 per cent this year reflecting its decision to stop lending in the UK and buy-to-let loans being "severely curtailed".

The Irish Times also reports that Dublin-based investment group TVC Holdings has reduced the value of its investment portfolio by €28 million to reflect a recent decline in value of its holdings in quoted and unquoted assets.

This emerged yesterday from the publication of results for the six months to the end of September. These showed that TVC had €28.9 million in cash at the end of the period and no debt.

Its investments in two quoted companies were worth a combined €39 million, while the value of its stakes in 11 unquoted businesses was €24 million.

This gave it a book value of €92.1 million on November 11th, while its market value on that date was €53.6 million. This indicates that TVC is trading at a 42 per cent discount to its book value.

TVC, which floated on the junior markets in Dublin and London in mid-2007, is the largest shareholder in Belfast media group UTV and Irish financial software company Norkom. It holds stakes in a number of software companies and has backed Maldron Hotels, a chain of three-star properties run by former Jurys Doyle chief executive Pat McCann.

Executive chairman Shane Reihill said TVC would sell down its investments in the software companies and remained interested in adding to its portfolio of plc assets.

“Our intention has always been to invest in about four to five publicly quoted businesses and we’ll be looking at some opportunities.”

Mr Reihill said he was satisfied its investments in UTV and Norkom were correct in spite of a sharp fall in the value of each.

TVC this month got $20.1 million (€16.1 million) from the sale of its stake in ChangingWorlds to a subsidiary of Amdocs. On Tuesday, it spent €2.7 million increasing its stake in UTV to 18 per cent.

TVC’s share price shed 3.6 per cent in Dublin yesterday to close at 54 cent. It has lost about 65 per cent of its value since its IPO.

The Irish Examiner reports that credit rating agencies (CRAs) are to be regulated and supervised under proposals from European internal market commissioner Charlie McCreevy.

The rating agencies are blamed for playing a critical role in the near collapse of the global banking sector.

There are just three major CRAs in the world, Standard & Poor’s, Moody’s and Fitches. All are US companies with subsidiaries throughout the world.

Mr McCreevy explained that banks rather than establishing their own in-house experts, used CRAs to rate the risk on loans and borrowers. But they also gave advice, thereby creating a conflict of interest.

“CRAs led a charmed existence and filled a space created by the market and banks that instead of having their own due diligence department went to a CRA who need not accept responsibility as they said they were only giving advice,” Mr McCreevy said.

The problem, he said, was that pension funds and others had it written into their deeds of trust that investments should meet a certain CRA rating — the highest would be a triple A.

Mr McCreevy’s has proposed that all CRAs and their subsidiaries in the EU should be registered to allow supervisors to control their activities. They must comply with a set of rules setting the way they rate credit; ensure they are not in conflicts of interest, and be transparent in their activities.

The commissioner said one of the reasons he decided to introduce legal controls was that it took CRAs months to acknowledge the clear danger signals in the US sub-prime market. “Goldman Sachs had a $3.5 billion bet that the subprime market was going to disintegrate, yet it was months before the CRAs began to downgrade them,” he said.

He believed the proposed regulation, that countries and the European Parliament must agree to first before it becomes law possibly in the next 18 months, would restore confidence in CRAs and help them rebuild their reputation, which was their main asset.

The issue of CRAs is due to come up at the G20 meeting on Saturday but Mr McCreevy said he believed this would be in a broad context and not in detail. The US rules are seen as less stringent that those put forward by the Commissioner.

The new European rules include the following:

• Credit rating agencies may not provide advisory services

• They will not be allowed to rate financial instruments if they do not have sufficient quality information

• They must disclose the models and methodologies they base their ratings

• They will have to create an internal function to review the quality of ratings

• They should have at least three independent directors.

The Financial Times reports that the pound plunged to new lows against the euro on Wednesday after the Bank of England issued its bleakest assessment of the economy in 15 years.

Mervyn King, the Bank’s governor, gave the green light for the government to use tax cuts or a rise in public spending to limit the recession, and official forecasts indicated interest rates still had further to fall.

