Senate Majority Leader Harry Reid, D-Nev.: Democrats are going to use the economic crisis to try and take care of the labor unions that take care of them.

The American people are right to react to the ongoing debate over an economic stimulus package with mixed feelings and a profound sense of frustration.

A recent USA TODAY/ Gallup poll found that most Americans overwhelmingly want Congress to pass the stimulus bill, but they’re not hopeful that the final product will help their families or turn the economy around.

Normally, we would applaud decisive action by our leaders in response to a crisis. But the quick work that House Democrats made of their $819 billion stimulus bill reminds us that haste often makes wasteful spending – especially when it goes to fund a party’s pet causes.

Having been taught that our financial system is broken, we are once again reminded that our political system is not exactly humming along, either. Lawmakers have a tendency to produce monstrously large, 600-page bills and then pass them in a rush before the media have had time to see what’s in the sausage.

Dwelling over which company paid out how much in bonuses or which executive spent lavishly to remodel his office or whether the spending package will benefit Main Street as opposed to Wall Street ignores the more important questions.

What we really need to decide is whether President Obama is right that Congress needs to act “swiftly” and shouldn’t let what he calls “very modest differences” between Democrats and Republicans get in the way, or whether Senate Republicans are right that the $819 billion House bill is a monstrosity that needs taming with more tax cuts and less spending.

It would be better if we could have both decisive action and still wind up with the right course of action. But, at the moment, that doesn’t seem likely. It is better to take the time to get it right.

This week, Republicans in the Senate drafted their own $713 billion stimulus bill with much different priorities than House Democrats had spelled out.

The Republicans want to spend $114 billion on infrastructure projects – which, ironically, the administration said were supposed to be the major points of the stimulus before Democratic lawmakers went astray funding everything from tax breaks for movie producers to child care on military bases.

Republicans also would spend $138 billion to extend unemployment benefits and $31 billion to help alleviate the housing crisis. Of course, the Republicans saved the real money for tax cuts – $430 billion worth.

One of the tenets of the business world is that chaos creates opportunity. But in politics, the phrase takes on a whole new meaning. In Washington, chaos presents an opportunity for lawmakers in both parties to selfishly put their own interests before those of the country.

Naturally, Democrats are going to use the economic crisis to try and take care of the labor unions that take care of them. The “Buy American” provision in the House bill would, for the most part, bar foreign steel and iron from public-funded infrastructure projects.

Senate Democrats want to require, with few exceptions, that any stimulus-funded project use only American-made products and equipment.

Meanwhile, Republicans can be counted on to push for hundreds of billions of dollars in tax cuts, despite the fact that the Bush tax cuts didn’t stimulate much of anything.

And even with economists saying that in bad times like these, people are more likely to save money or use it to pay down debt than to spend it, the GOP can’t help itself. It is just as eager as the opposition to use a crisis to advance an agenda item or reward supporters.

President Obama erred in trusting Democrats in Congress to put aside politics and find solutions. Democratic leaders on Capitol Hill will continue to give the president headaches by pursuing their own agendas.

But Americans made a bigger mistake in expecting government to come to the rescue with a quick fix to an economic collapse that did not happen overnight and thus will not be repaired overnight.

What were we thinking? Congress is going to do what it wants to do for the reasons it wants to do it. And still, in the end, whatever it does might not help all that much.

So, in making the kinds of decisions that impact their economic health and that of their families, Americans are going to have to continue to look out for themselves.

Ruben Navarrette Jr. is a columnist and editorial board member of The San Diego Union-Tribune. E-mail: ruben.navarrette@uniontrib.com

The Bush administration clearly botched the effort to shore up the country’s financial institutions.

Unfortunately, the Obama administration and the Democratic Congress have not learned the mistakes that were made and are poised to make the situation worse, not better.

The problem the Bush administration purported to be addressing was the uncertain value of certain assets held by financial institutions, mostly mortgage-backed securities, due to the burst of the housing bubble. As a result, the capital against which they lent declined and became shaky.

To address that problem, the Bush administration asked Congress for up to $700 billion to buy those assets and take them off the books of the financial institutions. Congress agreed, set up the Troubled Asset Relief Program, and released the first $350 billion.

But instead of using the money to buy up the distressed securities, the Bush administration decided to inject public capital into the banks.

In fairness to the Bush administration, the consensus among economic experts at the time was that injecting public capital was preferable to buying distressed securities. But it turned out to be a colossal mistake.

The TARP investments increased the capital of the financial institutions, but made it no more certain. Moreover, it put the federal government into the banking business, and that scared off private capital.

Ideally, the existing capital for financial institutions would become more certain and they would be recapitalized with private investment. But no sensible private investor wants Uncle Sam as a senior partner.

When injecting public capital, the federal government gave itself a preferred position, with a 5 percent to 9 percent return off the top. It also assumed the right to tell the financial institutions how to run their business, how much they could pay their executives and what they could distribute to other investors in dividends.

Uncle Sam is, of course, ultimately a political beast, with an army of regulators and bureaucrats and 535 would-be CEOs in Congress. Reports are beginning to trickle out about members of Congress trying to influence the allocation of TARP monies and the decisions of the financial institutions that received them.

Moreover, Uncle Sam has treated shareholders roughly in previous bailouts, requiring that shareholder equity be severely diminished or extinguished in the forced sale of Bear Stearns and the takeovers of Fannie Mae, Freddie Mac and AIG.

Now the market fear is of a more formal nationalization of the banks. Given the situation and the track record, private capital is going to stay on the sidelines so long as Uncle Sam haunts the boardroom.

The Obama administration and the Democratic Congress want to make the situation worse. Members of Congress are clamoring for more lending at the same time as the regulators are urging greater cushions due to the continuing uncertainty about capital.

