UPDATE 4-US should not aim to save carmakers-McCain adviser

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By Soyoung Kim

DETROIT, Oct 27 (Reuters) - The U.S. government can assist automakers but cannot save them and any aid should be limited so taxpayers do not become ensnared in a long-term investment in the embattled industry, an economic adviser to Republican presidential candidate John McCain said on Monday.

"I don't think the government can rescue the industry," Carly Fiorina, former chief executive of Hewlett-Packard Corp (HPQ.N), told Reuters at an event in suburban Detroit.

"Whatever the government does, it should not take away the fundamentals of risk-taking. Sometimes it leads to rewards and sometimes consequences, downside," she said. "In other words, the auto industry cannot be saved from its own bad bets."

Fiorina also said it remained an open question whether the U.S. auto industry needed aid beyond the $25 billion of low-interest loans already approved by the Bush administration and said any additional aid "depends on the particulars of the circumstance."

McCain campaign spokeswoman Jill Hazelbaker said the Arizona senator wanted to see the auto industry get fast access to the recently authorized $25 billion in low-interest loans that target retooling of plants as a first step.

"The top priority should be to get the $25 billion in loans for next-generation auto facilities out the door as fast as possible," Hazelbaker said in response to a question. "Senator McCain's view is that it should not take 18 months to issue loans that were authorized in 2007."

Fiorina's remarks came as a source told Reuters that the U.S. Treasury Department was considering aid of at least $5 billion to facilitate a merger between General Motors Corp GM.N and Chrysler [CBS.UL], through direct capital or purchases of auto loans.

The U.S. auto industry is struggling with a long-term decline as sales in the United States have slumped to two-decade lows and the economic slowdown that pressured North America has spread to Europe and other regions.

"As I understand it, the automotive industry is pushing for the dispersal of those funds as quickly as possible and so maybe this administration may have no other choice," Fiorina said.

"On the other hand, the next administration, whoever they are, will have the responsibility to make sure the taxpayer is protected and also hopefully to make sure the government is not a long-term owner in the automotive industry."

The government, now as an investor, will "have the requirement to understand how those investments are being used to protect taxpayers," she added.

Fiorina was speaking after an appearance at the Detroit Economic Club, a group that regularly hosts top executives and government leaders.

McCain also favors using the $700 billion fund established to buy up bad debt to help improve liquidity for the auto industry, Hazelbaker said.

The sharp downturn in auto sales this year has left analysts questioning whether GM, Chrysler and rival Ford Motor Co (F.N) have the liquidity to withstand the slump and complete restructuring plans.

The slump has set off fierce lobbying on behalf of the auto industry ahead of the U.S. presidential election, with supporters arguing that a bankruptcy of an automaker would have a cascading impact across the country.

David Cole, chairman of the Center for Automotive Research, estimated that a failure of GM or Ford could threaten up to 2 million jobs including suppliers and dealers.

Fiorina said the current economic recession would be "somewhat long and somewhat deep" and the recently approved $700 billion bailout package for the financial industry would have the government involved in markets for a long time.

"We are entering a period, whether people like or not, where the government will play a greater role in every market -- housing, banks, insurance and autos," she said.

As part of plans to fix the deepening troubles in the global financial industry, McCain believes there has to be regulatory oversight of markets that have global implications, such as the credit default swap market, Fiorina said.

"It's too big to be under the surface any longer. That market has to be regulated in some way", she said. (Writing by David Bailey and Soyoung Kim, editing by Matthew Lewis, Leslie Gevirtz)