Federal Reserve Chairman Ben Bernanke, speaks to a meeting of the Atlanta Federal Reserve Bank Monday. Referring to the federal stimulus, Bernanke said, "You have to take away the punchbowl, as someone once said, in order to avoid the inflation risk."

The federal government has committed trillions of dollars to domestic bailouts and propping up the recessionary economy, much of it borrowed, much created out of thin air by the Federal Reserve.

How much longer can all this go on? That’s the pressing question facing policymakers, and one without a clear answer.

At some point, “You have to take away the punchbowl, as someone once said, in order to avoid the inflation risk,” said Federal Reserve Chairman Ben Bernanke, paraphrasing William McChesney Martin Jr., who served as Fed chairman in the 1950s and ’60s under five presidents.

But change course too soon, and it could nip a fragile recovery in the bud. Wait too long, and runaway inflation and gargantuan federal debt could be the sequel to the worst downturn since the 1930s.

While nobody thinks the current combination of near-zero interest rates, bank and auto bailouts and trillion-dollar annual deficits is a sustainable economic model, knowing just when to take away the punchbowl is the problem.

For now, the Bernanke Fed is still filling the punchbowl. And President Obama and the Democratic-controlled Congress are doing the same with government spending.

One reason the Fed has been so aggressive in slashing rates and taking unconventional recession-fighting steps is because “we are trying to avoid another form of price instability, which is deflation,” Bernanke told a Fed financial conference in Jekyll Island, Ga., earlier this week.

The risk of deflation – a widespread and prolonged decline in retail prices, wages and real estate and other asset values – is “receding, but it certainly needs not to be ignored,” Bernanke said.

Despite some recent glimmers of hope, evidence is mixed on whether things are getting better or still worse. Disappointing reports Wednesday on falling retail sales and a jump in foreclosures fueled continuing uncertainties and helped push stocks down.

“You’ve got to take the stimulus off at some point. I don’t think that point is this year,” said David Wyss, chief economist at Standard & Poor’s in New York. He said Wednesday’s economic reports point to a continuing recession, despite some recent signs of encouragement.

Government and most private economists expect the recession, which began in December 2007, to end later this year, although they expect high levels of joblessness to continue beyond.

In the meantime, recent developments are complicating efforts to tame the deficit once the recession does end:

• White House budget officials said this week that the deficit would widen to a record $1.8 trillion this year, $89 billion more than their estimate in February. They blamed the recession.

• With nearly 80 million baby boomers nearing retirement, the government reported that Medicare and Social Security will face insolvency sooner than previously projected because of the recession – for Medicare in 2017 and for Social Security in 2037.

• A potential $90 billion shortfall opened up in paying for Obama’s health care proposal. The gap comes from congressional reluctance to go along with his proposal to help pay for the plan by limiting high-income families’ charitable-giving and other tax deductions. House Speaker Nancy Pelosi said the health care bill will be on the House floor before the August recess.

• The administration asked Congress on Tuesday to add $100 billion in new U.S. contributions to the International Monetary Fund as part of a war-spending bill.

Obama proposed just $17 billion in new spending cuts last week, representing savings of less than one-half of 1 percent in his $3.4 trillion budget. Republicans scoffed and even some top Democrats criticized him for targeting popular programs in recessionary times.

By some accounts, the sum of all the U.S. grants, loans, guarantees and new money created electronically by the Fed since the financial crisis began totals some $11 trillion – roughly equal to the country’s national debt.

That sum does include loan guarantees that might not be needed, money that hasn’t been spent, various revolving accounts and U.S. investments in bad mortgages and other toxic, hard-to-value securities that could someday return money to taxpayers. Still, staggering amounts are involved.

“We are creating a government debt bubble that we’re going to have to deal with in a massive way,” suggested Rep. Kevin Brady of Texas, the senior Republican on the Congressional Joint Economic Committee.

History shows the dangers of calling the end of economic downturns too soon.

President Franklin D. Roosevelt made this mistake in 1936 when, believing the Depression largely over, he sought to pare back public spending and to balance the federal budget. It torpedoed a fragile recovery and pushed the economy back under water in 1937.

Japanese leaders made a similar mistake in the 1990s when they prematurely – and temporarily – withdrew government stimulus spending, helping to prolong Japan’s recession to one that lasted a full decade.

At the White House, presidential spokesman Robert Gibbs dismissed suggestions by some analysts, including Liz Ann Sonders, chief investment strategist for brokerage Charles Schwab, that the recession may have already ended.

“I can report nobody has intoned that message” at daily White House economic briefings, Gibbs said. “There’s much work to be done.”

Veteran budget analyst Stanley Collender said increases in public spending are an important fiscal tool and that “a bigger deficit is justified in the current economic environment.”

Furthermore, Collender added, if Obama doesn’t push his agenda for more health care, energy and education spending now, when will he?

“He’s got a 60-percent-plus approval rating. And Democrats are willing to work with him. He should go for it now. He’s never going to get a better chance,” Collender said.

Tom Raum covers politics and the economy for The Associated Press.

President Barack Obama meets with members of his Cabinet at the White House in Washington, D.C., Health and Human Services Secretary Kathleen Sebelius (left) and behind, partially visible is Secretary of State Hillary Clinton (behind, partially visible).

There’s a fine line at the White House between hand-washing and hand-wringing.

When it comes to swine flu, President Barack Obama is trying to strike the right balance between protecting public and economic health. That’s resulted in some doublespeak and spin, evidence of the inextricable ties between a looming epidemic and a listing economy.

Obama has been out front in urging people to wash their hands, cover their mouths while coughing and stay home if sick. Still, there’s been a lot of anxious backing and filling going on behind him.

Overreact to the swine flu scare, and risk being accused of misspending public money and frightening consumers and travelers during the worst recession most Americans have endured.

Underreact, and take the chance of looking indecisive and out of touch if the outbreak turns into a deadly pandemic – now or in a possible rebound in the fall.

Former President George W. Bush learned that lesson the hard way with Hurricane Katrina.

Even what it’s called has political and economic overtones.