The Obama administration says any additional TARP investments will come with more strings. The House passed a bill that contained several, including diversity monitoring in management, employment and business activities.

A sensible approach would be designed to increase the likelihood of new private capital flowing into the country’s financial institutions.

This would require, first of all, a firm commitment to unwind the federal government’s current position in these institutions, including selling its preferred stock at a loss if necessary.

While being unwound, the stock should be turned over to a trustee with instructions not to interfere with the management decisions of the institutions in the interim.

Second, the federal government should guarantee, for a premium, the value of mortgaged-backed securities held by financial institutions.

About 90 percent of all mortgages remain current. Even two-thirds of subprime mortgages are still current. A guarantee of somewhere between 65 percent and 75 percent of face value should provide a floor on the value of these securities without taxpayers running great risks.

I am loathe to suggest special tax breaks. But in this circumstance, freeing new investments in financial institutions from capital gains taxation for a period of time would be less offensive and far more effective than what the federal government is doing and contemplating.

This is a way out, if anyone in Washington is truly interested in one.

Robert Robb, an Arizona Republic columnist, writes about public policy and politics in Arizona. E-mail: robert.robb@arizonarepublic.com

Former Texas Sen. Phil Gramm infamously called Americans a “nation of whiners” during last year’s presidential campaign when he served as senior economic adviser to Sen. John McCain.

It would seem that state Sen. Russell Pearce, R-Mesa, shares the same lofty opinion of Arizonans – at least those who don’t want legislators to eviscerate social services, public education and universities in the name of balancing the budget.

Earlier this week, the Arizona Republic quoted Pearce, chairman of the Senate Appropriations Committee, as saying he would try to accommodate the public’s desire to have its say, but we “don’t want to have 300 people sign up to whine.”

Pearce didn’t return a call from me this week. But he repeated the sentiment to an interviewer from arizonaguardian.com, saying, “We are not going to have a forum just for Dr. Crow (ASU president Michael Crow) to send everybody on his staff down here to whine. I’m not going to do it. And I stand by it.”

Let me just say this: There’s straight talk and there’s stupid talk. Suggesting that the people who pay your salary are whiners is stupid.

The legislators have the difficult job of cutting $1.6 billion out of the fiscal 2009 budget for the year that ends June 30 and an estimated $3 billion out of the 2010 budget.

Not surprisingly, the members of the public want a say in how those cuts are made and what services are prioritized.

It’s not whining. It’s the democratic process.

“I think Russell Pearce has made it clear that he really doesn’t want to hear from the public,” said state Rep. Steve Farley, D-Tucson. “He’s got his own idea of what should be done and we should just shut up and let him do it.”

The public is showing, whether through calls and e-mails to legislators or by marching on the Capitol, that they want to be heard, Farley said.

“And I think we better listen to them,” he said.

On Wednesday, an estimated 2,000 students and other supporters of the state’s university system protested at the Arizona Capitol in Phoenix. The universities have come up with a plan to cut $100 million from the ’09 budget, but the Legislature wants to cut tens of millions more.

I guess all those folks were just a bunch of snot-nosed snivelers, not responsible citizens who care about the quality of education in Arizona.

To Pearce’s credit, he hasn’t suggested that Arizona’s economic crisis isn’t real. When Gramm called us “a nation of whiners” last year it was in the context of saying that the country was in “a mental recession,” not a real one.

I wish Gramm and Pearce would have attended Tuesday’s job fair at the Tucson Convention Center. They might have learned something about the character of the Americans and Arizonans that they are so quick to disparage.

I didn’t see any whiners there. I saw thousands of people willing to stand in the longest line of their lives in the hope of getting at least one lead on a job.

Brandy Ficzeri, 36, who was standing behind me in line, used to make $125,000 a year as a sous-chef in Cleveland.

Last year, she moved to Tucson, along with her life partner, to help out her mother-in-law, who had just lost her husband.

Ficzeri has been in the food industry for 24 years, including 10 as a certified chef. Unable to find employment for the last six months, Ficzeri said she’d take a job as a line cook for $12 an hour.

Far from being discouraged about either the lengthy line or her lengthy unemployment, she said the job fair was a great way to save people from driving all over town to file applications. And she was optimistic about her own prospects.

“There is a job out there. It’s got to find me or I’ve got to find it,” Ficzeri said.

Frankly, if I were Pearce I’d find another word to describe the resilient people of Arizona.

They deserve his respect and attention.

Anne T. Denogean can be reached at 573-4582 and adenogean@tucsoncitizen.com. Address letters to P.O. Box 26767, Tucson, AZ 85726-6767. Her columns run Tuesdays and Fridays.

On Jan. 20, Barack Obama takes over the helm of the US government, and in large measure, will set the course of the American economy.

Mr. President – May I call you that already? – as you are almost certainly aware, small businesses and the self-employed represent approximately 50 percent of America’s gross domestic product. To help rebuild the American economy, you must directly and significantly help America’s small businesses.

To that end, I suggest as one of your first acts, that you adopt a “WPA”-type program for small businesses – a program that will enable small companies to adopt new technologies, adapt new strategies, expand and add jobs. (The WPA, or Works Progress Administration, was a massive Depression-era program that funded infrastructure projects, such as bridges and roads, but also programs such as job training, bringing electricity to rural communities, hiring artists and writers and funding cultural activities.)

My concept of a rebuilding program for small companies – I call it the “Grow America” program – is designed to provide small companies and the self-employed with:

- Subsidized direct technical assistance.

- Grants and loans for adopting new – especially green – technologies.

-Tax incentives for adding employees.

- An online portal for small-business information and connecting to pre-vetted service providers.

