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I still haven't figured out whether I am panicked or strangely comforted by Hank Paulson's market-roiling changes to TARP yesterday.

This is the third version of TARP since its initial unveiling just 41 days ago. The plan approved by Congress October 3 focused on the purchase of troubled assets. By mid-October, the plan had morphed into a program for direct capital investments into financial institutions, using half of the $700 billion. To-date, $250 billion has been invested into a group of nine major banks (and a handful of smaller ones), with another $40 billion going to AIG. Now, less than six weeks after the program was launched, Henry Paulson has proposed extending the plan to target reviving securitization of the consumer credit sector and perhaps to a bailout of the automotive industry.

In some ways, this is comforting. When I compare Paulson to, say, Donald Rumsfeld, quickly reacting to market conditions is preferable to a "stay the course regardless of the situation on the ground" mentality. At the same time, I've worked for people who want to change strategy 180 degrees every two weeks and the results aren't always pretty.

The larger question, of course, is what should the role of the government be in terms of direct participation in our markets? I'm more of a market pragmatist than someone with deep libertarian or interventionist views. I believe in capitalism, with well-regulated markets and am not willing to watch the economy implode in order to prove a point.

That being said, I think that the government needs to better assess the long-term impact of a bailout before jumping in with the funds. If we bail out the automotive industry, what is the likelihood that it will result in sustainable, long-term growth? I'd say practically zero and I doubt many would argue.

Yes, the current recession and emerging consumer credit crunch are exacerbating the existing weakness in the auto industry, but all they are doing is hastening their demise, not causing it. But pumping $25 billion or more into Detroit's "Big Three" will not change their trajectory unless there is significant change.

Part of that change comes with the structural challenge of their long-term health care benefits obligations. The cost of health benefits for the Big Three are roughly $2,400 more per vehicle than their nonunion counterparts in the south who make Toyotas. There's no easy way to resolve that, but a swap of equity for reduced benefits might be attractive to the unions, especially when the bankruptcy alternative could eliminate those benefits completely.

But it's not fair to lay the blame at the foot of the unions and retirees. The management of the big three have made horrendous decisions every step of the way. They have way too many brands and way too many products. They put all their eggs into the large SUV market, even when it became clear that the world was moving towards more energy efficient vehicles. And when it comes to energy efficiency, it's not just that they failed to build more efficient cars, but that they invested huge efforts to lobby the government to keep the CAFE standards where they were. Instead of trying to get in front of what could become favorable trends, they dug in and fought the inevitable changes. In many ways, it's just like how the music industry has dealt with digital music.

So, what's the solution? First, if there is going to be a bailout (and it seems inevitable at this point), the government needs to act more like a private equity firm. Yes, we'll invest to prop up your business, but you need to develop a business plan that demonstrates that your business remains viable. And that plan better include milestones and benchmarks which we can use to measure your results. Ideally, we should have a public-private partnership (as Paulson has suggested for banks) where some private funds are invested in conjunction with the public monies.

I'm all for the government acting as a safety net to help companies and individuals make it through situations outside their control. But we can't throw good money after bad when there's no realistic plan for how these companies can be turned around.