Say it’s swine flu and alienate hog farmers and pork processors. They note, correctly, that it can’t be acquired by eating pork products. The term also inflames Muslim and Jewish sensitivities over pork.

Call it the “Mexican flu,” as Canadian Prime Minister Stephen Harper has done, and Mexicans are offended.

The fact that Mexico is the epicenter has fired up outspoken conservatives who favor tighter border controls and cracking down on illegal immigration.

For now, Obama is navigating a careful middle course, dispensing common-sense advice, promising vigilance and reassuring people that he’s on the job.

Obama used his weekly radio address Saturday to assure listeners that “we are taking all necessary precautions in the event that the virus does turn into something worse.”

He’s sent an army of health professionals to brief the public and Congress to try to provide clear answers about what the administration is now inoffensively calling the “H1N1 virus.” Administration health and homeland security officials were booked on all the major broadcast and cable news shows Sunday.

“We have to make sure that we recognize that how we respond – intelligently, systematically, based on science and what public health officials have to say – will determine in large part what happens,” Obama told a news conference Wednesday, on his 100th day in office.

But on the 101st day, Vice President Joe Biden did the exact opposite.

He raised the anxiety level by suggesting people avoid airplanes, subways and other tight quarters. Period.

Going much further than what Obama or his top health advisers have advocated, Biden blurted out a remark that required quick damage control – at a time when the administration is trying to get Americans to buy houses, go shopping and take vacations to awaken a comatose economy.

Biden spokeswoman Elizabeth Alexander said he was merely giving “the same advice the administration is giving all Americans: that they should avoid unnecessary air travel to and from Mexico.”

But Biden wasn’t just talking about Mexico.

White House press secretary Robert Gibbs suggested with a faint smile that it didn’t matter what Biden said – but what “he meant to say.”

Frightening people unnecessarily could take a heavy toll on the travel and tourism industries. The quick negative reaction from business to Biden’s words underscored the delicate balance.

Here’s Obama’s dilemma: If the death rate from swine flu begins to climb frighteningly and there is a global pandemic, then Biden’s suggestion will sound less like a gaffe – and more like sound advice.

The 2003 epidemic of severe acute respiratory disease and the 2005 outbreak of avian flu stand as a warning to the world that humans could again be infected from a runaway virus of animal origins. And so much about this flu is unknown.

“It’s a rapidly evolving situation filled with uncertainty,” said Dr. Richard Besser, acting director of the Centers for Disease Control and Prevention in Atlanta.

He said it’s still not clear why many more people have died in Mexico than in the United States.

The decision to give the flu the neutral name of H1N1 may have been scientifically and politically correct. But it won’t calm a worried public, suggested Wayne Fields, director of American culture studies at Washington University in St. Louis and an expert on presidential rhetoric.

“I don’t think anybody’s more assured by a name that’s made up of letters and numbers than one that’s got a hog in its title,” Fields said.

Still, he gives Obama high marks for coolheaded oratory. “If you do something and nothing happens, you’re in hot water. And if you do nothing and something happens, you’re in hot water. So the need for moderation at this point is pretty important,” Fields said.

For Obama, it was just one more ball to juggle along with wars in Iraq and Afghanistan, nuclear tensions with North Korea and Iran, auto bankruptcies and rising joblessness.

“For a president, life isn’t a cabaret. It’s a high-wire act. And the ones who get it right get re-elected,” said Stephen Hess, a political veteran who worked in the Eisenhower and Nixon administrations and is now a presidential scholar at the Brookings Institution.

Tom Raum covers politics and economics for The Associated Press.

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On the Net

CDC swine flu site: http://www.cdc.gov/h1n1flu

Obama

ANKARA, Turkey – Barack Obama, making his first visit to a Muslim nation as president, declared Monday the United States “is not and will never be at war with Islam.”

Urging a greater partnership with the Islamic world in an address to the Turkish parliament, Obama called the country an important U.S. ally in many areas, including the fight against terrorism. He devoted much of his speech to urging a greater bond between Americans and Muslims, portraying terrorist groups such as al Qaida as extremists who do not represent the vast majority of Muslims.

“Let me say this as clearly as I can,” Obama said. “The United States is not and never will be at war with Islam. In fact, our partnership with the Muslim world is critical … in rolling back a fringe ideology that people of all faiths reject.”

The U.S. president is trying to mend fences with a Muslim world that felt it had been blamed by America for the Sept. 11, 2001, terrorist attacks.

At a news conference earlier with Prime Minister Abdullah Gul, Obama dealt gingerly with the issue of alleged genocide committed by Turks against Armenians during World War I. He urged Turks and Armenians to continue a process “that works through the past in a way that is honest, open and constructive.”

Al Jazeera and Al Arabiyia, two of the biggest Arabic satellite channels, carried Obama’s speech live.

“America’s relationship with the Muslim world cannot and will not be based on opposition to al Qaida,” the president said. “We seek broad engagement based upon mutual interests and mutual respect.”

“We will convey our deep appreciation for the Islamic faith, which has done so much over so many centuries to shape the world for the better, including my own country,” Obama said.

The president spoke for about 25 minutes from a small white-marble-and-teak rostrum in the well of a vast, airy chamber packed with Turkish lawmakers in orange leather chairs.

Except for a few instances of polite applause, the room was quiet during his speech. There was a more hearty ovation toward the end when Obama said the U.S. supports the Turkish government’s battle against PKK, which both nations consider a terrorist group, and again when he said America was not at war with Islam. Lawmakers also applauded when Obama said the United States supports Turkey’s bid to join the European Union.

Earlier, Obama said he stood by his 2008 assertion that Ottoman Turks had carried out widespread killings of Armenians early in the 20th century, but he stopped short of repeating the word “genocide.”

Gul said many Turkish Muslims were killed during the same period. Historians, not politicians, Gul said, should decide how to label the events of those times.

In his 2008 campaign, Obama said “the Armenian genocide is not an allegation,” but rather “a widely documented fact supported by an overwhelming body of historical evidence.”