- Information and training for those who are laid off and can’t find other jobs to successfully make the transition to self-employment.

Let’s say there’s a dry cleaner in Phoenix. Right now, I’m guessing they’re struggling to adapt to new environmental requirements. They may not have a Web site or have the ability to use even simple online marketing techniques. In this economy, they’re almost certainly in danger of closing.

Instead, a WPA-program would provide a “Growth Team” to assist that small dry cleaner, helping them access government loans or grants to adopt the new technologies necessary to become “green,” and also providing pre-vetted, government-subsidized small-business consultants to help them market their business, put up a website. This, of course, would also provide work for self-employed marketing consultants, graphic designers, technology providers.

In particular, the components of a Grow America Campaign would include:

Growth teams, on a local level, to assist individual small businesses and entrepreneurs in solving their specific problems. These teams would be composed of pre-qualified service providers from the private sector, with preference given to providers who are themselves small companies or self-employed, thus creating work for those companies as well. Assisting them would be appropriate specialists such as Small Business Development Center (SBDC) counselors or Entrepreneurship professors from local universities.

A growth portal – an online portal to be the central address for entrepreneurs and small businesses to find the resources, assistance, and services they need. The online Growth Portal will be composed of:

- Exchange – to link up individual businesses with the growth teams and other service providers they need.

- Learning modules – for individuals to learn some of the skills necessary for growing and repositioning their businesses or transitioning to self-employment.

- Resources.

- Community.

Growth task force – a national commission/task force comprised of experts on a range of skill sets, such as business strategy, technology, and finance and across verticals, including green business, manufacturing, retail, and agriculture – to assist and encourage small business growth and formation, oversee the growth portal and network of local growth teams, and work with and leverage resources from the private sector to support and encourage new business formation and small-business growth.

Federal funds – to subsidize direct services to individual small businesses from local growth teams, for grants and loans to transition to or adopt new technologies, and to expand assistance from Small Business Development Centers and other small business technical assistance providers.

“Hire Your First Employee” tax credit – a 25 percent tax credit (or more) for those self-employed or new businesses to encourage them to take the step to hire their very first employee. (There are more than 20 million nonemployer businesses in the U.S.)

President Obama, congratulations on your inauguration. I know you plan to get to work immediately. I hope that one of your first actions will be to adopt a WPA-type program to help small businesses be a vital part of America’s economic recovery.

Copyright, Rhonda Abrams, 2009 Rhonda Abrams is the president of The Planning Shop, publisher of books for entrepreneurs. Her newest is “Successful Marketing: Secrets & Strategies.” Register for her free business tips newsletter at www.PlanningShop.com.

Paul Volcker (left) will be a key economic adviser to President-elect Obama. In the 1980s, Volcker, then chairman of the Federal Reserve Board, led the U.S. into a period of prosperity: His raising of interest rates and reining in of inflation has been called "the single most beneficial act of economic policy in the past half century."

During this economic malaise, references to the Great Depression have become ubiquitous.

It is commonly stated that these are the worst economic times since the Great Depression. The 1930s are plumbed about what happened and how to prevent it.

This has always struck me as misplaced. The things that caused the Great Depression – a contracting money supply, tax increases and protectionist tariffs – aren’t present in the current downturn, at least not yet.

Unemployment hit 25 percent in the 1930s and never really got below 10 percent. Unemployment is rising today, but has a long way to go to reach the level or chronicity of the Great Depression.

Moreover, there was an intervening economic event that is usually overlooked. Economic journalist Robert Samuelson does a good job of chronicling it and giving it a name in his recent book, “The Great Inflation.”

Samuelson dates the Great Inflation as the period from the late 1960s to the early 1980s. During that period, inflation climbed from low single-digits to more than 13 percent.

In the 14 years from 1968 through 1982, the economy experienced four recessions. During that 168-month span, the economy was contracting for 49 months – or for more than four years.

In the 300 months of the next 25 years, the economy would be in recession for only 16 months.

Samuelson, in his other writings and public comments, seems to be willing to cut current policymakers some slack in their response to the current economic downturn, since it finds its roots partly in the financial system. The need for government to keep the financial system operating is one of the lessons of the Great Depression.

I, however, find the response to the current economic downturn to have worrisome parallels with the Great Inflation and fear that policymakers are ignoring some of the lessons learned in its taming.

Samuelson attributes the Great Inflation to the conceit by policymakers that they could manage the business cycle through fiscal and particularly monetary policy.

There was a belief that there is a tradeoff between unemployment and inflation. If unemployment was rising to troublesome levels, a little monetary expansion would cure it.

However, that tradeoff proved illusory. Inflation injects uncertainty and uncertainty dampens economic activity, including employment.

Moreover, the monetary tools available were too imprecise to fine-tune business cycles in that way. And once monetary policy was to be deployed for something other than price stability, the political pressure to keep the spigots open was difficult to resist.

The Great Inflation was brought to an end by shock therapy delivered by then Fed Chairman Paul Volcker, with indispensible political backing by Ronald Reagan.

Volcker hiked interest rates and put the brakes on monetary expansion. The country experienced a severe recession, with unemployment reaching nearly 11 percent. But, by 1984, Reagan could run for re-election on the theme that it was morning again in America.

Samuelson calls the Volcker-Reagan fortitude “the single most beneficial act of economic policy in the past half century.”

Today, the country is undergoing two major corrections, from an overinvestment in housing and from overborrowing in general.

The interventions that are occurring go well beyond stopping runs on the banks and keeping the financial system operating.

Current Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson are clearly also trying to manage the corrections – to keep lending rates below what they otherwise would be and stop housing prices from falling as low as they otherwise would.

