JEANNINE AVERSA | 12/22/10 11:23 AM | AP

WASHINGTON — Expectations for economic growth next year are turning more optimistic now that Americans will have a little more cash in their pockets.

A cut in workers’ Social Security taxes and rising consumer spending have led economists to predict a strong start for 2011.

Still, most people won’t feel much better until employers ramp up hiring and people buy more homes.

Analysts are predicting economic growth next year will come in next year close to 4 percent. It would mark an improvement from the 2.8 percent growth expected for this year and would be the strongest showing since 2000.

“Looking ahead, circumstances are ripe for the economy to develop additional traction,” said Joshua Shapiro, chief U.S. economist at MFR Inc. in New York. He is estimating growth for 2011 to be above 3.5 percent.

The economy grew at a moderate pace last summer, reflecting stronger spending by businesses to replenish stockpiles, the Commerce Department reported Wednesday. Gross domestic product increased at a 2.6 percent annual rate in the July-September quarter. That’s up from the 2.5 percent pace estimated a month ago. While businesses spent more to build inventories, consumers spent a bit less.

Many analysts predict the economy strengthened in the October-December quarter. They think the economy is growing at a 3.5 percent pace or better mainly because consumers are spending more freely again.

Still, the housing market remains a drag on the slowly improving economy.

The National Association of Realtors reported Wednesday that more people bought previously owned homes rose in November. The sales pace rose 5.6 percent to a seasonally adjusted annual rate of 4.68 million units. Even with the gain, sales are still well below what analysts consider a healthy pace.

Even if analysts are right about 2011 being a better year for the economy, growth still wouldn’t be strong enough to dramatically lower the 9.8 percent unemployment rate.

By some estimates, the economy would need to grow by 5 percent for a full year to push down the unemployment rate by a full percentage point. Even with growth at around 4 percent, as many analysts predict, the unemployment rate is still expected to hover around 9 percent.

The third-quarter’s performance marks an improvement from the feeble 1.7 percent growth logged in the April-June quarter. The economy’s growth slowed sharply then. Fears about the European debt crisis roiled Wall Street and prompted businesses to limit their spending.

“It sure looks like the `soft patch’ is over,” said Nariman Behravesh, chief economist at IHS Global Insight.

In the third quarter, greater spending by businesses on replenishing their stocks was the main factor behind the slight upward revision to GDP.

Consumers boosted their spending at a 2.4 percent pace. That was down from a 2.8 percent growth rate previously estimated. Even so, consumers increased their spending at the fastest pace in four years. The slight downward revision reflected less spending on health care and financial services than previously estimated.

More recent reports from retailers, however, show that shoppers are spending at a greater rate in the final months of the year.

Companies are discounting merchandise to lure shoppers. A price gauge tied to the GDP report showed that prices – excluding food and energy – rose at a 0.5 percent pace in the third quarter, the slowest quarterly pace on records going back to 1959.

Americans have more reasons to be confident. Stock prices are rising, helping Americans regain vast losses in wealth suffered during the recession. Job insecurity remains a problem, but the hiring market is slowly improving. And loans aren’t as difficult to obtain for those with solid credit histories.

Even with the improvements, though, consumers are showing some restraint. In the past, lavish spending by consumers propelled the economy to grow at a rapid pace. After the 1981-1982 recession, the economy expanded at a 9.3 percent clip. Consumers increased their spending at an 8.2 percent pace.

Consumers have yet to display that level of confidence in the economy. While hiring is improving, employers still aren’t adding enough jobs to lower the unemployment rate.

Even with stronger economic growth anticipated for next year, analysts predict it will still take until near the end of this decade to drop unemployment back down to a more normal 5.5 percent to 6 percent level.

The government’s estimate of GDP in the July-September quarter was its third and final one. The government makes a total of three estimates for any given quarter. Each new reading is based on more complete information. GDP measures the value of all goods and services – from machinery to manicures – produced within the United States.

 

Fortune
Sunday, October 17, 2010; 2:32 AM

 As reported in Washington Post

Let us tell you an Ugly Truth about the economy, a truth that no one in power or who aspires to power wants to share with you, at least until after the midterm elections are over. It’s this: There is nothing that the U.S. government or the Federal Reserve or tax cutters can do to make our economic pain vanish overnight. There are no all-powerful, all-knowing superheroes or supervillains who can rescue or tank the economy all by themselves.

From listening to what passes for public debate in our country, you’d never know that. You’d think that the federal government could revive the economy quickly if only Congress would let it be more aggressive with stimulus spending. Or that the Fed could fix it if only it weren’t overly worried about touching off inflation. Or that the free market could fix it if only we made deep and permanent tax cuts.

Watch enough cable TV, listen to enough talk radio, read enough blogs and columns, and you’d think that they – the bad guys – are forcing the country to suffer needlessly when a simple and painless solution to our problems is at hand. But if you look at things rationally rather than politically, you’ll see that Washington has far less power over the economy, and far less maneuvering room, than people think.

“It’s endemic in our type of society that we always think there’s a person who holds the magic wand,” says Sen. Judd Gregg (R-N.H.), a fiscal conservative who isn’t running for reelection, so he can, well, be blunt. “But this society and this economy are far too complex to be susceptible to magic wands.”

Heaven knows we could use such a wondrous fix. Even though the Great Recession ended 16 months ago, according to the business-cycle arbiters at the National Bureau of Economic Research, that only means that the economy started to grow in June 2009. It doesn’t mean that the economy has healed. It certainly doesn’t mean that the recession’s victims have healed. Tens of millions of people are still economically wounded from declines in their home values and investment accounts. Worse, despite some modest employment growth we’re down almost 8 million jobs from the end of 2007, when the Great Recession officially began.

Now, on to the real problems in the economy: why they’ve been so resistant to the traditional cures of lower interest rates and higher government spending. And we’ll show you that, when you talk to them in private (albeit on-the-record) forums, people from across the political and economic spectrum agree that there’s no magic cure for what ails the economy.

The fact is that our nation has suffered a huge financial trauma, and it’s going to take years to get well again. This isn’t exactly unknown in Washington, but it’s not something people in power go out of their way to emphasize.

For President Obama, who campaigned on the promise of transformational change, it’s been especially tough medicine to deliver. Take his performance in a September town hall session on CNBC. People in the audience were looking for immediate solutions to their problems, and Obama seemed to struggle with how to answer them. You can see why. Look what happened to the last president who ran for reelection during bad economic times: George H.W. Bush, in 1992. Bush came under fire for not doing more to help people who lost their jobs in the recession that had started in 1990, and for not showing more empathy in public.