The grim message on the economy came as it emerged unemployment rose by 140,000 in the three months to the end of September, to more than 1.8m, its highest level since 1997.

The pound sank on the gloomy outlook, dropping 2.9 per cent to a six-year low of $1.4939 against the dollar; it lost 2.5 per cent to a fresh record low of £0.8356 against the euro and fell 5.6 per cent to Y141.81 against the yen.

The Bank’s central growth forecast suggested the year-on-year drop in national income would hit 1.9 per cent in the second quarter of 2009 and, for 2009 as a whole, the economy would sink 1.3 per cent.

That puts its view of the UK outlook at the bottom of the league for most advanced economies. With such weakness, the Bank now thinks inflation will drop rapidly from its current rate of 5.2 per cent to well below its 2 per cent inflation target.

Saying it expects very low inflation, with a 20 per cent risk of deflation, is the Bank’s way of guiding markets to believe interest rates will be cut. Mr King is never explicit on the subject, but said: “We are certainly prepared to cut the bank rate if that proves to be necessary.”

Malcolm Barr, of JPMorgan Chase, said: “The implication could not be any clearer that last week’s 1.5 percentage point downward adjustment in rates was only part of what is needed.”

Reversing an earlier stance against using tax cuts and public spending to boost the economy, Mr King said that in the current “exceptional circumstances it would be perfectly reasonable to have some use of fiscal stimulus”. But he urged politicians to ensure any tax cuts were temporary.

UK public borrowing is among the highest in Europe at more than 3 per cent of gross domestic product, but it is expected to reach 6 per cent of GDP by 2010.

With unemployment rising from 5.4 per cent in the second quarter to 5.8 per cent in the third, Mr King accepted no responsibility for the bleak outlook. He argued that the coming pain was entirely because of the banking crisis and a sudden deterioration in the short-term economic indicators and, because these two forces were global, oil and commodity prices plunged.

“I am not sure that our behaviour will be very different. We’ve reacted because the world has changed. The way we go about setting interest rates hasn’t changed. I think it’s worked well and I think it will continue to work well,”Mr King insisted.

The FT also reports that efforts by western governments to prevent the collapse of their banking systems could cause more harm than good if leaders failed to agree on a radical reform of their financial systems, Germany’s top economists warned on Wednesday.

The council of “wise men” – five academics who advise the government on economic policy – said the bank rescue packages adopted in the US and Europe might “encourage behaviour that could massively increase risk-taking, particularly among lenders”.

The warning comes ahead of the Group of 20 meeting on the financial crisis in Washington on Saturday, and reflects growing concern among economists on the impact of rescue measures.

The council welcomed the “debate [ahead of the G20 meeting] about far-reaching reforms to create a more stable international finance architecture. For this to succeed, however, the governments must be ready to delegate some supervisory competences”.

Without such reforms, the economists argue, the measures taken in Europe and the US to protect banks – including credit guarantees, state-financed capital injections and the acquisition of illiquid assets – could encourage a resumption of irresponsible lending.

The council recommended the creation of a global supervisory apparatus with a reformed International Monetary Fund at its helm, as well as changes in accounting standards that would lift some of the pressure on banks to deleverage too fast in times of rapidly falling asset prices.

“We’ve put all the passengers in lifeboats. Everyone is safe. Now we must start to think about what caused the accident in the first place,” Bert Rürup, the council’s chairman, said.

Despite their caveats, the economists welcomed the rescue packages, which they said had averted the collapse of entire national banking sectors. But they stressed that the sums at stake – European governments alone have pledged €1,500bn ($1,875bn, £1,215bn) in assistance to banks – meant governments had a special duty to implement plans sensibly.

They should steer a finely calibrated course, the economists said, acting neither too passively – which could extend the life of institutions that have no viable business models – nor interfering in the day-to-day management of banks, something experience had shown the state was not qualified for.

“State support should concentrate on those banks with the best business models,”they said, pointing to the case of Japan. There the state acted too passively during an earlier financial crisis, unnecessarily postponing the sector’s reconstruction.