This may seem to be a strange time to be worrying about inflation. But the Fed is pursuing an extraordinarily expansive monetary policy whose effects cannot be forever masked or contained.

The notion that the Fed can precisely time its unwinding to match economic recovery defies the historical record.

The lessons of the Great Inflation are that the government cannot manage the business cycle and sometimes big corrections need to run their course.

Those are lessons that, if applicable to today’s circumstances, are certainly being ignored.

Robert Robb, an Arizona Republic columnist, writes about public policy and politics in Arizona. E-mail: robert.robb@arizonarepublic.com

Building really cool cars that get 50 mpg would be a good start

Detroit must convince buyers that its wares, such as these trucks sitting in Michigan, are worthy of purchase.

DETROIT – The $17.4 billion lifeline the federal government threw Friday is the best chance General Motors Corp., Chrysler LLC and Ford Motor Co. will have to regain the American people’s trust and reshape their business models for long-term profit and success.

First and foremost, they must get the vehicles right. Every new model they introduce must be a fuel-efficiency leader of its class.

Second, they must build great small cars. Cars that don’t just match, but exceed, the quality, fuel economy and flair of models such as the Honda Civic, Nissan Versa and Mini Cooper. Then they must demonstrate that 40-mile-per-gallon midsize sedans and 50 mpg subcompacts are just around the corner, and that when they come into view, they’ll be gorgeous.

To win back American buyers’ respect, the automakers must show the aid package was a sound investment, not a handout.

Symbolically, GM should immediately resume work on the Flint-area plant that will build fuel-efficient little engines for the 40 mpg-plus Chevrolet Cruze compact and the Chevrolet Volt electric car. The delay in construction announced this week didn’t threaten plans to have the Volt on the road by Thanksgiving 2010, but laying mortar to build hyperefficient cars sends an important message: We get it; we’re on it.

America is watching. It needs to be convinced the aid is more than a jobs package, but a helping hand to companies that deserve respect and will repay the loans, not just with money, but by building vehicles people will be proud and excited to own.

The first cars necessary to do this are already in the pipeline. They include the Volt, Cruze, Ford Fiesta and Fusion hybrid.

The aid President Bush approved Friday applies to GM and Chrysler, but Ford must play by the same rules. The public commitment to a new kind of American car from a new kind of American automaker must be shared, because Ford faces the same business challenges and public skepticism as its rivals.

Chrysler faces the toughest task. It doesn’t have the technology and resources to produce small, technically advanced vehicles like those coming from GM and Ford. Chrysler will offer the quirky and efficient little Dodge Hornet, but that car was engineered and produced by Nissan in Japan.

All three automakers have structures inherited from the time when they accounted for 70 percent or more of U.S. vehicle sales. Those days are gone forever, not because Detroit’s automakers are incompetent basket cases, but because the nature of a free market is that every new competitor takes some business from the leaders.

In addition to programs for new vehicles and advanced alternative fuels, the recovery plans the automakers present in three months must include a manufacturing footprint that acknowledges that reality and is sized to be very profitable at lower sales volumes. GM will still be No. 1, Ford second or third, but they cannot continue to foot the bill for factories they no longer need.

The crisis just became an opportunity. Detroit’s automakers must seize it to show Congress and the public that American companies can still build a great car.

Mark Phelan covers the auto industry for the Detroit Free Press. E-mail: phelan@freepress.com

———

BAILOUT AT A GLANCE

Some details of the Bush administration’s $17.4 billion rescue plan for the U.S. auto industry:

• Automakers will get $13.4 billion in short-term financing from the Troubled Asset Relief Program, with an additional $4 billion to be made available in February, contingent on drawing down the second portion of the TARP funds.

•The United Auto Workers union will be asked to rework contracts to make wages and work rules comparable with those at nonunion plants in the U.S. owned by foreign automakers by Dec. 31, 2009.

• Auto companies must use the money to become financially viable.

•If a company has not become financially viable by March 31, 2009, its loan will be called and all funds returned to the Treasury Department.

• Auto companies must accept limits on executive compensation and eliminate perks such as corporate jets.

• Debts owed to the government would outrank other debts.

• Auto companies must allow the government to examine their books and records.

• The government has the power to block transactions of $100 million or more.

• Auto companies must comply with applicable federal fuel efficiency and emissions requirements.

• The UAW will be asked to accept stock rather than cash for the billions of dollars of pension and retiree health care liabilities being shifted from the companies to the union.

President-elect Obama's plan is based on the assumption that federal spending can compensate for the lack of private sector consumption and investment.

President-elect Barack Obama is promising a stimulus program large enough to “jolt” the economy back on track.

Metaphorically, Obama apparently views the economy as in some sort of cardiac arrest, requiring the federal government to act as a defibrillator.

Obama hasn’t specified the size of the federal shock, but leaks and estimates have it in the range of $500 billion to $1 trillion. The theory is federal spending can compensate for the lack of private sector consumption and investment.

The notion that the federal government can manage business cycles should have died with the stagflation of the 1970s. But it has returned, with a vengeance.

Here’s why such a jolt stimulus is more of a contribution to a return to stagflation than a robust economy.

In the first place, the federal government has no money.

The Keynesian theory from which the stimulus derives its intellectual nourishment assumes that the federal government acts in a countercyclical fashion. During good times, it runs a budget surplus to keep the economy from overheating. During bad times, it deficit spends to keep up aggregate demand.

In the modern era, the federal government deficit spends in good and bad times. So, to fund an economic stimulus, it has to borrow the money.

To the extent it borrows money that otherwise would have been invested or spent in the United States, there is no net economic gain. To the extent it borrows money that otherwise would have been spent or invested elsewhere, there might be some net domestic gain.