After losing to Bill “It’s the economy, stupid” Clinton, Bush blamed Fed Chairman Alan Greenspan for his defeat. (If Greenspan had cut interest rates, the thinking goes, it would have looked as though Bush were doing something.) Seven weeks after Election Day, the recession arbiters announced that the downturn had actually ended in March 1991 – some 20 months before the election. Bush was right, as it turned out, not to push for extraordinary measures. But tell that to the voters.

Not the normal recession

If you think Bush had troubles, imagine what Obama is wrestling with. Today’s economic problems have proved enormously resistant to the traditional rate-cutting cure Bush wanted “Maestro” Greenspan to order up. That’s because the Great Recession, whose aftermath we’re living through, was different from the 10 previous post-World War II recessions. Those slowdowns were caused by the Fed’s increase of short-term interest rates to combat inflation. Recessions caused by the Fed’s rate-raising could be cured by the Fed’s rate-lowering. If things looked especially dicey, the federal government would send people checks to generate economic activity and spur confidence.

But the Great Recession was different. It was triggered by a financial meltdown brought on by excessive lending, reckless risk-taking, the implosion of an unregulated shadow banking system that assumed that short-term money would always be available – and ignorant and careless borrowing by people and institutions. The recession’s genesis is why things are still sluggish even though the Fed has cut short-term rates, which it controls, to virtually zero and has forced down long-term rates, which it doesn’t control, by buying more than $1 trillion of securities in the open market and letting it be known that it and other central banks will buy more.

Yet although such “quantitative easing” – econo-speak for “printing money” – helped allay financial panic in 2009 by providing cash to institutions that needed it badly, it’s less effective and more risky to use it to stimulate the economy. Hence the knife fight at the Fed Board of Governors between the fans of quantitative easing and those opposing it.

 

Let us explain. Even though the Fed is very powerful, it’s not all-powerful, just as the United States is not all-powerful when it comes to its own financial affairs. The Fed has to worry not only about the U.S. economy and money supply but also about debasing the dollar too much too quickly, lest it spook the foreigners who finance our trade and federal budget deficits. If foreigners lose faith in the dollar’s value, it could run our interest rates up sharply and abort any recovery.

To its credit, the Fed – the one institution that because of its independence can actually act quickly without making a political show – sort of admits that its power is limited.

“Central bankers alone cannot solve the world’s economic problems,” Chairman Ben S. Bernanke said in a speech at the Fed’s conclave in Jackson Hole, Wyo., in August.

The Fed wouldn’t let us interview Bernanke about the limits of the Fed’s power. It’s easy to see why: He’d risk diminishing what remains of the Fed mystique by talking on the record about its limitations and problems.

However, former Fed vice chairman Donald Kohn, a 40-year Fed veteran, agreed to discuss those limits, provided we made it clear he was speaking for himself as an outsider, not for the Fed.

“The Federal Reserve can make a difference, but it doesn’t have a magic bullet,” Kohn said. “It can’t take a weak economy facing a lot of major challenges and rapidly turn it into a strong economy.”

Kohn isn’t alone in that view.

“The public has been sold this notion that somehow we can control the economy – that we can fine-tune it so we don’t get inflation on the upside, we don’t get recessions on the downside, [that] when something happens, they can step in and offset it,” says another longtime Washington insider, Douglas Holtz-Eakin. “The economics profession is painfully aware that this is just not true, and [that it] has a terrible impact on politicians, presidents in particular.”

Holtz-Eakin, president of the American Action Forum, a conservative think tank, was Sen. John McCain’s economic adviser in the 2008 campaign. He and his Democratic counterparts know the dirty little secret: that the huge financial trauma suffered by the economy won’t disappear overnight.

“No one has found a way to have an incredibly severe financial crisis and snap back a year or two later,” says Jason Furman, deputy director of the White House’s National Economic Council.

Losses: Plenty of them

Look at the numbers on the economy and you’ll see why. The biggest single source of wealth for many people – their home equity – has fallen almost 50 percent from its peak in 2006, according to Federal Reserve statistics. Loss: $6.5 trillion. U.S. stocks are still down 25 percent from their peak in 2007, their 75 percent gain in the past 19 months notwithstanding. Cost: $4.8 trillion. Then there are the 7.7 million lost jobs with their associated lost income, lost wealth and lost consumer spending. Loss: untold trillions of dollars.

This wealth-reducing trauma, combined with consumers becoming afraid to spend and lenders changing from being ultra-lax to ultra-strict, has sucked huge amounts of money from the economy. Don’t let occasional upticks in consumer spending, the stock market or home equity fool you into thinking that things are okay, because they aren’t.

 

“The economy suffered a really deep wound – it’s healing, and it’s a little bit uneven,” says Alan Krueger, assistant Treasury secretary for economic policy. “But that is what you’d expect given the loss of wealth from the financial crisis.”

People used to collectively spend more than they took home – hence, our negative national savings rate, which was covered by borrowing. Now we’re spending 6 percent or so less than we’re taking home. That’s a big head wind to fight. The switch from borrowers to savers augurs well for the long run, if the trend lasts. But in the short run, it hurts the economy by diminishing activity. Compared with all the losses we’ve talked about, the $814 billion in stimulus spending – the effectiveness of which we won’t get into today – is small beer.

So what do you do? One proposed solution is to jump-start the economy with deep and permanent tax cuts. That’s more than a little problematic, given that the Great Recession began in 2007, when tax rates, especially on investment income, were about the lowest in modern times and there were no “Obama tax increases” on the horizon.

President George W. Bush had pushed through two big tax cuts – one in 2001 because the government was supposedly taking in too much money, the second in 2003 to stimulate investment. But the economy tanked anyway. The latest tax-cut screed, the Republican Party’s Pledge to America, has no meaningful numbers, proposes no changes in programs like Social Security, Medicare and defense, and asks no sacrifices of anyone, yet it says it can balance the budget. Good luck with that.

What about having the Treasury engage in a massive stimulus program to put money in people’s pockets and have them spend it, ginning up economic activity and restoring confidence? But stimulus money has to come from somewhere – and it doesn’t seem possible for the Treasury to raise a few trillion more stimulus bucks without dire consequences to interest rates and the dollar’s value.

It doesn’t help that the administration wrongly predicted that its stimulus package would hold unemployment to 8 percent; the rate soared to 10 percent and still hangs stubbornly in the mid-nines.

