The American car industry is in deep trouble. Sales in October fell to their lowest level since 1991. The big three manufacturers - General Motors, Ford and Chrysler - recorded big losses in the last quarter and are haemorrhaging cash. Deepening recession, tighter credit conditions and a shift in consumer tastes away from sports utility vehicles, on which profit margins are high, have inflicted severe damage.

The companies are looking to the US Government for help. They have asked congressional leaders for $25 billion in loans to cope with the recession, and another $25 billion to fund employee health care schemes. And they are finding a receptive audience. At the weekend, Nancy Pelosi, the House Speaker, and President-elect Obama both expressed support in principle for a rescue. They were wrong to do so. A bailout of the car industry is a terrible idea. It augurs badly for the new administration's response to tough economic issues.

The supposed precedent for a rescue is the bailout of the banks. And there is a powerful populist appeal in comparing the fate of workers in these two sectors. Bankers are perceived as protected from the costs of failure for which they are directly responsible. Car workers in Detroit are the victims of impersonal economic forces that are depressing global demand. But the analogy is spurious. The failure of an individual enterprise, even a huge one, can be absorbed by a market economy. The problem with the banking system, however, is that the institutions are linked to each other, through the interbank lending market. Failure of one institution can have a contagious effect on the whole sector.

What is at stake in the financial crisis is not only the existence of particular businesses but the functioning of the entire economy. The provision of credit is not like manufacturing a consumer good, even one so important as the motor vehicle. It is more like an essential utility. If that service is impaired, then the entire economy might go into a destructive tailspin of negative growth, lost jobs and curtailed investment.

The financial crisis is born of mismanagement and predatory lending in the private sector. But at least the bailout of the banks is not a straight subsidy: the taxpayer gets a stake. A rescue for the car industry would recall the failed industrial policies of the 1970s. Subsidising manufacturers in order to protect jobs is a politically potent cause, but it does not work. Its enduring economic effects are to divert scarce capital from more productive uses, and to provoke other countries to erect trade barriers. The danger in acceding to the demands of the car manufacturers is that other industries will also seek aid to withstand recession. Yet the most successful and innovative American industries in recent years have operated without subsidy or trade protection: for example, software, telecommunications and entertainment. American cars have not attracted enough buyers. Supposedly targeted industrial aid is more likely to breed complacency than promote competitiveness.

Rescuing ailing industries represents a retreat to comforting orthodoxies by the Democrats. The new administration might note that the British Government has learnt from experience. Labour in the 1970s supported British car manufacturing, when British Leyland faced a liquidity crisis. The company was a constant drain on public resources. Only later did Labour grasp that investment in manufacturing is wasteful if there is no demand for the product. Gordon Brown has rightly urged Mr Obama not to introduce protectionist trade policies, which would merely compound the crisis. They are not the only example of economic interventionism that should be avoided scrupulously.