Now that he is president, the genocide question may not be Obama’s best issue for taking a tough stand that antagonizes a key ally. It is important in U.S. communities with large numbers of Armenian-Americans, but it has a low profile elsewhere.

In his speech to the parliament Monday, Obama said the United States strongly supports the full normalization of relations between Turkey and Armenia. He also noted that the United States “still struggles with the legacy of our past treatment of Native Americans.”

And the president also urged Turkey to help Israel and Palestine live “side by side in peace and security.”

Obama’s visit is being closely watched by an Islamic world that harbored deep distrust of his predecessor, George W. Bush.

In talks with Gul, and Turkey’s prime minister, Recep Tayyip Erdogan, Obama hoped to sell his strategy for melding U.S. troop increases with civilian efforts to better the lives of people in Afghanistan and Pakistan.

Obama recognized past tensions in the U.S.-Turkey relationship, but said things were on the right track now because both countries share common interests and are diverse nations. “We don’t consider ourselves Christian, Jewish, Muslim. We consider ourselves a nation bound by a set of ideals and values,” Obama said of the United States. “Turkey has similar principles.”

Obama’s trip to Turkey, his final scheduled country visit, ties together themes of earlier stops. He attended the Group of 20 economic summit in London, celebrated NATO’s 60th anniversary in Strasbourg, France, and on Saturday visited the Czech Republic, which included a summit of European Union leaders in Prague.

Turkey has the largest army in NATO after the United States. It and tiny Albania, recently admitted, are the only predominantly Muslim members of NATO.

Turkey opposed the war in Iraq in 2003 and U.S. forces were not allowed to go through Turkey to attack Iraq. Now, however, since Obama is withdrawing troops, Turkey has become more cooperative. It will be a key country after the U.S. withdrawal in maintaining stability, although it has long had problems with Kurdish militants in north Iraq.

Turkey maintains a small military force in Afghanistan, part of the NATO contingent working with U.S. troops to beat back the resurgent Taliban and deny al-Qaida a safe haven along the largely lawless territory that straddles Afghanistan’s border with Pakistan. Turkey’s participation in fighting Islamic extremism carries enormous symbolic importance to the Muslim world, and Turkey has diplomatic leverage with Pakistan and Afghanistan.

G20 summit leaders attend a dinner at 10 Downing Street in London on Wednesday. President Obama and British Prime Minister Gordon Brown exuded optimism about a global deal to help pull the world out of recession, attempting to downplay a rift with French President Nicolas Sarkozy ahead of the imminent Group of 20 leaders summit.

LONDON – Global leaders are keeping a nervous eye on world markets as they try to fix their ailing economies. From New York to Tokyo, investors stand ready to instantly grade the summit of the world’s 20 biggest economic powers.

As leaders gathered, the U.S. recession that triggered the global crisis entered its 17th month on Wednesday, making it the longest downturn since the decadelong Great Depression. It has now surpassed two previous postwar U.S. recessions that each lasted 16 months, in 1973-75 and 1981-82.

After the Dow Jones industrials’ worst first quarter in 70 years, Wall Street began the second three months of the year on Wednesday with a small increase at midmorning.

Usually, leaders at international forums care little about what markets are doing and markets pay little attention to such forums. Their predictable and vaguely written communiques rarely move the numbers.

And after all, who can predict market movements? Gauging how markets might react can be a futile exercise.

But in this case, plunging stock markets around the world are not only a symptom of the larger problem, they are part of the problem.

Trillions of dollars of wealth have disappeared from pensions, endowments, nest eggs and home values. The market slides have sapped consumer confidence and spending in developed countries and slammed developing ones that rely heavily on their exports.

In the United States, nearly half of households own securities, either directly or indirectly through 401(k) and other retirement plans. That’s more than ever before in a time of severe economic downturn. Stock ownership also is up in other industrialized nations.

Summit partners don’t want to unnecessarily spook the markets. And that injects an additional degree of caution into their deliberations.

Failure to reach some acceptable level of accord at Thursday’s G-20 summit could “obviously have a very negative effect on markets,” sowing seeds of further protectionism that in turn would “further impact shares of major corporations,” said Joseph Lampel, a professor at Cass Business School at City University in London. “A vicious circle could accelerate.”

There’s no way to tell what markets might view as acceptable accomplishments. And since much of the present global decline is caused by lack of confidence, markets are looking for signs of returning confidence.

And this is one of the places they’re looking.

British Prime Minister Gordon Brown and President Obama both sought to show cautious confidence at their joint news conference on Wednesday.

Obama urged Americans, and consumers across the globe, to show confidence in the ability of the global economy to recover. “Don’t shortchange the future because of fear in the present, that I think is the most important message we can send – not just in the United States, but around the world,” Obama said.

Said Brown: “It will get worse if people do not act.”

But tensions simmered just beneath the surface.

Hours before the leaders were to sit down for dinner, French President Nicolas Sarkozy vowed to keep fighting for stronger international financial regulation, especially of tax havens, saying in an interview with Europe 1 radio that he would not associate himself with “false compromises.”

Few expect the gathering to endorse either the bold stimulus spending that the U.S. and Britain have advocated nor the tough new international financial regulation that France, Germany and some other European countries want.

Instead, the gathering was expected to endorse a mix of measured steps, including increased coordination in regulation, more money for the International Monetary Fund and a modest amount of stimulus spending, much of it already announced.

“My sense is that it will be a credible and legitimate package of steps both on the restoring-growth side and on the regulatory-reform side. And how the market reacts to that remains to be seen,” said Mike Froman, a White House international economics adviser.

Markets hate uncertainty.

When Treasury Secretary Timothy Geithner first outlined the Obama administration’s bank-rescue plan in early February, the Dow Jones industrials plunged 300 points, mainly over the plan’s lack of details. When he later filled in the blanks with a detailed plan, it soared nearly 500 points.

And Geithner briefly unsettled currency markets a week ago when he appeared willing to entertain a Chinese proposal that an international currency replace the U.S. dollar as the world’s main reserve currency – a notion he quickly dispelled.

Recent reports suggest the world economy is weakening, not strengthening.