Other institutions, such as the Fed and the Social Security Administration, both nonpartisan, also underestimated our economic problems. But the administration’s mistake, which seems to have been an honest one, has undermined its credibility.

The fact that stimulus programs seemed designed to favor unionized workers, a core Democratic constituency, didn’t help. Nor did the fact that Cash for Clunkers and the $8,000 credit for first-time home buyers caused one-time spikes in new-car and house sales that fell off sharply after the programs expired.

‘Quantitative’ what?

Our final little secret is that the United States is now being forced to live within its means, and that’s not fun. For years our country could spend and spend because two bubbles showered companies, consumers and governments with free money. Who needed to save when stocks were producing returns of almost 20 percent a year, which they did from August 1982 through the spring of 2000? Or when house prices rose at double-digit rates and you could get cash easily and quickly through refinancing, a second mortgage or a home equity loan? Homeowners raising and spending cash propped the economy for years.

The closest we’re likely to come to free money is the Fed’s proposed quantitative-easing moves to buy Treasury securities. Let us show you how it works – and the problems with it.

Let’s say the Fed buys $1 trillion of Treasury securities in the secondary market. Out of thin air, it creates $1 trillion in credit balances in the sellers’ accounts. The sellers have $1 trillion more cash than they did, increasing the money supply. There is now $1 trillion less in publicly traded Treasurys, which props up their price.

By contrast, if Goldman Sachs wanted to buy $1 trillion of Treasury securities, it would have to find $1 trillion of cash to pay for them. Sellers would have $1 trillion more cash than before. Goldman would have $1 trillion less. There would be no increase in the money supply or decrease in the Treasury supply.

 

If the Fed could buy endless amounts of Treasury securities without any side effects, it would be almost like free money. The securities would cost the Treasury little or nothing in the way of interest, because the Fed turns over its profits – $53 billion last year, $40 billion in the first half of 2010 – to the Treasury.

So if the Fed buys $1 trillion of 2.5 percent, 10-year Treasury notes, Treasury’s $25 billion annual interest expense is offset by the $25 billion of extra profit the Fed would make, all (or almost all) of which would be turned over to the Treasury. See? Isn’t that grand?

There is, however, a problem. The Fed can’t do that indefinitely without touching off inflation, debasing the dollar, or both. Markets are bigger and more powerful than the Fed.

Consider the reaction of people like veteran Wall Street value investor Hugh Lamle of M.D. Sass to quantitative easing.

“It’s one thing to do $800 billion once,” he says. “But if the federal government is going to print $1 trillion a year for five years, maybe I don’t want to be in dollars.”

A second factor is that long-term rates are already so low that it’s not clear how much stimulus you get from cutting them more. It’s a big deal to cut interest rates to 5 percent from 8 percent. But at lower levels, the result is less dramatic.

Do you think the difference between 3 percent and 2.5 percent is going to matter? Meanwhile, these ultra-low rates are penalizing American savers – especially retirees relying on CD income to supplement Social Security. They tend to spend all their income, and it’s down sharply. That’s one reason the economy is weak.

Don’t get us wrong, there are plenty of winners in this game – just not the ones who need help. Cash-rich corporations are issuing billions of dollars of cheap debt for purposes such as buying back stock rather than expanding and creating new jobs. Corporations have record cash on hand but aren’t using it to expand in the United States.

Banks, too, are profiting mightily from quantitative easing. They can borrow short-term money for essentially nothing, then buy Treasury securities, knowing that the Fed will support the securities’ prices by buying them in the market. Playing the yield curve is easier, less risky and more lucrative than what the government wants the banks to do, which is to make loans.

It comes down to housing

Perhaps the biggest problem we have standing in the way of having good times return is housing – which is an example of how deep-rooted our problems are and how resistant they are to government programs.

Housing was a major source of national wealth for decades, and home equity, however sadly diminished, is still the biggest single piece of wealth many Americans have. That’s especially true of lower-income people.

No one shouts this from the rooftops, but the federal government and the Fed are doing all they can to prop up house prices. Thanks to the Fed’s forcing down of long-term rates, fixed-rate mortgages are at record lows. Most of those mortgages come via Uncle Sam.

For the first half of the year, 89 percent of mortgages came from the government-run Fannie Mae, Freddie Mac, Federal Housing Administration and Department of Veterans Affairs, according to Inside Mortgage Finance. That’s almost triple the levels of housing’s peak years: 31 percent in 2005 and 30 percent in 2006.

Even with all that effort, though, housing prices may be stabilizing at levels far below their peak four years ago rather than recovering broadly.

When will house prices get back to where they were? John Burns of John Burns Real Estate Consulting, one of the nation’s savviest real estate analysts, invokes the seven-and-seven rule. In previous local-market bubbles, Burns says, “the rule of thumb is seven years down and seven years up” after the bubble pops. Apply that rule to the national market, where the bubble popped in 2006, and we’re talking about a sustained recovery starting in 2013, and taking until 2020. That’s pretty grim, but probably realistic.

So when are we going to know when things are getting better? They may, in fact, be getting better now, but it’s going to take a long time for the wound to heal completely. We need to take care of people who have lost their jobs and lost their hope.

But after the midterm elections, when there’s going to be immense pressure to adopt everyone’s programs, we can’t just throw money at everything, searching for magic cures and magic sound bites. If we do, it will take us that much longer to climb out of the hole.

Allan Sloan is senior editor at large at Fortune magazine. Tory Newmyer is a writer at Fortune. Doris Burke is a senior reporter at Fortune.

Obama Health Care

March 5, 2010

WASHINGTON — The end game at hand, President Barack Obama took command Wednesday of one final attempt by Democrats to enact bitterly contested health care legislation, calling for an “up or down vote” within weeks under rules denying Republicans the ability to kill the bill with mere talk. Appearing before a White House audience of invited guests, many of them wearing white medical coats, Obama firmly rejected calls from Republicans to draft new legislation from scratch. “I don’t see how another year of negotiations would help. Moreover, the insurance companies aren’t starting over,” the president said, referring to a recent round of announced premium increases affecting millions who purchase individual coverage.

While Obama said he wanted action within a few weeks, Senate Majority Leader Harry Reid, D-Nev., seemed to hint a final outcome could take far longer. “We remain committed to this effort and we’ll use every option available to deliver meaningful reform this year,” he said.

 The results will affect nearly every American, mandating major changes in the ways they receive and pay for health care or leaving in place current systems that leave tens of millions with no coverage and many others dissatisfied with what they do get.

