The hurricane that is the financial crisis blowing across our economy has left no one untouched.

The financial industry took the first major blows, stemming from the housing bubble and securitization of mortgage loans. Names steeped in tradition like Lehman Brothers, Merrill Lynch and Bear Stearns disappeared overnight. This led to a tightening of the credit markets, making it harder for businesses to purchase inventory on credit and pay their employees.

At the same time, consumer confidence has dropped like a stone. October retail sales were down 2.8 percent and confidence in small business is at a 28 year low. Some of the biggest names in retail, from Linen’s N’ Things to Circuit City, have been forced into bankruptcy. Unemployment has risen to 6.5 percent and appears headed to eight percent. Even Metro and the nation’s major transit agencies are twisting in the wind. Their lease back arrangements with banks to purchase rail cars have left them liable for hundreds of millions of dollars when analysts recently downgraded AIG’s creditworthiness.

Into the whirlwind now steps our long suffering U.S. auto industry. The big three, GM, Ford and Chrysler were hammered by a one-two punch starting with the summer’s sky-high gas prices, which undercut sales of their bread and butter SUVs and trucks, and followed by a global economic slowdown, rising unemployment and a domestic economy in recession that has decimated sales and driven these firms even deeper into debt.

GM in particular, appears to be in the worst shape. Once selling over half of all cars in the U.S., the past four decades have seen their market share erode to less than 1/5th of the market. This despite GM owning eight auto brands: Cadillac, Saab, Buick, Pontiac, GMC, Saturn, Chevrolet and Hummer as compared with Toyota’s three and Honda’s two, which comprise 30 percent of the total U.S. market. Estimates show that GM is $48 billion in debt. Most observers believe the company will go bankrupt within the next six months if something drastic does not change.

GM is in trouble for two main reasons 1) a failure to innovate in the face of competition and 2) labor costs which include pension and healthcare liabilities. Asian auto makers have been running circles around our American firms in terms of fuel efficiency and cost for years. The average wages of a GM employee in 2007 were $71/hour. Top competitor Toyota pays their U.S. workers $47/hour. When sales of SUVs and trucks were strong, this disadvantage was overcome. The energy and economic crises slamming auto companies the world over, however, has laid bare GM’s competitive disadvantage, leaving them staring into the abyss.

Two paths appear left for GM’s future. One is for Congress to modify a previously passed $25 billion loan meant to help Detroit produce more fuel efficient cars into a line of credit to cover short-term operating costs. The hope is that they can ride out the economic downturn while they attempt to reform their business model. The second occurs if Congress does not approve an assistance package for the beleaguered firm, sending GM to almost certain bankruptcy. It’s a scary sounding proposition, but going through Chapter 11 bankruptcy could be of real benefit to their long term success. In Chapter 11, judges can modify labor contracts and debts and the Pension Benefit Guaranty Corporation (PBGC) can assume responsibility for retirees’ pensions, ensuring retired workers continue receiving some level of guaranteed benefits while lifting the burden off the firm. It’s entirely possible that the firm could emerge stronger than ever before and ready to be competitive in the global market.

I support a hybrid of these two options. GM cannot be allowed to fail outright. Were the auto maker to no longer exist, 2.5 million jobs would be lost, having a devastating impact on the broader economy and bringing down with it many more firms. To avoid this nightmare scenario, Congress should require GM or any auto maker looking for government assistance to agree to tough restructuring changes to increase competitiveness. Firms would have the option of taking this path or going into Chapter 11. Under either option, taxpayer dollars are better protected and the industry would be required to make long delayed business model changes that would allow GM and others to get back on track.