“The world economy is in the midst of its deepest and most synchronized recession in our lifetimes,” wrote Klaus Schmidt-Hebbel, chief economist at the Organization for Economic Cooperation and Development, in a report this week predicting the world economy would shrink this year for the first time since World War II, by 2.75 percent. He also wrote that trade would further contract sharply.

Of course, if markets hate uncertainty, there can also be the certainty of low expectations.

What if the summit is viewed as a flop?

“I think flop is pretty well built into expectations,” said David Wyss, chief economist of Standard and Poor’s in New York.

Nearly everybody involved in the process expects more international coordination and regulation, “it’s just a matter of how much,” Wyss said.

As to possible market reaction, Wyss said that while the G-20 summit “won’t accomplish much, it’s a good first step. And it’s better than canceling the meeting.”

Tom Raum has covered Washington for The Associated Press since 1973, frequently reporting on the economy.

At economic summit, leaders cognizant of need not to spook world’s markets

LONDON – Global leaders are keeping a nervous eye on world markets as they try to fix their ailing economies. From New York to Tokyo, investors stand ready to instantly grade the summit of the world’s 20 biggest economic powers.

As leaders gathered, the U.S. recession that triggered the global crisis entered its 17th month on Wednesday, making it the longest downturn since the decade-long Great Depression. It has now surpassed two previous postwar U.S. recessions that each lasted 16 months, in 1973-75 and 1981-82.

After the Dow Jones industrials’ worst first quarter in 70 years, Wall Street finished higher in trading on Wednesday and major indexes closed higher in Europe. But markets could sink fast if world leaders fail to present a united front at their meeting on Thursday.

Usually, leaders at international forums care little about what markets are doing and markets pay little attention to such forums. Their predictable and vaguely written communiques rarely move the numbers.

And after all, who can predict market movements? Gauging how markets might react can be a futile exercise.

But in this case, plunging stock markets around the world are not only a symptom of the larger problem, they are part of the problem.

Trillions of dollars of wealth have disappeared from pensions, endowments, nest eggs and home values. The market slides have sapped consumer confidence and spending in developed countries and slammed developing ones that rely heavily on their exports.

In the United States, nearly half of households own securities, either directly or indirectly through 401(k) and other retirement plans. That’s more than ever before in a time of severe economic downturn. Stock ownership also is up in other industrialized nations.

Summit partners don’t want to unnecessarily spook the markets. And that injects an additional degree of caution into their deliberations.

There’s no way to tell what markets might view as acceptable accomplishments. And since much of the present global decline is caused by lack of confidence, markets are looking for signs of returning confidence.

And this is one of the places they’re looking.

British Prime Minister Gordon Brown and President Barack Obama both sought to show cautious confidence at their joint news conference on Wednesday.

Obama urged Americans, and consumers across the globe, to show confidence in the ability of the global economy to recover. “Don’t short change the future because of fear in the present, that I think is the most important message we can send – not just in the United States, but around the world,” Obama said.

Said Brown: “It will get worse if people do not act.”

But tensions simmered just beneath the surface.

Hours before the leaders were to sit down for dinner, French President Nicolas Sarkozy vowed to keep fighting for stronger international financial regulation, especially of tax havens, saying in an interview with Europe 1 radio that he would not associate himself with “false compromises.”

Later, Sarkozy was asked about tensions between Europe and the United states and threats that he might walk out of the meeting. “I have confidence in Obama,” he told reporters. “I am sure that he will help us and that he will understand us.”

Few expect the gathering to endorse either the bold stimulus spending that the U.S. and Britain have advocated nor the tough new international financial regulation that France, Germany and some other European countries want. Instead, the gathering was expected to endorse a mix of measured steps, including increased coordination in regulation, more money for the International Monetary Fund and a modest amount of stimulus spending, much of it already announced.

“My sense is that it will be a credible and legitimate package of steps both on the restoring-growth side and on the regulatory-reform side. And how the market reacts to that remains to be seen,” said Mike Froman, a White House international economics adviser.

Markets hate uncertainty.

When Treasury Secretary Timothy Geithner first outlined the Obama administration’s bank-rescue plan in early February, the Dow Jones industrials plunged 300 points, mainly over the plan’s lack of details. When he later filled in the blanks with a detailed plan, it soared nearly 500 points.

And Geithner briefly unsettled currency markets a week ago when he appeared willing to entertain a Chinese proposal that an international currency replace the U.S. dollar as the world’s main reserve currency – a notion he quickly dispelled.

Recent reports suggest the world economy is weakening, not strengthening.

“The world economy is in the midst of its deepest and most synchronized recession in our lifetimes,” wrote Klaus Schmidt-Hebbel, chief economist at the Organization for Economic Cooperation and Development, in a report this week predicting the world economy would shrink this year for the first time since World War II, by 2.75 percent. He also wrote that trade would further contract sharply.

Of course, if markets hate uncertainty, there can also be the certainty of low expectations.

What if the summit is viewed as a flop?

“I think flop is pretty well built into expectations,” said David Wyss, chief economist of Standard and Poor’s in New York.

By Tom Raum, The Associated Press

In this July 17, 1980 file photo, Republican presidential candidate Ronald Reagan stands before a cheering Republican National Convention in Detroit's Joe Louis Arena. Three decades after Ronald Reagan launched a determined campaign to ease government regulations on business, the pendulum is swinging the other way.

Capitalism can’t always be trusted. If you’re too big to fail, you’re too big to make all your own decisions, according to the emerging view in Washington.

Three decades after Ronald Reagan launched a determined campaign to ease government regulations on business, the pendulum is swinging the other way.

“Too big to fail is the right size to regulate,” declares Rep. Al Green, D-Texas.

Riding a wave of public anger over Wall Street greed and government bailouts, the Obama administration last week unveiled a far-reaching plan for “better, tougher, smarter” rules over big financial companies. The plan would crack down on major – but now lightly regulated – players such as hedge funds and traders of exotic financial products.

The administration is also pressing for closer international coordination. Allies want the U.S. to get tougher, and the new plan will give President Barack Obama something to show when he goes to London next week for an economic summit of 20 major and developing nations.