With Republicans united in opposition, there is no certainty about the outcome in Congress – or even that Democrats will go along with changes Obama urged on Wednesday in what he described as a bipartisan gesture. With polls showing voters unhappy and Democrats worried about this fall’s elections, Obama also sought to cast the coming showdown in terms larger than health care, which is an enormously ambitious undertaking in its own right. “At stake right now is not just our ability to solve this problem, but our ability to solve any problem,” he said.

Republicans dug in for another struggle on an issue that they agreed would echo into the fall campaign. The Senate GOP leader, Mitch McConnell of Kentucky, said a decision by Democrats to invoke rules that bar filibusters would be “met with outrage” by the public. “This is really not an argument between Democrats and Republicans. It’s an argument between Democrats and the American people,” he said. At its core, the legislation under discussion still is largely along the lines Obama has long sought and GOP critics attack as a government takeover of health care. It would extend coverage care to tens of millions of uninsured Americans while cracking down on insurance company practices such as denying policies on the basis of a pre-existing medical conditions. A new “insurance exchange” would be created in which private companies could sell policies to consumers under terms fixed by the federal government.

Much of the cost of the legislation, nearly $1 trillion over a decade, would be financed by cuts in future Medicare payments to hospitals and other providers and higher payroll taxes on individuals earning more than $200,000 and couples over $250,000.

 Story continues below The president’s appearance marked a presumably final pivot point in a long, uphill effort by Obama and other Democrats to enact far-reaching changes to the health care system – and with his own administration at an important crossroads. Eager to turn attention to efforts to stimulate the economy and create jobs, the president is seeking a victory on health care that can also give him a boost on other priority legislation. At the same time, a defeat could damage Obama’s ability to help fellow Democrats heading into the fall campaign. Failure on health care could well lead to a shake-up of the president’s White House team, which has received criticism recently from Democratic lawmakers.

After nearly a year of struggle, the House and Senate passed separate bills late last year, and appeared on course for approving a final compromise version early in 2010. But those efforts were abruptly abandoned when Republicans unexpectedly won a special election in Massachusetts. Sen. Scott Brown’s victory gave the GOP an ability they had lacked, the strength to sustain a filibuster, a form of opposition that requires supporters of a bill to post 60 Senate votes in order to cut off debate and force a final decision.

 Democrats went into something of a political fetal position, and have begun to stir in recent days only as Obama asserted his determination with a bipartisan summit followed by a revised set of proposals.

Obama said the use of rules that deny the minority the right to a filibuster had been used numerous times in recent years, including on passage of welfare reform legislation in the 1990s and twice when President George W. Bush pushed tax cuts to passage. Health care “deserves the same kind of up or down vote” as those earlier measures, he said.

 Under the rather complicated approach under discussion, the House would be asked to approve the bill that passed the Senate late last year, despite objections by many members of the rank and file to several provisions. Simultaneously, both houses would also vote for a companion measure whose purpose would be to make changes in the first bill sought by either House Democrats or the White House.

Obama said he was exploring GOP proposals for cracking down on fraudulent medical charges, revamping ways to resolve malpractice disputes, boosting doctors’ Medicaid reimbursements and offering tax incentives to curb unnecessary patient visits to doctors. The ideas include an experiment that would establish special courts in which judges with medical expertise would decide malpractice allegations. The idea has been criticized by the Center for Justice & Democracy, a consumer group that prefers the current system of awarding damages. It said health courts would be “anti-patient.”

The White House and Democratic leaders said they hoped that Obama’s maneuvering would at least win the votes of wavering conservative and moderates in their own party, even if it didn’t entice Republicans. But there was no guarantee of success, despite Obama’s vow to do everything in his power to succeed – and a White House announcement that he would travel to Pennsylvania and Missouri next week to campaign for the legislation.

 ___ Associated Press writers Jennifer Loven, Ben Feller, Alan Fram and Erica Werner contributed to this story.

August 6, 2009

Written by Michael Grabell and Jennifer La Fleur as reported in ProPublica

Since the economic stimulus bill passed nearly six months ago, the Obama administration has repeatedly pledged that the money would reach middle America, seeping into the communities hardest hit by the recession.

But analysis of the most comprehensive list of stimulus spending to date found no relationship between where the money is going and unemployment and poverty.

Stimulus spending is literally all over the map, according to ProPublica’s analysis, which examined nearly all the contracts, grants and loans the government has reported awarding. Some battered counties are hauling in large amounts, while others that are just as hard hit have received little.

Take Trigg County, Ky. [2], where unemployment was 15.8 percent in June after the auto industry crisis rippled among suppliers. The stimulus has chipped in $1 million toward a biofuels facility and $30 million for a road project. According to the data, the county has been awarded $2,419 per resident.

But LaGrange County, Ind. [3], hasn’t fared so well. Despite having the identical unemployment rate, it has received only $33 a person. The community is still trying to recover after recreational vehicle plants shuttered last fall. Yet the stimulus has provided little more than the education and rural housing money that every county is scheduled to receive.

For months now, Democrats and Republicans have debated whether the stimulus is trickling down to communities that need it most. Much of the available evidence has been anecdotal, however, or based on studies that examined only transportation spending or a smaller list of projects.

The debate accelerates today as President Obama and Vice President Joe Biden visit Elkhart, Ind., and Detroit for a progress report on the economy that will again highlight the stimulus. What the available data show is that spending is uneven and sometimes runs contrary to measures of need.

Elizabeth Oxhorn, the White House stimulus spokeswoman, said much of the money thus far has moved through existing grant formulas that don’t take into account regional economic swings. But as some newer stimulus programs kick in — such as economic development grants and money to hire police officers — there will be more discretion in where to send dollars, she said.

“Where we do have opportunities to target assistance and programs that are meant to help hard-hit areas, we have done that, particularly in the hard-hit auto communities,” Oxhorn said.

First Look at County-Level Spending

Overall, the stimulus program will pump $787 billion into the economy, including tax cuts.

To assess what has happened so far, ProPublica combined all the data on the federal stimulus Web site, Recovery.gov, with reports from other government sources into a list totaling $120 billion worth of stimulus spending. Of that, ProPublica examined $55 billion that could be traced to the county level.

Getting a complete accounting of the stimulus is nearly impossible because some of its largest elements — tax cuts for individuals, increases in Medicaid and unemployment — aren’t being tracked to the local level or have yet to be distributed by the states.