But even that is not a clean economic advantage. The United States has relied upon imports to hold down inflation and American manufacturers rely heavily on exports. So, the federal government absorbing funds that would otherwise be invested or spent elsewhere does hurt some American consumers and workers.

Economists can debate Keynesian economics long after everyone else has become bored and left the party. I’m a doubter, but put that aside for now.

Even if Keynesian economics has some validity, the federal government has been in a semi-permanent stimulus posture ever since the end of World War II.

Since 2001, the federal government has spent $2.1 trillion more than it collected in taxes. If that didn’t prevent the recession, why the assumption that another half a trillion to a trillion will shock us out of one?

Obama says he will initiate an infrastructure spending program that rivals the federal highway program President Eisenhower launched. Well, in inflation-adjusted dollars, the federal government already is spending more than twice as much on transportation infrastructure as it did during the height of the highway program.

The states and cities say they have hundreds of billions of dollars worth of projects ready to go, if the federal government would just cut the check. Obama clearly is predisposed to do exactly that.

This, however, assumes there is no constraint on the supply side among businesses and workers who do that kind of work. That’s just not the case.

The construction industry has taken quite a tumble, but primarily in residential housing. According to the Census Bureau, spending on nonresidential construction is actually up – 8 percent for private construction and 7 percent for public works over the previous year.

There has been a decline in heavy and commercial construction employment, but not nearly as severe as in housing. Nor are residential construction workers easily transferable to heavy or commercial construction. It’s a different set of skills.

The economy is working through two large corrections, from an overinvestment in housing and overborrowing in general. A large infrastructure stimulus won’t change the need to work through those corrections. Instead, it will increase federal borrowing thus creating a drag on private sector recovery, while inflating private sector construction costs.

This doesn’t mean that the federal government needs to be idle during an economic downturn. The lower middle-class is particularly hurt in a down economy.

The federal government can help them cope by such things as extending unemployment benefits, guaranteeing the refinancing of underwater mortgages, and income transfers such as the rebate.

However, these should be viewed and debated as social welfare measures, not economic stimuli.

The federal government can’t manage business cycles. But it can help people cope.

Robert Robb, an Arizona Republic columnist, writes about public policy and politics in Arizona. E-mail: robert.robb@arizonarepublic.com

Timothy Geithner

Virtually unknown outside financial circles, Timothy Geithner suddenly is the man at every crisis point in the economy.

As Barack Obama’s pick to be treasury secretary, Geithner is serving as a chief economic adviser to the president-elect and will shape the new administration’s strategy to cure the country’s deep economic woes.

But he already is helping lead the battle at the Federal Reserve – and with the Bush administration – to rescue the nation from the worst financial conflagration since the 1930s.

Geithner is a man wearing different hats.

He straddles the administrations of two presidents, and intervenes in the economy on behalf of both. Through Geithner, Obama has a historically unique opportunity to make an imprint even before he is president.

Still, Geithner must tread gingerly.

“He needs to be careful and gauge his response,” said Anthony Sabino, a professor of law and business at St. John’s University. “He needs to be hands-on between now and the end of the Bush administration. But he can’t squeeze. He needs to be involved, but he can’t push too hard.”

With the country believed to be sinking ever deeper into recession, Obama isn’t wasting any time during the transition.

He’s assembled his economic team – led by Geithner – and already is working on crafting economic initiatives that some Democrats estimate at $500 billion to $700 billion to send to Congress in January.

As president of the Federal Reserve Bank of New York, Geithner has taken an activist, interventionist approach to battling the financial crisis.

He supported the Fed’s decision to financially back JPMorgan Chase’s takeover of teetering Bear Stearns. He helped engineer a potential rescue of Lehman Brothers, although the efforts didn’t gel and the company was forced into bankruptcy.

He also was involved in the government’s bailout of insurer American International Group and this week’s rescue of Citigroup.

And he has figured prominently in the creation of a raft of innovative new programs to get banks to lend more freely, a crucial effort to break the nation’s debilitating credit clog.

One day after Geithner was tapped to be Obama’s treasury secretary, the Fed announced two new programs to provide $800 billion toward unlocking lending.

Some people caution against interpreting Geithner’s selection as meaning that Obama endorses those steps.

Yet in choosing him, Obama “was making a judgment that it is better to have continuity than it is to get a fresh start,” said Anil Kashyap, professor of economics and finance at the University of Chicago’s Graduate School of Business. “But continuity comes with some baggage.”

Treasury Secretary Henry Paulson spoke of his close relationship with Geithner in devising the new $800 billion programs, the Citigroup rescue and other efforts.

“We’ve worked as a team. He was working right with us all weekend.” Paulson said.

Paulson said it is especially crucial to have a seamless transition between the old and new administrations given the country’s fragile economic and financial state.

“We will discuss with them very, very carefully any programs we are developing and any programs that we implement,” Paulson said. “It’s very important that the next team understand anything we have in place and be able to carry them out effectively. Tim is very well positioned for that, because he understands everything we have in place and helped to put it in place.”

One of the most pressing decisions Geithner will face early is deciding how to spend the next $350 billion installment of the $700 billion financial bailout package overseen by Treasury.

Will he carry on Paulson’s main focus of using cash injections into companies to relieve credit problems or will he revive efforts to buy rotten mortgages and other toxic assets from financial institutions?

Geithner has little time to ponder these weighty matters.

“Being president of the New York Fed right now is a 168-hour-a-week job,” said Kenneth Rogoff, an economics professor at Harvard University. “He’s still president of the New York Fed and there’s so much to do there, I don’t think one can imagine he’s shifted over to planning the transition. He can’t. He has to stay in his current role.”