Much of the regulatory framework now in place dates back to the Great Depression, some back to just after the Civil War.

Most of what Obama is seeking, including a new regulator to oversee the entire financial system, will require legislation. With the level of angst in the country as high as it is, it seems likely he will get at least some of the changes through the Democratic-controlled Congress.

Even administration critics acknowledge there needs to be more financial regulation to avoid any repeat of the kind of meltdown that has plunged much of the globe into painful recession. Few would argue that it’s a good idea to allow sprawling financial conglomerates to be able to shop for their own regulator – pretty much what bailed-out insurer American International Group did.

But there is also fear of going too far and suppressing the entrepreneurial spirit that is part of the nation’s free-market heritage. The pendulum had been swinging against tough regulation until recently.

Although President Jimmy Carter began deregulation efforts in the late 1970s, focusing on airlines, trucking, railroads and natural gas, Reagan popularized the idea as a major government goal. He imposed a moratorium on all new federal regulation enforcement upon taking office.

Contending government was the problem – not the solution – to the nation’s ills, he persuaded Congress to deregulate many businesses. He spoke of setting free the mighty engine of capitalism. Distinctions between commercial and savings banks were eliminated during his presidency.

President Bill Clinton continued the process, signing legislation ending the 1930s-era barrier between banks and investment and insurance companies, but without subjecting those nonbank institutions to the rules that apply to banks.

In the midst of the current crisis, Sen. Judd Gregg, R-N.H., still says the government needs to not overregulate “to the point where we wipe out one of our great advantages as a nation, which is that we had folks willing to put money up for people willing to take risk and try to create jobs.”

Paul C. Light, a professor of public service at New York University, noted that complex investment products known as derivatives, including mortgage-backed securities, “were once seen as a great innovation and widely celebrated.” Their implosion set off the global financial meltdown.

“We want more transparency, but we want – at the same time – to protect innovative ideas. Everyone’s so angry. What the public wants is a radical pendulum swing toward the tightest regulation. We just have to be careful that we don’t overdo it,” Light said.

In any event, said Light, “We’re certainly done with the era of self-regulation. That’s over.”

Supporters of more regulation say they don’t want to squelch American entrepreneurship.

“Obviously, no system is going to prevent all failures, because it would then be too restrictive,” said House Financial Services Committee Chairman Barney Frank, D-Mass. The goal is to minimize the likelihood that big financial entities will get so heavily indebted “that their lack of success threatens the whole system,” he said.

Another part of the administration’s financial-regulation overhaul unveiled last week would grant the government the power to seize any large failing financial company, a power it now holds only for banks. It also plans to send Congress legislation protecting consumers and eliminating flaws in existing regulations.

The proposals announced last week, designed to limit risk-taking, are “a good start to a long process,” said White House spokesman Robert Gibbs.

Still, Washington always addresses the sins of the past, tries to solve old problems and doesn’t have a crystal ball to deal with the future.

Whatever the rules, someone tries to come up with ways to slip around them, sometimes with Washington’s help.

Remember: Brooksley E. Born, former chairwoman of the Commodity Futures Trading Commission, tried in 1997 to impose greater federal rules on derivatives. She was fiercely opposed by then-Federal Reserve Chairman Alan Greenspan and by Robert Rubin, President Clinton’s Treasury secretary.

Rubin, now an outside adviser to Obama, says he favors regulating derivatives, particularly increasing reserves against potential losses, but saw no way of doing so while serving as Treasury secretary.

Greenspan, who calls the current downturn a “once in a century” financial crisis, says the problem wasn’t with the derivative contracts but with the greed of the people who dealt in them.

Tom Raum has covered Washington for The Associated Press since 1973, frequently reporting on the economy.

President Barack Obama, flanked by Treasury Secretary Timothy Geithner (left) and Federal Reserve Chairman Ben Bernanke, receives an economic briefing on Monday in the Roosevelt Room of the White House.

WASHINGTON – The Obama administration aimed squarely at the crisis clogging the nation’s credit system Monday with a plan to take over up to $1 trillion in sour mortgage securities with the help of private investors. For once, Wall Street cheered.

The announcement, closely stage-managed throughout the day, filled in crucial blanks in the administration’s financial rescue package and formed what President Barack Obama called “one more critical element in our recovery.”

The coordinated effort by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. relies on a mix of government and private money — mostly from institutional investors such as hedge funds — to help banks rid their balance sheets of real-estate related securities that are now extremely difficult to value.

The goal, said Obama, is to get banks lending again, so “families can get basic consumer loans, auto loans, student loans, (and so) that small businesses are able to finance themselves, and we can start getting this economy moving again.”

It was a huge gambit and one that came like a tonic to Wall Street, which had panned an earlier outline of the program that lacked detail.

Stocks soared, the Dow Jones industrial average shooting up nearly 500 points, thanks to the bank-assets plan and a report showing an unexpected jump in home sales.

The introduction of the plan was closely choreographed so that the president — rather than Treasury Secretary Timothy Geithner — would be the first administration official to appear on camera at midday to discuss it. Geithner met earlier in the day, before markets opened, with a group of reporters at the Treasury Department to go over specifics. But cameras and broadcast-quality audio recorders were barred.

It was the reverse of what happened Feb. 10. Then, after Obama had helped raise expectations toward Geithner and the plan, the treasury secretary went before cameras and bombed. The Dow plunged about 300 points amid investor confusion about details.

The fleshed-out plan is designed to help fix a value on damaged mortgage loans and other toxic securities.

If the value of the securities goes up, the private investors and taxpayers would share in the gains. If the values go down, the government and private investors would incur losses.

“This will help banks clean up their balance sheets and make it easier for them to raise capital,” Geithner said.

The plan will take $75 billion to $100 billion from the government’s existing $700 billion Troubled Asset Relief Program. The government will pair this with private investments and loans from the FDIC and the Fed to generate $500 billion in purchasing power.

Geithner said purchases eventually could grow to $1 trillion — roughly half of the estimated $2 trillion of toxic assets on bank books now.