While those programs clearly benefit individuals hurt by the recession, they aren’t intended to create or sustain many jobs, as with dollars aimed at infrastructure or schools. The 7 percent of overall stimulus funding in ProPublica’s analysis is the broadest, most complete snapshot of spending to date.

The largest categories are highway projects, Pell Grants for low-income college students and funding to school districts for disadvantaged students. The data also include airport grants, small business loans, housing assistance, nuclear cleanup and military construction contracts.

ProPublica tested the relationship between spending per person and several socioeconomic and demographic factors across more than 3,100 counties and equivalent areas, such as Louisiana parishes, to see if there was a statistically significant pattern in the way money has been allocated.

Nationwide, the results showed no significant relationship across counties when spending was compared against unemployment, poverty, race and income. Looking within state boundaries, spending did have a relationship to unemployment in a few cases — but not always in the same direction.

In New Jersey [4], for example, counties with high unemployment were more likely to get more stimulus money per person. The opposite proved true in Michigan [5], which has the nation’s highest jobless rate at 15.2 percent. A searchable list of county stimulus projects and demographics is here. [6]

Nuclear Cleanups Boost Rural Counties

The biggest winner so far — at nearly $12,000 per resident — is Thomas County [7], an area of 583 people in the Nebraska Sandhills. Unemployment there is 4.8 percent, about half the national rate.

Judy Taylor, chairwoman of the Village Board in Thedford, said the majority of residents consider the main stimulus project, a $7 million viaduct over the railroad tracks, a waste of money.

“Out here, there seems to be plenty of work for people,” said Janice Hodges, whose family owns a gas station nearby. “It probably could have been better used somewhere else.”

Overall, the counties faring the best in the stimulus program are sparse communities with a giant road project — such as Brooks County [8], Texas, or Hocking County [9], Ohio — as one expensive project to a county with few people can skew per-capita figures.

Other counties doing well are home to Cold War weapons plants. The stimulus includes $6 billion to clean up and dispose of waste in 12 states, and those were among the first contracts awarded.

Thanks to the massive cleanup of the Hanford Nuclear Reservation, Benton County, Wash. [10], has received more than $1.5 billion — second only to Los Angeles County‘s [11] $2 billion in total funding so far. Benton County’s per capita spending: $9,300.

In metro areas, per-capita spending varies. LA County’s funding equates to $215 per person. New York County [12], which covers Manhattan, is receiving $610; its neighbor, the Bronx, is getting $185. Palm Beach County, Fla., is receiving $57, and Wayne County, Mich., epicenter of the auto industry meltdown, has received $183 per resident — about the national average for spending that could be tracked to the county level.

Some well-off counties are benefiting greatly.

Summit County, Utah [13], home to Park City and several upscale ski resorts, is one of the wealthiest counties in the country with a median household income of $83,000. Under the stimulus so far, it’s received $659 per person.

The money includes a $15 million interstate paving project, a $5 million bridge replacement, $1 million for sewers and sidewalks on Main Street in Coalville, and a $570,000 small-business loan to a Park City oral surgeon.

John Hanrahan, chairman of the Summit County Council, said the highway and bridge projects are in the rural part of the county and are mainly used by long-haul truckers rather than residents.

“It doesn’t necessarily help a farmer a lot for hay or gas,” he said. “It doesn’t affect the ski industry. We still have a significant portion of the population who are struggling with this recession.”

Hanrahan’s point underscores one of the basic uncertainties when determining who benefits from stimulus dollars. Money spent on a project doesn’t necessarily stay in the community. Construction workers often drive through several counties to job sites.

“People will live in one area and work in another,” said Mark Zandi, chief economist for Moody’s Economy.com. “Some county in a region could be getting more money but it could have a beneficial impact on other counties in the region.”

Obama’s Pledge: Help Is on the Way

When Obama launched the stimulus package in February, he visited Elkhart, a city that had seen its jobless rate skyrocket from a 5.8 percent in October 2007 to 20.8 percent this March.

The next day, he visited Fort Myers, Fla., which had been pummeled by the foreclosure crisis. Since then, administration officials have repeatedly visited auto industry towns to promise help.

Trigg County is one struggling area that has seen a flood of stimulus money. The county, on the Kentucky-Tennessee border, northwest of Nashville, has about 13,000 residents but received $32.5 million.

The county’s largest manufacturer, Johnson Controls, made car seat frames until it closed in March, leaving 560 people out of work. But right on the heels of that shutdown came $30 million in federal money for an ongoing project to widen U.S. Highway 68.

That stimulus money freed state funds already pledged to the $55 million expansion, protecting the contractor’s current workforce. State officials said it might have stalled without the stimulus.

The U.S. Forest Service awarded $2 million in contracts to clean up the Land Between the Lakes recreation area, which had been devastated by an ice storm. The agency also gave the county a grant for a facility that will convert wood to fuel to power a local hospital.

“When you tally it up and see the dollars that will come into our area through the stimulus, it is working,” said Stan Humphries, Trigg County judge-executive. “It doesn’t move as fast as we would like or reach as many families as we would hope for. But we feel that we are getting our share of the funds.”

Big Pots of Money Hard to Track

Edmund Phelps, a Nobel laureate who is director of Columbia University’s Center on Capitalism and Society, said it’s no surprise that spending so far doesn’t relate to characteristics like employment or poverty. To get money out quickly, the government relied on funding formulas that aren’t designed for an economic downturn. “It’s kaleidoscopic,” he said of the stimulus. “And it was all done very quickly.”

Some of the largest pots of money — tax cuts, food stamps and Medicaid assistance — go to more than 100 million individuals, and government auditors are struggling to estimate the local impact.

“Can you send a man to Jupiter? In theory you can,” said J. Russell George, the Treasury inspector general for tax administration. “We could in theory track every dollar, but you have to consider the expense and the time it would take to do that.”

For other types of spending programs — such as the $54 billion to stabilize state budgets and help local schools, or $6 billion to build water and sewage treatment plants — the money trail stops at the state governments, which are still deciding how to divvy up the funds. Only a fraction of the stabilization money has been sent to the states from Washington.

Other programs, such as transit grants, mask where the jobs are created. When the Akron, Ohio, transit authority bought 19 buses, for example, it created work at local rubber suppliers — but also at the plants that made the buses in Kansas, North Dakota and California.

“It’s difficult to take into account all of the different dimensions,” said Steve Murdock, a former Census Bureau director who is a professor of sociology at Rice University. “You have populations with various kinds of needs and local economies that reflect different kinds of conditions.”