Some financial experts believe Geithner soon will leave the Fed to give himself time to prepare and focus on his next job. Obama’s transition folks say Geithner will recuse himself from Fed decisions on interest rates. Its next meeting is Dec. 16.

Many predict Geithner – widely expected to be confirmed by the Democratic Senate as treasury secretary – may push harder for new government interventions to ease financial stresses once he is in office. That’s consistent with his activist approach.

“The whole transition issue is fascinating,” said Brian Sack, a former Federal Reserve economist now at Macroeconomic Advisers. “He is in the middle of that. It’s a wonder how he managed to perform the job even wearing one hat.”

Geithner’s first act is walking tightrope

Jeannine Aversa has covered economics for The Associated Press since 1999. Ellen Simon, based in New York, has covered business and economics for four years for AP.

By Jeannine Aversa, Ellen Simon

As we slide into the holiday season, several industries have their hands out like a bunch of Salvation Army bell-ringers.

Like many, I’m disinclined to toss coins into the auto industry pot. Why throw good money after bad decisions?

Here’s why we should: An additional loan right now could save the industry and its millions of jobs until 2010, and that timing is key. If we think only in the short-term, helping Detroit seems a waste of money. Yet think of 2010, and you’ll see something else – opportunity.

According to Chris Isidore at CNNMoney.com, “Billions of dollars in annual savings won in the 2007 labor agreement with the United Auto Workers union kick-in that year, including shifting the responsibility for retirees’ health care costs to union-controlled trust funds.”

Moreover, 2010 is the year most experts predict that the plug-in hybrid technology will be ready for market. Do we really want to let General Motors, Chrysler and Ford collapse right when they can be part of this vanguard?

In addition, Gen. Wesley Clark, former supreme allied commander of NATO, points out that, like the improvements in armored fighting vehicles in Iraq, future automotive innovations will have crucial military applications.

It’s essential to our national security, he explains, that a “vibrant car industry” remains in the United States.

Don’t get me wrong. Right now, Detroit is like an annoying relative I’m seldom pleased to hear from, in dire need of rehab. Yet I’m not ready to kick the Big Three out of the family just yet with so many factors to consider.

Sure, part of me would rather see them go bankrupt than hit up Uncle Sam for a loan, but the likelihood of the Big Three rising from those ashes is slim. Meanwhile, the government – that would be you and me – will wind up with retirees’ pension and health care obligations anyway.

There’s clearly no perfect solution here, but perilous times call for taking the long view and finding opportunities in chaos.

Through a contingency-laden loan, we buy Detroit two more years, one last opportunity to join the technological and environmental leaders in this industry.

If Motown manages to succeed after an extreme makeover, we all benefit. And if not? Then let it be just another Circuit City.

About five seconds after the $700 billion financial bailout passed, politicians asked about saving automakers, too.

And then there were the “underwater” mortgage-holders. And really, would it be fair to let Circuit City die?

The “Where does it stop?” roulette is complicated when it comes to our important domestic auto industry – but not that complicated.

For years, the Big Three automakers have known this day would come. For years, they rushed shoddy-quality cars to dealerships, trading away brand value for immediate cash.

They eventually resolved quality problems but repeated the same pattern of grasping the quick cash fix with SUV gas guzzlers and putting off development of increasingly popular hybrids.

They also entered into insanely pricey labor contracts loaded with future costs (like pensions) that would have to be paid eventually.

Well, the day of reckoning is now here, and the U.S. taxpayer is in a pickle.

I realize that the ripple effect a Big Three failure would cause further pain for our economy – and would personally hurt many close friends in my husband’s hometown near Flint, Mich.

However, I’m appalled that the Democratic leadership and President-elect Barack Obama are even considering extending the financial-sector bailout to carmakers.

It would be one thing to try to help the industry retool, manage a painful process of drastic expense reduction and become competitive. That would be reasonable if still anti-free market.

But most current proposals would simply bail out automakers that are dying due to inability to meet demand, as well as excess capacity and unsustainable expenses.

In 2005, for example, GM produced three times as many cars as Toyota in North America – but had five times the number of production workers. GM had 77 plants (all unionized) to Toyota’s 12 (only three of which were unionized).

As Russ Roberts, professor of economics at George Mason University, put it in an interview:

“Historically, many companies are driven by bad decisions. If GM dies, it will be painful, but it may die anyway. And with a bailout, it will die with my money.

“Let the resources and energy and creativity flow into companies that can actually do something with them.”

Ford assemblymen mesh the engine to the drive shaft on the 2009 Ford F-150 truck at the Dearborn Truck Assembly in Dearborn, Mich., last month

No: Lifeline to Big Three would be appalling

Yes: It’s too early to write off Detroit

Shaunti Feldhahn (scfeldhahn@yahoo.com), a married mother of two, is a conservative Christian author and speaker. Andrea Sarvady (ASarvad@gmail.com), a married mother of three, is a writer and educator specializing in counseling.

Treasury Secretary Henry Paulson explains to Congress what he's doing to, and for, the economy.

The transmogrification of federal bailout efforts illustrates why the government should not be in this game.

Simply put, government has neither the wisdom nor the self-restraint to manage a bailout or ameliorate necessary market corrections, regardless of how large or painful they may become.

Free markets depend on failure. This is a hard concept for many people to understand or accept. But failure is how markets impose discipline and reallocate resources from less efficient producers to more efficient ones.

Bailouts are an attempt by government to interrupt and prevent market failures.

Initially, the bailout was justified on the basis that government needed to act to prevent systemic risk. This is the fear that the failure of company A will lead to the failure of companies B, C and D, and then we’ll all be standing in bread lines.