On the hot seat, Geithner has a lot personally tied to the success of the new program. His performance in the Cabinet, including his slowness in learning about multimillion dollar executive bonuses paid by insurance giant AIG after taking bailout money, has been severely criticized by some in Congress.

Geithner testifies on Tuesday before the House Financial Services Committee.

Under a typical transaction, for every $100 in soured mortgages being purchased from banks, the private sector would put up $7 and that would be matched by $7 from the government. The remaining $86 would be covered by a government loan.

The plan was introduced ahead of a summit next week in London of 20 major and developing economies struggling with the global recession.

Obama is trying to get other wealthy countries to do more to stimulate their economies with government spending, as the United States has done. However, other countries, particularly ones in Europe, are resisting U.S. calls for more stimulus and would prefer to see more internationally coordinated bank regulation.

The administration was expected to outline its plan for financial regulation overhaul later this week.

Federal Deposit Insurance Corp. Chairman Sheila Bair said she expects her agency will finance as much as $500 billion in purchases of residential and commercial real estate loans.

Bair said the program should help banks clean up their balance sheets and raise fresh capital, though she added that “there may be some banks beyond help.” The agency has said before it expects more bank failures, she said.

A joint statement by the Federal Reserve and Treasury Department said the Fed should play a “central role” in preventing future financial crises. That implied a wish that Congress expand the Fed’s authority in regulating all financial institutions, not just banks.

Geithner said taxpayers still could lose money on the deal to soak up bad assets but there was no fixing the system without risk.

Other options, such as having the government purchase the securities outright or letting them languish on bank balance sheets, would pose even greater vulnerabilities, he said, and it was important to find the right blend of risk versus reward.

“I am very confident this scheme dominates all the alternatives for trying to find that balance,” he said.

The sentiment was echoed by congressional Democrats, who said risk seemed inevitable with any plan big enough to work.

But House Republican Whip Eric Cantor of Virginia called Obama’s plan a “shell game” that hid the true cost.

He said he hoped the administration would consider instead an earlier Republican proposal to set up a government-sponsored insurance program for mortgage-related securities.

The administration plan “seems to offer little incentive for private investors to participate unless the subsidy is made so rich that it comes at the expense of the taxpayer,” Cantor said in a statement.

The new program marks a return by the government to a strategy of acquiring toxic securities. Henry Paulson, who was treasury secretary in the final days of the Bush administration, abandoned plans to purchase these securities, largely because they were impossible to price.

The plan builds on earlier programs to pump money into banks, help some homeowners repay their mortgages and stimulate college, small business and other forms of lending.

“There’s still great fragility in the financial systems, but we think that we are moving in the right direction,” Obama said after meeting Geithner and Fed Chairman Ben Bernanke.

Obama said the plan will allow taxpayers to “share in the upside as well as the downside.”

Treasury officials had no firm forecast on when the government would begin making the asset purchases although market expectations were that the process could begin within weeks.

Lawrence Summers

WASHINGTON – President Barack Obama’s top economic adviser said Friday the nation’s economic crisis has led to an “excess of fear” among Americans that must be broken to reverse the downturn.

“Fear begets fear,” and that “is the paradox at the heart of the financial crisis,” Lawrence Summers, the president’s director of the National Economic Council, told a forum.

“It is this transition from an excess of greed to an excess of fear that President Roosevelt had in mind when he famously observed that the only thing we had to fear was fear itself,” Summer said. “It is this transition that has happened in the United States today.”

Summers spoke amid new signs of a deepening recession. The U.S. trade deficit plunged in January to the lowest level in six years as the economic downturn cut America’s demand for imported goods, the Commerce Department reported Friday.

The economic adviser said it’s still too early to gauge the broad impact of the president’s recovery program.

“But it is modestly encouraging that since it began to take shape, consumer spending in the U.S., which was collapsing during the holiday season, appears, according to a number of indicators, to have stabilized,” Summers told the Brookings Institution, a think tank.

Summers was asked by a member of the audience what the nation’s business community could do to help speed the recovery.

“What we need today is more optimism and more confidence,” Summers said.

“Those who have sound long-term stragegy, who have investments that they want to make, who see productive opportunities, are going to find this a very good moment to make those investments,” he said. “There are a very large number of things that are on sale today. Think about the cost of doing construction today, versus the cost of doing construction two years ago.

“My advice to business leaders is not to foreshorten the horizon at a moment like this.”

On Wall Streets, stocks were seesawing after three straight days of gains.

The government said the U.S. trade imbalance dropped to $36 billion in January, the lowest level since October 2002.

However, while America’s deficit with many of its trading partners declined sharply, the politically sensitive shortfall with China bucked the trend, rising by 3.5 percent to $20.6 billion.

U.S. manufacturing companies, battered by what they view as unfair competition from China, said that the continued high deficit with that nation pointed to a need for the Obama administration to take a tougher line on trade rules with the Chinese.

By Tom Raum, Jim Kuhnhenn

Thousands of people line up at a federal government job fair in downtown Atlanta in February. The 1981-82 recession, widely considered America's worst since the depression, is a grim marker of how bad things can get, yet this recession could slice deeper into the U.S. economy, and if it lasts into April 2009, will be on record as the longest in postwar history.

President Barack Obama offered his domestic-policy proposals as a “break from a troubled past.” But the economic outlook now is more troubled than it was even in January, despite Obama’s bold rhetoric and commitment of more trillions of dollars.

And while his personal popularity remains high, some economists and lawmakers are beginning to question whether Obama’s agenda of increased government activism is helping, or hurting, by sowing uncertainty among businesses, investors and consumers that could prolong the recession.

Although the administration likes to say it “inherited” the recession and trillion-dollar deficits, the economic wreckage has worsened on Obama’s still-young watch.

Every day, the economy is becoming more and more an Obama economy.

More than 4 million jobs have been lost since the recession began in December 2007 – roughly half in the past three months.

Stocks have tumbled to levels not seen since 1997. They are down more than 50 percent from their 2007 highs and 20 percent since Obama’s inauguration.