Elkhart’s Poor Cousin Next Door

As Obama returns to Elkhart, he might want to consider LaGrange County just to the east.

While Elkhart County has been awarded about $169 per resident — a little less than the national average — LaGrange has received just $33 a person, according to the data.

Both counties saw their economies crater last year when high gas prices and tight credit made it difficult to sell recreational vehicles, a primary industry there. Dozens of factories, dealerships and suppliers shut down while thousands lost their jobs.

LaGrange County has several needed transportation and infrastructure projects, said Keith Gillenwater, the county’s economic development director. But so far, it has been shut out of any of the federal highway funding doled out by the state government.

“It’s frustrating,” he said. “To me there’s a lot of disparity that should be re-examined and taken into consideration.”

 

ProPublica is America’s largest investigative newsroom.

The following is a guest post by Chelsea Green‘s Makenna Goodman:

I remember a time when defenseless kids with hippie moms got made fun of for using wax sandwich bags (ehem). I remember a time when it was considered uncool to be packing carrot sticks in your tote bag. When yoga was what the weird naked guys did at the hot springs in Ouray, Colorado; you know downward-facing dogs splayed out by the pool. I remember a time, in other words, when trendy things used to be not-trendy. Like BIODIESEL. The wave of the future.

You’ve seen it station wagons clanking around town with a sign on the back window that says, “This Vehicle Runs on Veggie Oil I’m Awesome.” You probably drive by and think: Damn. Those hippies are self-important, but I’m repressing the fact that I want to be just like them. What is wrong with me? But here’s the first thing you should know about biodiesel: It’s not just white people with dreads who use vegetable oil to run their cars. It’s a movement. Dude, my boss does it.

Know this:
*Biodiesel can be made from virtually any vegetable oil
*It can be used in any modern diesel engine
*It’s America’s fastest growing alternative fuel

But really, biodiesel is a tricky thing to understand, which is why many people just plain don’t. Consider it worth your while to get versed on biodiesel, from the experts. And everything you need to know, Greg Pahl will tell you. He’s the author of Biodiesel: Growing a New Energy Economy and The Citizen-Powered Energy Handbook: Community Solutions to a Global Crisis and knows the deal.

The following is an excerpt from The Citizen-Powered Energy Handbook: Community Solutions to a Global Crisis by Greg Pahl. It has been adapted for the Web.

Biodiesel 101

Biodiesel, a diverse group of diesel-like fuels, can be easily made through a simple chemical process known as transesterification from virtually any vegetable oil, including (but not limited to) soy, corn, rapeseed (canola), cottonseed, peanut, sunflower, mustard seed, and hemp. But biodiesel can also be made from recycled cooking oil (referred to as “yellow grease” in the rendering industry) or animal fats. One Vietnamese catfish processor is even using fish fat as a biofuel feedstock.30 There have even been some promising experiments with the use of algae as a biodiesel feedstock. As long as the resulting fuel meets the American Society for Testing and Materials (ASTM) biodiesel standard (D-6751), it’s considered biodiesel in the United States, regardless of the feedstock used in its manufacture (in Europe, the standard is EN 14214). And the process is so simple that biodiesel can be made by virtually anyone, although the chemicals required (usually lye and methanol) are hazardous, and need to be handled with extreme caution.

Simply stated, here is how biodiesel is made. The transesterification process is initiated by adding carefully measured amounts of alcohol (methanol) mixed with a catalyst (sodium hydroxide lye the same chemical used to unclog kitchen or bathroom drains) to the vegetable oil. The mixture is stirred or agitated (and sometimes heated) for a specific length of time. If used cooking oil is the feedstock, the process requires a bit more testing, lye, and filtration, but is otherwise essentially the same. During the mixing, the oil molecules are split or “cracked” and the methyl esters (biodiesel) rise to the top of the settling/mixing tank, while the glycerin and catalyst settle to the bottom. After about eight hours, the glycerin and catalyst are drawn off the bottom, leaving biodiesel in the tank. The whole idea of the process is to remove the thick, sticky glycerin from the vegetable oil, so the remaining biodiesel will flow easily and combust properly in a modern diesel engine without leaving damaging deposits inside the engine.

In most cases the biodiesel needs to be washed with water to remove any remaining traces of alcohol, catalyst, and glycerin. In this procedure, water is mixed with the biodiesel, allowed to settle out for several days, and then removed. The wash process can be repeated if needed, but it is time-consuming. Not everyone agrees on whether the water wash is necessary. A few smaller producers who are making biodiesel for themselves skip the process, while commercial producers usually must do it to meet industry standards. In the case of some larger, more sophisticated manufacturing facilities, the transesterification process itself is so carefully controlled and refined that the water wash is not needed. There are, of course, quite a few technical variations on this entire process for large-scale industrial operations, but the general transesterification procedure is similar.31

As the amount of biodiesel being produced grows exponentially, the quantities of glycerin by-product grows apace. Glycerin has always been a niche market that is highly sensitive to oversupply, and the recent exponential growth of this commodity as a result of biodiesel production has caused the world glycerin market to collapse. As a result, traditional glycerin manufacturing plants around the world have been closing, while new ones that use glycerin as feedstocks for epoxy resins, propylene glycol, and other products have been opening. Recently, glycerin has even been used by one California company, InnovaTek Inc., as a source for the production of hydrogen.32 Trying to develop new uses for glycerin has been keeping a lot of people awake at night.

Our perspective:

Biofuels is the wave of the future. The federal and many state governments have provides great incentives to help start this process.  Biodiesel adds the needed lubrication to low sulpher diesel, that extends the life of the engine and help it to run more efficiently.

let us know your toughts? You may leave a comment or email george@hbsadvantage.com with any questions you may have.

Vivi Gorman, GREENandSAVE.com

Governor Ed Rendell announced June 1 that the state is seeking $15 million in federal funding to expand the state’s use of biodiesel and alternative fuel vehicles by applying to the U.S. Department of Energy under the American Reinvestment and Recovery Act.

The governor explained that Pennsylvania’s Energy Independence Strategy includes an initiative mandating the production and use of renewable fuels to develop the state’s economy and reduce dependence on foreign fuels. The state initiative has set a goal to produce and use one billion gallons of domestically produced biofuels in Pennsylvania by 2017.