So, to prevent feared systemic failure, the federal government forced the fire sale of Bear Stearns and took over the country’s two largest mortgage firms and the country’s largest insurance company.

Rather than deal with the fear of systemic risk one company at a time, the Bush administration proposed that the federal government get into the business of buying distressed assets from financial institutions, particularly mortgaged-backed securities, thought to be the heart of the problem.

Congress allocated $700 billion for the program. Although the language of the bill was written irresponsibly loosely, it was clear to all that the purpose was to buy distressed assets directly. It was even called, legally in the legislation, the Troubled Assets Relief Program.

Now, Treasury Secretary Henry Paulson has announced that none of the money will be used for the purpose for which it was allocated. Not a penny.

Instead, Paulson has been using the money to buy preferred shares of stock in financial institutions. He began by investing in nine large banks he described to the American people as healthy. In other words, they didn’t need the money.

This was supposedly to reduce the stigma attached to participating in the program, so that the financial institutions that did need help wouldn’t be reluctant to ask for it. Instead, a reverse stigma was created. Healthy smaller banks felt obligated to try to get federal funds as well, fearing being perceived as too weak to qualify.

So, presumably to try to restore “confidence” in the system as a whole, the government has purposely obscured from depositors and investors which banks are healthy and which need help. Remember that the next time you hear some government official pontificating about the need for more transparency in private markets.

It’s clear that the Bush administration is no longer trying to do the minimum necessary to avoid systemic risk, the collapse of the entire financial system. In fact, Paulson has declared that that danger has passed.

Instead, the Bush administration is trying to use the pile of money to make more credit available on easier terms in an effort to goose the economy.

So, Treasury wants to expand the program to include companies dealing with auto, student and consumer credit, none of which can be remotely described as representing a systemic risk to the financial system as a whole.

Democrats in Congress want to include the auto companies themselves, which is most accurately seen as a jobs program. Auto parts manufacturers want in on the action, too.

So, rather than a targeted program to avoid systemic risk, there’s a $700 billion grab bag for whatever interests can politically muscle their way to the front of the line.

This isn’t to say that government has to remain idle during economic downturns. The government is good at writing checks. It can increase income support to those most vulnerable during a slow economy.

However, the government is incapable of managing or ameliorating fundamental market corrections. If the country has overinvested in housing, housing prices have to come down. If the country has overborrowed, credit must become more scarce and costly.

If auto companies have developed unsustainable cost structures, they need to pare their expenses through bankruptcy reorganization.

The federal bailout bill allocated an initial $350 billion, with Treasury able to trigger the second $350 billion subject to a vote of disapproval by Congress.

The sensible thing to do at this point would be to shut the program down.

Paulson has indicated that he might not trigger the second $350 billion. But that would leave $350 billion on the table. And that’s a temptation I doubt the politicians can resist.

Robert Robb, an Arizona Republic columnist, writes about public policy and politics in Arizona. E-mail: robert.robb@arizonarepublic.com

The average outstanding balance of a mortgage is about $145,000.

Many of us are upset about the bailout fiasco that has ensued as a result of our economic crisis.

Instead of buying up all the bad mortgages responsible for much of the housing mess, the government is buying banks and other companies.

AIG came to the well while providing luxury getaways and huge executive bonuses, all with taxpayer-funded bailout money.

None of this sits well with the taxpayers. Yet our government is determined to keep spending in hopes something positive will result.

Simply for the sake of argument, consider a different use of this bailout money.

Most of the 50 million or so mortgages in the U.S. are solvent and being paid on time, but those that are behind or in default are undermining the financial industry.

So what if we gave the money directly to the mortgage holders? The average outstanding balance of a mortgage is about $145,000.

If the government paid half of that, to pay down principal and restructure the notes to favorable terms, the cost would be about $362.5 billion.

The financial institutions that hold the loans would be flush with cash, which would be required to go toward new, responsible loans to people who can repay them.

The banks also would have to pay a small percentage of their profits to the government – not only profits from the government money, but also from the new loans that resulted – in order to repay the taxpayers footing the bailout costs.

Most mortgages would then be caught up and affordable. The homes would have equity. Home values would rise, adding more equity. And people would have more money to spend.

Spending spurs economic growth. Retailers buy more product; manufacturers produce more goods; and more people are employed – giving rise to more income and more spending.

This also would create more home purchases. And as home inventories declined, building would resume, but hopefully at a more moderate pace.

Sales tax and real estate tax revenues would help the states, counties and cities.

If all this were coupled with reforms in government and a national energy plan, we could go a long way toward eradicating our economic quagmire.

If consumer overspending on mortgages started this problem, would it not make sense to start fixing the problem on this end? Does this make any less sense than what we are doing now?

Rick Murray is a writer, researcher and analyst in Huachuca City. E-mail: rammediasyndicate@gmail.com

Unlike Tucson, Berlin is improving areas at a frenetic pace

The 17,000-seat O2 World Arena opened in Berlin in September just beyond the longest remaining fragment of the Berlin Wall, decorated here by the depiction of a Los Angeles Lakers player.

I’m just back from Berlin, where Tempelhof Airport, famed for the 1948 Berlin Airlift, closed forever during my two-week stay, and a new, swank commercial and office complex called Upper East Side Berlin opened at a prime intersection: Unter den Linden and Friedrich Strasse.

Tucson has an empty lot where the Thrifty Block used to stand; a concrete plug where a second UniSource Tower was never built; and big holes in the ground on the West Side where no money is at hand yet to build a series of museums.

No other city on the planet has undergone nonstop phenomenal change for at least 75 years as has Berlin. If you haven’t been to Berlin in one month, chances are something big happened in the meantime.