The president’s suggestion that it was a good time for investors with “a long-term perspective” to buy stocks may have been intended to help lift battered markets. But a big sell-off followed.

Presidents usually don’t talk about the stock market. But the dynamics are different now.

A higher percentage of people have more direct exposure to stocks – including through 401(k) and other retirement plans – than ever.

So a tumbling stock market is adding to the national angst as households see the value of their investments and homes plunge as job losses keep rising.

Some once-mighty companies such as General Motors and Citigroup are little more than penny stocks.

Many health care stocks are down because of fears of new government restrictions and mandates as part a health care overhaul. Private student loan providers were pounded because of the increased government lending role proposed by Obama. Industries that use oil and other carbon-based fuels are being shunned, apparently in part because of Obama’s proposal for fees on greenhouse-gas polluters.

Makers of heavy road-building and other construction equipment have taken a hit, partly because of expectations of fewer public works jobs here and globally than first anticipated.

“We’ve got a lot of scared investors and businesspeople. I think the uncertainty is a real killer here,” said Chris Edwards, director of fiscal policy for the libertarian Cato Institute.

Some Democrats, worried over where Obama is headed, are suggesting he has yet to match his call for “bold action and big ideas” with deeds.

In particular, they point to bumpy efforts to fix the financial system under Treasury Secretary Timothy Geithner.

Obama may have contributed to the national anxiety by first warning of “catastrophe” if his stimulus plan was not passed and in setting high expectations for Geithner. Instead, Geithner’s public performance has been halting and he’s been challenged by lawmakers of both parties.

Republicans and even some top Democrats, including Rep. Charles Rangel, D-N.Y., chairman of the House Ways and Means Committee, have questioned the wisdom of Obama’s proposal to limit tax deductions for higher-income people on mortgage interest and charitable contributions.

Charities have strongly protested, saying times already are tough enough for them. The administration suggests it might back off that one.

Even White House claims that its policies will “create” or “save” 3.5 million jobs have been questioned by Democratic supporters.

“You created a situation where you cannot be wrong,” the chairman of the Senate Finance Committee, Montana Democrat Max Baucus, told Geithner last week.

“If the economy loses 2 million jobs over the next few years, you can say, yes, but it would’ve lost 5.5 million jobs. If we create a million jobs, you can say, well, it would have lost 2.5 million jobs,” Baucus said. “You’ve given yourself complete leverage where you cannot be wrong, because you can take any scenario and make yourself look correct.”

Republicans assert that Obama’s proposals, including the “cap and trade” fees on polluters to combat global warming, would raise taxes during a recession that could touch everyone. “Herbert Hoover tried it, and we all know where that led,” says House Republican leader John Boehner of Ohio.

The administration argues its tax increases for the households earning over $250,000 a year and fees on carbon polluters contained in its budget won’t kick in until 2011-2012, when it forecasts the economy will have fully recovered.

But even those assumptions are challenged as too rosy by many private forecasters and some Democratic lawmakers.

Many deficit hawks also worry that the trillions of federal dollars being doled out by the administration, Congress and the Federal Reserve could sow the seeds of inflation down the road, whether the measures succeed in taming the recession or not.

The money includes Obama’s $3.6 trillion budget and the $837 billion stimulus package he signed last month.

Polls show that Obama’s personal approval ratings, generally holding in the high 60s, remain greater than support for his specific policies.

“He still has a fair amount of political capital, so the public is willing to cut him some slack and go along with him for a while,” said pollster Andrew Kohut, director of the Pew Research Center. “But the public will have to get some sense that the kinds of things he’s proposing are going to work, or are showing some signs that they are working.”

Allan Sinai, chief global economist for Decision Economics, a Boston-area consulting firm, said the complexity and enormity of the crisis make it hard to solve.

“There’s no way to get it all right, regardless of which president is making policy,” Sinai said. “The problem is the sickness got too far. The actions taken, medicine applied, were mainly the wrong actions. So it’s just worse, and it gets harder to deal with. At this stage, there is no easy answer, no easy way out. It’s a question of how we fumble through.”

Tom Raum has covered Washington for The Associated Press since 1973, frequently reporting on the economy.

WASHINGTON – He’s not being timid, that’s for sure.

President Obama’s first federal budget lays out the most far-reaching agenda for American life since Lyndon Johnson’s Great Society. But paying for it by having upper-income earners shoulder much of the cost quickly provoked cries of class warfare in Congress.

The Obama priorities reflected in the $3.6 trillion budget guarantee a fierce political battle ahead over taxes and spending. And despite the administration’s agonizing over the depth and global nature of the worst recession in decades, the new president’s budget forecasts a rapid U.S. recovery.

The budget outline includes activist initiatives on energy, health care, education and climate change.

It would boost taxes on the wealthy, oil companies and other businesses while cutting Medicare and Medicaid payments to insurance companies and hospitals to make way for a $634 billion down payment on universal health care. It would also limit charitable and other tax deductions for the affluent and trim spending on government subsidies to big farms.

Predictably, Republicans complained, much as they had done during last year’s presidential campaign, that Obama was pitting the haves against the have-nots.

“The era of big government is back, and Democrats are asking you to pay for it,” said House Republican leader John Boehner of Ohio. He suggested Obama’s proposed tax increases would reach deep into the middle class, despite repeated administration statements that tax hikes would be limited to families making more than $250,000 a year.

The Democratic administration’s own economic forecasts suggest that the brunt of the tax increases, including letting existing tax cuts from the Bush administration to expire, will fall only after the nation is in recovery.

The Obama budget forecasts that, despite the depth of the recession, the economy will recover and grow by 3.2 percent in 2010 and then climb to an even more robust 4 percent in the three following years.

Most of the proposed Obama tax increases, including the permit levy on greenhouse gas emissions, would not take effect until a presumably post-recession 2012.

Christina Romer, chairman of the president’s Council of Economic Advisers, defended the administration’s upbeat forecast for recovery, saying it “reflects the administration’s assessment that the comprehensive recovery program outlined by the president on Tuesday night will be effective.”