Under the plan, the Department of Environmental Protection will partner with the Pittsburgh Regional and the Greater Philadelphia Clean Cities programs, the National Biodiesel Board and eight other industry partners to install fueling infrastructure, retail sites, procure vehicles, promote the use of alternative fuels and educate the public. The eight industry partners included in the project are: Buckeye Partners LP, Centre Area Transportation Authority, Gulf Oil LP, Guttman Oil Co., Lower Merion School District, Lycoming County Resource Management Services, Pennsylvania Energy Co., and Sunoco Logistics Partners LP.

Governor Rendell remarked that Pennsylvania occupies one of the largest natural gas supplies in that country in the Marcellus Shale reserve. The project proposes to install 23 biofuel terminals and four retail stations throughout the state; l natural gas refueling facilities at two locations; and compressed natural gas equipment on 36 existing vehicles and purchasing 57 new natural gas vehicles for public transit agencies.

The project will allow for the displacement of 263 million gallons of petroleum-based fuel over four years, create at least 9,000 jobs, and reduce carbon dioxide emissions by 7.2 million pounds.

ANGELA CHARLTON | May 28, 2009 05:01 PM EST | AP

PARIS — The top U.S. environment official says it’s time for the United States to shed its energy-wasting image and lead the world race for cleaner power sources instead.

After several years with a relatively low profile under President George W. Bush, the U.S. Environmental Protection Agency “is back on the job,” EPA Administrator Lisa Jackson told The Associated Press on Thursday during a trip to Paris.

What the EPA does domestically this year will be watched closely overseas. Nations worldwide are working toward a major meeting in Copenhagen in December aimed at producing a new global climate pact. The U.S. position on curbing its own pollution and helping poor countries adapt to global warming is seen as key to any new pact.

Jackson was in Paris for international talks on how rich governments can include global climate concerns in overall development aid.

She dismissed worries that economic downturn was cutting into aid commitments or investment in new energy resources. She said the United States should take the lead on clean energy technology, recession or no.

“We have to get in the race now _ and win it,” she said. “I don’t expect a moving backwards because of recession.”

At climate talks in Paris earlier this week, European environment ministers welcomed greater U.S. commitment to environmental issues under the Obama administration _ but said it still wasn’t aiming high enough in its targets for cutting U.S. emissions.

Jackson said a shift in the American mindset is only beginning.

Talking about energy efficiency and saying companies should pay to pollute _ “that’s a revolutionary message for our country,” she said.

For a long time, she said, “People didn’t even expect the EPA to show up” at events, much less set policies that could be seen as examples for the rest of the world.

“Now it seems like every day we’re rolling back or reconsidering a Bush era policy on clean air,” she said.

She said it was time for the United States to take a more active role in limiting chemical pollutants, after falling behind Europe in that domain.

The U.S. also has lessons to learn from countries such as the Netherlands, she said, after visiting its low-lying, flood-prone lands to study ways cities like her native New Orleans can better manage water.

Our Perspective:

It is good to hear the administration making positive comments about our energy’s future. Alternative energy is a growth business and the correct path for insuring our future energy indepenence.

Let us know your thoughts? You may leave a comment or email george@hbsadvantage.com

Would you like to know more about the financial opportunities that drive this investment. Feel free to contct us.

NEWTON, Iowa — President Barack Obama, standing Wednesday in the shell of a once-giant Maytag appliance factory that now houses a wind energy company, declared that a “new era of energy exploration in America” would be a crucial to leading the nation out of an economic crisis.

With pieces of wind turbine towers as a backdrop, Obama touted the small manufacturing firm as a success and as a step toward reducing the United States’ reliance on polluting fuels. But as the president on Earth Day set a goal for wind to generate as much as 20 percent of the U.S. electricity demand by 2030, legislation to make that a reality faced a challenge back in Washington in the Democratic-led Congress.

“The nation that leads the world in creating new energy sources will be the nation that leads the 21st century global economy,” Obama said in a state that launched him on the road to the White House with a surprise upset over one-time rival Hillary Rodham Clinton.

“America can be that nation. America must be that nation. And while we seek new forms of fuel to power our homes and cars and businesses, we will rely on the same ingenuity _ the same American spirit _ that has always been a part of our American story.”

It’s an American spirit, though, that has been damped with economic downturn and financial crisis.

The president left Washington for a few hours Wednesday to visit this small Iowa town, which took a huge economic hit when Maytag Corp. shut its doors in 2007. The Maytag plant employed some 4,000 in a town of 16,000 residents in jobs that paid about $30,000 to $40,000 a year.

In its place is Trinity Structural Towers, a 90-person manufacturing firm that makes parts of wind turbines the president hopes to expand on land and at sea through the government’s first plan to harness ocean currents to produce energy.

O”Now, the choice we face is not between saving our environment and saving our economy,” Obama said. “The choice we face is between prosperity and decline. We can remain the world’s leading importer of oil, or we can become the world’s leading exporter of clean energy.”

In Washington, the president’s plan to increase alternative energy sources and create environmentally friendly jobs hit some snags despite Obama’s fellow Democrats controlling both chambers of Congress. Energy Secretary Steven Chu, EPA Administrator Lisa Jackson and Transportation Secretary Ray LaHood reinforced Obama’s message in testimony to a House Energy and Commerce subcommittee on Wednesday.

The administration’s draft bill is designed to help stem the pollution blamed for climate change by capping greenhouse gas emissions and reducing the nation’s reliance on fossil fuels. The goal is to reduce greenhouse gases by 20 percent from 2005 levels by 2020, and by 83 percent by mid-century.

The White House wants to see movement on the legislation by Memorial Day. To help that along, aides said the president plans to personally make his case that the costs of dealing with climate change can be reduced dramatically by adopting programs that will spur energy efficiency and wider use of non-fossil energy such as wind, solar and biofuels.

In Newton, Obama proclaimed that “once-shuttered factories are whirring back to life,” although the facility he toured is a shadow of what it replaced here about 30 miles east of Des Moines.

“Today this facility is alive again with new industry,” Obama said, while noting that “this community continues to struggle and not everyone has been so fortunate as to be rehired.”

Trinity now employs about 90 people _ hardly the replacement Newton so desperately needs.

“We’ll never have another Maytag,” said Paul Bell, a Newton police officer who also serves in the state legislature. “Maybe we shouldn’t have had a company here that the majority of people worked for. We put all of our eggs in one basket.”

Recognizing the challenges remaining in Newton and scores of towns like it coast-to-coast, Obama quickly added: “Obviously things aren’t exactly the same as they were with Maytag.”

With the same root in realism, Obama acknowledged the United States’ energy policy will not change instantly, given the country’s reliance on oil and natural gas.