The New York Times reports that the Treasury Department on Wednesday officially abandoned the original strategy behind its $700 billion effort to rescue the financial system, as administration officials acknowledged that banks and financial institutions were as unwilling as ever to lend to consumers.

But with a little more than two months left before President Bush leaves office, Treasury Secretary Henry M. Paulson Jr. is hoping to put in place a major new lending program that would be run by the Federal Reserve and aimed at unlocking the frozen consumer credit market.

The program, still in the planning stages, would for the first time use bailout funds specifically to help consumers instead of banks, savings and loans and Wall Street firms.

Treasury officials said they hoped to invest about $50 billion from the bailout fund into the new loan facility, with the aim of helping companies that issue credit cards, make student loans and finance car purchases.

As envisioned, the Treasury would put up about 5 percent of the money that a company would use for lending and private investors would put up perhaps 20 times that much by buying bonds issued by the new program.

Despite the mind-boggling amount of money that Congress has authorized the Treasury to spend — $350 billion immediately, and another $350 billion that Congress would approve under a fast-track procedure — Mr. Paulson is running short of money and time.

The news that the government will not buy soured mortgage assets, along with a string of poor corporate earnings, disheartened investors on Wednesday, sending the markets down for a third straight day this week. The Dow Jones industrial average fell 411.30 points, or 4.7 percent, to close at 8,282.66.

The Treasury has already committed about $290 billion. It has allocated $125 billion to the nation’s nine biggest banks and investment banks; another $125 billion for publicly traded regional banks; and $40 billion to expand the existing bailout of American International Group, the insurance conglomerate that collapsed in September.

Mr. Paulson alluded to the consumer credit plan vaguely in a news conference on Wednesday, and some Fed officials cautioned that they had seen few details. But Treasury officials said such a plan would give them the biggest bang for the buck and might be enacted within several weeks.

Mr. Paulson conceded that he had scrapped the plan he originally sold to Congress in September, which was to have the Treasury Department buy hundreds of billions of dollars worth of illiquid mortgage-backed securities in order to free up banks to resume normal lending.

The program is still called the Troubled Asset Relief Program, or TARP, but it will not buy troubled assets. “Our assessment at this time is that this is not the most effective way to use TARP funds,” Mr. Paulson said.

Instead, Treasury will step up its program of injecting capital directly into banks and, for the first time, expand it to include financial companies that are not federally regulated banks or thrifts.

Mr. Paulson made it clear he would not use Treasury money to help bail out the automobile industry, rebuffing pleas from General Motors, Ford and Chrysler as well as from top House and Senate Democrats.

But Mr. Paulson left open the prospect of providing backdoor support to the car companies by offering to recapitalize nonbank financial companies like GE Capital and CIT Financial, and the financing subsidiaries of Ford, Chrysler and G.M.

House Democrats are already drafting legislation that would provide Detroit’s Big Three with an additional $25 billion, on top of $25 billion in low-interest loans that are supposed to be used for retooling factories for energy-efficient cars.

“The consequences of a collapse of the American automobile industry would be particularly troublesome,”said Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee. Mr. Frank said the assistance would come with strict conditions aimed at protecting taxpayers.

Some Republican lawmakers have already objected, saying the effort would amount to throwing good money after bad. But the White House on Wednesday left the door open to a legislative compromise with Congress.

“I know the automakers are important to the United States,”Mr. Paulson said. “We care about the automobile industry.” But he cautioned that“my focus is on the financial sector — getting credit going, getting lending going.”

White House and Treasury officials have been devising policy on the fly for months now, as what began as a panic over losses on subprime mortgages broadened into a crisis that wreaked havoc on Wall Street, at major commercial banks and in the broader economy itself.

In September, Mr. Paulson went to Congress and urgently pressed for authority to spend as much as $700 billion to unclog the nation’s financial pipelines by buying up unsellable securities from banks and other financial institutions.