A month before I arrived, the 17,000-seat O2 World Arena opened just beyond the longest remaining fragment of the Berlin Wall.

Even now, a decade after the prime building boom to merge West Berlin and East Berlin, cranes rise all over the place. Out the front door of my hotel, four cranes stood at a distance; out the window in the opposite direction was another crane; and down the street a loft project was under construction.

The Berliners are in the last stages of dismantling the gaudy glass 1976 Palace of the Republic and will rebuild the former royal palace at the same location for about $700 million (552 million Euros). I shot pictures of the eight remaining concrete elevator/stairway towers. That scar to the landscape should be gone by the end of the year.

Last time I was in Berlin in 2005, an empty lot sat just south of the Brandenburg Gate. Today, the new U.S. embassy sits there. Three years ago, there was no central train station in Berlin and today there is.

If I were to go to Berlin again in a few years, I know I’d be landing at a new international airport and the Neues Museum on Museum Island will be open and a new subway line will be in place.

If you haven’t been to Tucson in 20 years, you would hardly notice any change in the central core. In a few years, there may be museums and a mission on the West Side and a street may run through downtown, but funding still is not nailed down for any of that.

Berlin is a unique city: a former imperial seat; a former dictatorial center; a former fractured city; and today a cosmopolitan city of the first order.

Just 20 years ago, East Berlin and West Berlin were two very different cities on either side of a 11.5-foot wall. Today, you can never sense if you’re crossing from former East to former West because the Germans have diligently worked to upgrade the former East Berlin to match the West side.

Berlin’s 75-year quest is part circumstance (obliteration in World War II and subsequent East-West dissension) but equally Germanic pride to do more and, apparently, never settle for just what’s there now.

My Berlin sojourn was a reminder – one I get any time I travel just about anywhere – that other places have an attitude in place that there are always ways to make a city better, and there is not the inbred fear to spend money to achieve substantial results.

Teya Vitu covers downtown for the Tucson Citizen. He was in Berlin from Oct. 19 to Nov. 2. Tempelhof Airport closed on Oct. 30.

Tempelhof Airport was still bustling with flights when this photograph was taken Oct. 26, but the airport, famed for its role in the Berlin Airlift in the late 1940s during the Cold War, shut down forever on Oct. 30.

Berlin is dismantling the former Palace of the Republic. All that remained in October were the eight concrete elevator shafts. They should be gone by the end of the year.

East Germany built the glass-sheathed Palace of the Republic in Berlin in 1976, but after East and West Germany combined, it was decided to get rid of it and rebuild the historic royal palace at the site.

The conventional wisdom on the credit crisis for many observers has been that free markets created the crisis, and government is going to solve it.

In fact the very opposite is true, and the Bush administration’s decision to strong-arm the nation’s largest banks into allowing government to buy in and undoubtedly begin dictating decisions will make the situation much, much worse.

Twenty-four times in the Constitution and 23 times in the Bill of Rights the words “no” and “not” are used to restrain government power, as in “Congress shall make no law” and “the right of the people . . . shall not be infringed.”

Ignoring that injunction, Bush, Treasury Secretary Henry Paulson and other government leaders recently frog-marched executives of the nation’s largest financial institutions into a room without telling them why they had been hauled there.

They then made these executives sign away a portion of their businesses on the government’s “take it or take it” terms.

A government whose easy credit policies, loan market manipulation and counterproductive regulatory machinery got us into this crisis is now injecting itself into the nation’s financial system in ways that were almost unimaginable just a few weeks ago.

Paulson recently announced that the federal government is sinking $125 billion of taxpayers’ money into Citigroup, JPMorgan Chase, Bank of America, Merrill Lynch, Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York Mellon and State Street Bank.

In return, the government will get, among other things, a 20 percent ownership stake (on average), restrictions on executive pay and promises the banks will pay a 5 percent dividend on senior preferred shares, rising to 9 percent after five years.

“These are healthy institutions,” Paulson told reporters Tuesday, “and they have taken this step for the good of the U.S. economy.”

No, they took this step to avoid the wrath of government. These healthy financial institutions did not need or request government money or a partial government takeover.

Paulson, with the president’s full support, has put citizens who did not make bad investments or borrow more money than they could afford on the hook for these hundreds of billions of dollars.

Citizens also are on the hook for the additional hundreds of billions the government earlier pledged to insurance company AIG, the government-sponsored mortgage giants Fannie Mae and Freddie Mac, investment bank Bear Stearns and other companies.

Taxpayers may also be hit up for hundreds of billions more to buy short-term corporate debt and they will be hit hard by much higher price inflation if the government continues to loosen the money supply.

None of this is necessary, and all of it is wrong.

A fundamental condition for economic growth is risk and reward. People take risks. They earn rewards if those risks pan out, and they take their lumps if they don’t.

That ensures people on the whole will make the best decisions possible and this perpetual weighing of risks and rewards usually keeps things from going too far in any direction.

When things do go too far – as when the government floods the economy with easy credit and uses the tax code and lending regulations to encourage loans to people who should not have them – there is usually a “correction,” and should be.

We’re seeing one now in the housing and credit markets as house prices fall and credit tightens.

The government is recklessly doing all it can to stop this necessary correction, sending government deficits and the national debt skyrocketing and manipulating markets in ways almost sure to have awful unintended consequences.

There could be a terrible price to pay for these government actions. Unfortunately, those who stand to pay the dearest are ordinary citizens, not the politically connected millionaires and billionaires and their agents who made the decisions that caused the supposed crisis and who should be the ones to pay for it.

E-mail: sstanek@heartland.org

Steve Stanek is a research fellow in budget and tax policy at The Heartland Institute in Chicago (www.heartland.org).

By Guest Opinion, Steve Stanek