“But the bulk of our efforts must focus on unleashing a new, clean-energy economy that will begin to reduce our dependence on foreign oil, will cut our carbon pollution by about 80 percent by 2050 and create millions of new jobs right here in America, right here in Newton,” he said.

But it won’t come quickly. The United States imports almost 4.9 billion barrels of oil and refined products annually. That is raw energy that cannot be replaced, one windmill at a time.

Instead, Obama urged bold thinking _ and spending _ to address climate change and energy supplies.

“So on this Earth Day, it is time for us to lay a new foundation for economic growth by beginning a new era of energy exploration in America,” he said to applause.

Obama also pushed personal responsibility, calling on every American to replace one incandescent light bulb with a compact fluorescent. The president also said the leaders of the world’s major economies will meet next week to discuss the energy crisis.

In Landover, Md., on Monday, Vice President Joe Biden marked Earth Day by announcing that $300 million in federal stimulus money will go to cities and towns to purchase more fuel-efficient vehicles.

___

Associated Press writer Brian Westley in Landover, Md., contributed to this report.

Daniel C. Esty

Posted April 20, 2009 | 03:50 PM (EST)  As reported in Huffington Post Green

Talk has begun to turn to the new economy that will emerge from the present collapse. General Electric CEO Jeff Immelt has suggested that the current crisis is not just a recession but a fundamental “reset” of how business gets done. And Time magazine has taken up this theme with a reset cover story. But there has been little discussion of exactly what changes – in principles and practices — should be made so that we rebuild our economy on firmer foundations. As we celebrate Earth Day this week, it is a good time to commit to “sustainability” as a centerpiece of a revitalized regulatory system.

For the past three decades, debate has raged over whether and how to deregulate. But while markets offer the prospect of promoting innovation, growth, and prosperity, few now believe that capitalism is self-correcting or that the private sector needs only minimal supervision. From the demise of Lehman Brothers and AIG to the skullduggery of Bernie Madoff and Allan Stanford, the signs of inadequate regulation and market failure surround us.

Two particular forms of market failure underlie the meltdown of the past year and make sustainability the right touchstone for our regulatory reset efforts:

• Externalized costs and risks
• Incomplete information

Both of these problems require that we rethink our approach to regulation — and re-establish the fundamentals of our economy on a more sustainable basis. And note that this principle should apply broadly, not just in the financial arena.

We need regulations which ensure that companies cannot structure their operations so that any upside gains accrue to their owners (or worse yet their managers), while risks or costs get shifted onto society as a whole. In the banking sector, rules against over-leveraging are urgently required. The recently released Turner Report in the UK outlines the first steps in this direction that should be taken. More generally, financial reporting rules must be designed to expose hidden risks and externalized costs.

We should likewise insist that companies which send emissions up a smokestack or out an effluent pipe cease their pollution or pay for the harm inflicted on the community. In our “reset” world, economic success cannot come at the price of harms imposed on the public in the form of contaminated air and water or risk of climate change. Thus while we lay the foundation for a more sustainable economy, let’s similarly adopt rules that provide for a sustainable environmental future. This will require overhauling the traditional approach to environmental regulation which countenances way too much in the way of externalities by offering “permits” up to a certain level of harm.

President Obama’s call for a price on carbon dioxide emissions represents a good first step in the “no externalities” direction. But let’s broaden the push and make polluters pay for all the harm they cause. If companies — and each one of us in our personal lives — had to pay for our waste and pollution, behavior would change. Putting a price on harm-causing creates incentives for care and conservation — efficiency and resource productivity.

More importantly, these price signals will drive a market response. Companies that are positioned to help others reduce their waste or cut their emissions will find customers eager for their goods and services. And where no easy solutions are available, harm charges will motivate “cleantech” innovation as inventors and entrepreneurs recognize the prospect of making money by solving environmental problems.

In parallel with a commitment to internalizing externalities, we must adopt transparency as a watchword. Market capitalism does not work without adequate information about economic actors. This reality has been understood in theory, but now needs to be advanced in practice. Government has a critical role to play in establishing the terms of disclosure about companies, markets, products, investment vehicles, and more. Public officials must also be empowered to ensure that disclosures are complete and accurate.

Well-designed reporting rules make it easier to spot externalized costs or risks and harder to hide malfeasance. Widely available metrics also facilitate benchmarking across companies, which offers a mechanism for assessing performance, highlighting leaders and laggards, and spurring competitive pressures that drive all toward better results. Studying the leaders offers an important way to identify best practices in everything from corporate strategy to pollution control. Likewise, outliers (such as those who make 10% returns year after year without fail) can be isolated for special review and scrutiny.

Such transparency would make it easier to refine our compensation systems to reward superior performance and real value creation. Carefully constructed disclosure rules could help, on the other hand, to unmask mere financial engineering, which should not be credited with outsized rewards.

There is a great deal of work to be done to re-establish prosperity across our country and the world. Smart regulation can channel corporate behavior and individual effort toward sustainable economic growth — that is durable because it rests on solid underpinnings not hidden risks or externalized costs.

Daniel C. Esty is the Hillhouse Professor at Yale University with appointments in both the Yale Law School and the Yale School of Forestry and Environmental Studies. He is the co-author (with Andrew Winston) of the prize-winning book, Green to Gold: How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage (just released in a revised and updated edition published by John Wiley). A former Deputy Assistant Administrator at the US Environmental Protection Agency, Professor Esty advised the Obama Campaign on energy and environmental issues and served on the Obama Transition Team.

Written by Paul Krugman  NY Times

The Geithner plan has now been leaked in detail. It’s exactly the plan that was widely analyzed — and found wanting — a couple of weeks ago. The zombie ideas have won.

The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.

To this end the plan proposes to create funds in which private investors put in a small amount of their own money, and in return get large, non-recourse loans from the taxpayer, with which to buy bad — I mean misunderstood — assets. This is supposed to lead to fair prices because the funds will engage in competitive bidding.

But it’s immediately obvious, if you think about it, that these funds will have skewed incentives. In effect, Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem.

Or to put it another way, Treasury has decided that what we have is nothing but a confidence problem, which it proposes to cure by creating massive moral hazard.

This plan will produce big gains for banks that didn’t actually need any help; it will, however, do little to reassure the public about banks that are seriously undercapitalized. And I fear that when the plan fails, as it almost surely will, the administration will have shot its bolt: it won’t be able to come back to Congress for a plan that might actually work.

What an awful mess.

Let us know your thoughts? You may leave a comment.