But by the time Congress approved the bailout law in early October, Mr. Paulson and the chairman of the Federal Reserve, Ben S. Bernanke, were already shifting to a strategy he had actually opposed: buying equity stakes directly in American banks, a move that was reminiscent of European-style nationalization.

As recently as a few days ago, Treasury officials insisted that they still intended to buy up the troubled assets. But by late October, it had become clear that Plan A had become little more than a sideshow.

“Illiquid assets looked like the way to go,”Mr. Paulson told reporters at a news conference on Wednesday. But as economic and financial conditions declined so rapidly, he said, that he had to change gears. “I will never apologize for changing the approach and the strategy when the facts change,” he said.

The change in strategy has had only limited impact on the frozen credit markets. The biggest improvement has been in the willingness of banks to lend to each other, a change that largely caused by the willingness of both the United States and European governments to guarantee bank deposits and interbank loans.

But the market for commercial debt backed by consumer and business loans has remained at a near standstill since Lehman Brothers, one of Wall Street’s leading investment banks, collapsed in September.

Borrowing costs for credit card issuers are at least five percentage points higher than they were before the credit crisis began. Financing costs for automobile lenders are even higher. Even student loans that are guaranteed by the federal government have been difficult to finance.

“You have a market that is frozen,”said Alex Roever, an analyst at JPMorgan Chase.

To stretch his resources, Mr. Paulson told reporters he was examining ideas to have private investors contribute capital alongside Treasury.

Mr. Paulson also made it clear he did not want to use bailout money to refinance the mortgages of homeowners who are in danger of losing their homes to foreclosure. Democratic lawmakers and the chairman of the Federal Deposit Insurance Corporation, Sheila C. Bair, have been calling for the Treasury to spend $40 billion in a broad mortgage refinancing program.

As envisioned by Treasury officials, the Federal Reserve would set up a new special-purpose lending entity, which would lend cash to investors or companies that put up collateral in the form of consumer loans. The Fed might lend up to 80 percent of the value of those loans, providing a cushion for taxpayers against losses.

The Treasury would contribute 5 percent to 10 percent of the money to finance the lending. But the Fed would raise most of the money by selling what is known as nonrecourse commercial paper to investors.

Treasury officials said the plan would allow them to leverage the government’s money by as much as 20 to 1, meaning that the Treasury would provide 5 percent of the money and investors would provide 95 percent. Using $50 billion in money from the government rescue program, they said, could thus underwrite $1 trillion worth of lending for consumer loans.

Such an arrangement would bear a similarity to exactly the highly leveraged, and eventually disastrous, special-investment vehicles that banks like Citigroup created in countless numbers to hold, among other things, securities backed by subprime mortgages.

Although the Treasury would contribute only a small share of the money for such a program, analysts said the plan would only overcome investor fears if the Treasury or the Federal Reserve provided some kind of backstop against losses. If that were to be the case, taxpayers would be indirectly liable for the entire volume of lending.

Fed officials appeared to be taken aback by Mr. Paulson’s public reference to the idea, and cautioned that it was still in early development.

“Both the structure and the parameters are under discussion and development,”said Michele A. Smith, a spokeswoman for the Fed.

The NYT also reports that momentum is building in Washington for a rescue package for the auto industry to head off a possible bankruptcy filing by General Motors,which is rapidly running low on cash.

But not everyone agrees that a Chapter 11 filing by G.M. would be the disaster that many fear. Some experts note that while bankruptcy would be painful, it may be preferable to a government bailout that may only delay, at considerable cost, the wrenching but necessary steps G.M. needs to take to become a stronger, leaner company.

Although G.M.’s labor contracts would be at risk of termination in a bankruptcy, setting up a potential confrontation with its unions, the company says its pension obligations are largely financed for its 479,000 retirees and their spouses.

Shareholders have already lost much of the equity that would disappear in a bankruptcy case. Shares of G.M. rose 16 cents Wednesday, to $3.08, but they have fallen 90.5 percent over the last 12 months, amid sharply lower auto sales and fears about G.M.’s future.

And as companies in industries like airlines, steel and retailing have shown, bankruptcy can offer a fresh start with a more competitive cost structure to preserve a future for the workers who remain.

“Just let market forces play out,” said Matthew J. Slaughter, associate dean at the Tuck School of Business at Dartmouth. “And if G.M. or one of the other companies files for bankruptcy, support the workers and the communities that would affected by a bankruptcy filing.”

William Ackman, a prominent activist investor who runs Pershing Square Capital, said Tuesday that G.M. should consider bankruptcy. “The way to solve that problem is not to lend more money to G.M.,” he said in an interview with Charlie Rose on PBS.

Instead, G.M. should submit a prepackaged bankruptcy, laying out steps it plans to enact once in Chapter 11 protection, said Mr. Ackman, who is not a major holder of G.M. shares.

“I’d rather the government’s money be used to train people for other jobs,”Mr. Ackman said. “The bankruptcy word scares people. It’s simply a system.”

Not surprisingly, Rick Wagoner, G.M.’s chief executive, disagrees. He told investors last week that “the consequences of bankruptcy would be dire and extend far beyond” the company. G.M. will “take every action we possibly can to avoid it,” he added.

The company also may be forced to take drastic actions as a condition of receiving any federal bailout package. It may include stiff requirements that G.M. and other automakers restructure and meet financial goals before they can get access to federal financing. Lawmakers may also demand a change in management.

Such demands “may have the same end as a restructuring,” but avoid the taint of an actual bankruptcy filing, said Susan R. Helper, a professor of regional economic development at Case Western Reserve University.

Even though a bankruptcy might help create a stronger company in the long run, consumers could easily see it as a sign that the cars they bought might not retain their value, and seek other options when shopping for a new car. (By contrast, travelers tend to have fewer concerns about flying on airlines operating in bankruptcy because their commitment ends with the flight.)

A car is “a major investment for a lot of families and the assurance that it will perform for a set period of time is part of the bargain,” said Christie L. Nordhielm, an associate professor of marketing at the University of Michigan.

To help ease consumers’ fears, G.M. could put money in escrow to reimburse its 6,468 dealers for any repairs to address problems covered by warranties. Airlines have taken such steps in the past to guarantee the value of tickets for future flights.

A study of 6,000 consumers last summer by CNW Marketing found that 80 percent of them said they would switch companies if G.M. or Ford filed for bankruptcy protection in the United States, suggesting that only G.M. loyalists would stand by the automaker.

A bankruptcy filing by a single Detroit car company could cost the economy $175 billion in the first year of the legal case in lost employee income and tax revenue, the Center for Automotive Research estimated this week. Given the complexity, a G.M. bankruptcy case could last three years or more.

A bankruptcy at G.M., with $111 billion in assets, would rank as one of the biggest bankruptcies ever, but would still be dwarfed by the case filed by Lehman Brothers last spring.

There are parallels between the Lehman bankruptcy and G.M.’s situation. In each case, the government was faced with deciding whether it was worth favoring one entity over its competitors as it worried about the impact on the broader economy of a potential collapse.

Certainly workers in other industries who have lost their jobs may feel the government should extend more help to them, too.

“Why should the government treat G.M., Ford and Chrysler workers any differently?”said Professor Slaughter.

But the United Automobile Workers union, which has joined the automakers to push for a bailout, might find grounds for a strike if a bankrupt G.M. asked a court to throw out its labor contracts.

A bankruptcy also could jeopardize the fate of a health care fund created in 2007 that was supposed to shift a $100 billion burden off the companies’ backs. The U.A.W. recently agreed to let G.M. delay payments to the fund.

Professor Helper, of Case Western Reserve, said the social cost to communities in Michigan, Ohio and other states where its 55 plants and other operations are located could be devastating, if G.M. were to liquidate or significantly cut its work force.

“Even if they go bankrupt in a year, it is better than going bankrupt now,”given the state of the national economy, she said.“From a social point of view, even if G.M. is not providing a return on investment, it is still providing a lot of good jobs.”