Asked whether the class-warfare argument could complicate White House efforts to win support for some of its big priorities, White House spokesman Robert Gibbs said, “No. And I think it’s important to understand that what the president has enumerated in his budget is precisely the blueprint and series of promises that he made over the course of two years in a campaign . . . that the American people voted for.”

Bernard Roques a refiner of Societe company smells a Roquefort cheese as they mature in a cellar in Roquefort, southwestern France. French farmers called on President Obama to stop holding Roquefort cheese "hostage" in a trans-Atlantic trade fight.

It didn’t last long, the lofty pledge by leaders of 20 top economies in November to refrain from erecting new trade barriers for at least a year.

A “Buy American” clause in the big stimulus bill before Congress is causing howls from major U.S. trading partners and posing a difficult early challenge for President Barack Obama.

The provision has strong support among congressional Democrats and labor unions, and clear popular appeal in the midst of economic distress. But it is opposed by many Republicans, business groups and economists who warn it could provoke trade retaliation and thus further deepen the global downturn, much as protectionist legislation did in the 1930s.

“If we refuse to buy foreign-made goods, then our trading partners will refuse to buy from us,” said Thomas Donahue, president of the U.S. Chamber of Commerce.

Not only in the U.S., but also around the world, leaders are facing intense domestic pressure to protect jobs and homegrown industries. Economic woes have worsened since the Group of 20 countries pronounced their opposition to trade barriers at their meeting in Washington.

The bill that passed the House would require the use of American-made iron and steel for public works projects paid for with tax dollars. The Senate is debating even stronger language that also includes “all manufactured goods.”

It puts Obama in a tricky position as he tries to win support for an economic recovery package totaling more than $900 billion.

Flat-out rejection by Obama could alienate Democrats. But his acceptance of strong language would antagonize economic partners; some say it could risk new trade wars.

Without commenting specifically on the House or Senate language, Obama told Fox News “we can’t send a protectionist message.” He told ABC it is important that “any provisions that are in there are not going to trigger a trade war.”

Supporters argue such provisions are similar to ones that have been on the books for decades in government procurement policies and would not violate international trade obligations.

“We frankly believe this is a lot of bluster,” said Scott Paul, executive director of the Alliance for American Manufacturing, a union coalition that backs the provision.

White House spokesman Robert Gibbs said Obama remains open to suggestions for wording. “The balance he wants to strike is to continue to get our economy going without unnecessarily starting something with trading partners all over the world and global partners that will hinder getting our economy moving again,” Gibbs said Wednesday.

European Union officials have indicated they may file a complaint with the Geneva-based World Trade Organization if the U.S. passes such a provision.

John Bruton, the EU’s top diplomat in Washington, warned congressional and administration officials of “a spiral of protectionist measures around the globe that can only hurt our economies further.”

The Group of 20 nations meets again in early April, this time in London. Part of the agenda will be discussed when Treasury Secretary Timothy Geithner meets in Rome this weekend with his counterparts from Britain, Germany, France, Japan, Canada and Italy.

Some critics of the Buy American provision suggest it contains echoes of the Smoot-Hawley Tariff Act signed by President Herbert Hoover in 1930 that raised U.S. duties on thousands of imported goods. Other nations retaliated by raising their own barriers on U.S. goods, leading to a collapse in international trade that worsened the Great Depression.

The U.S. isn’t the only nation considering measures to protect home industries and jobs.

British banks receiving government money have been asked by the government to only lend to British-based companies and individuals. The EU is renewing subsidies on some dairy products to protect its farmers. Indonesia last month raised new trade barriers on various manufactured imports.

And China launched its own multibillion-dollar stimulus package that envisions using China-made steel in scores of public works projects.

The centrist Peterson Institute for International Economics last week released a study finding that the Buy American provision could end up costing more new jobs than it creates.

Economist Gary Hufbauer, one of the authors of the study, said in an interview that the U.S. action “will be seen as a license to other countries to do their own protectionist measures. The U.S. has always preached open markets and open trade. And now the United States is violating its international commitments.”

“Do I think we’ll go down the ’30s road?” he said. “Certainly, one hopes not. One hopes there’s a lot of good sense and a lot of rules that have to be trampled on and countries won’t follow that path.”

Congressional defenders of the provision dismiss talk that it will spark trade wars, noting it deals just with government spending practices and doesn’t raise a single tariff on foreign goods or services.

Sen. Charles Schumer, D-N.Y., said a Buy American clause “doesn’t bother me much” in that it’s part of “a stimulus package that’s supposed to create American jobs.”

Tom Raum has covered Washington for The Associated Press since 1973, frequently reporting on the economy.

Treasury Secretary Tim Geithner (right) and National Economic Council Director Lawrence Summers, left, await the arrival of President Barack Obama in the East Room of the White House on Friday.

WASHINGTON – In a string of powerful actions, the government moved on Tuesday to marshal colossal sums that could approach $3 trillion in taxpayer and private money to help thaw credit markets, slow painful layoffs and revive the collapsing national economy.

In a historic day of emergency federal action, the Treasury Department and Federal Reserve announced enormous plans to strengthen ailing banks, and the Senate prepared to approve an $838 billion economic stimulus measure that would outstrip all previous revival actions.

Wall Street didn’t seem impressed. The Dow Jones industrials were down nearly 300 points at midday.

President Barack Obama, meanwhile, kept up his dawn-to-dusk efforts to sell his news administration’s rescue plan, flying to Fort Myers, Fla., a city especially hard hit by mortgage foreclosures. He was in the air early Tuesday, the morning after he told his first prime-time news conference the nation’s economic downturn had grown into “a full-blown crisis.”

Treasury Secretary Timothy Geithner, who spelled out some new bailout details for the nation’s lenders, said that, “critical parts of our financial system are damaged.”

“The financial system is working against recovery and that’s the dangerous dynamic we need to change,” he said.

The Treasury plan includes a public-private partnership of over $1 trillion to help strengthen banks. Added to the congressional stimulus plan, which aims to get Americans spending again, the total of the combined efforts could easily pass $2 trillion.

In a related government commitment of financial support, the Federal Reserve broadened a program designed to boost resources for consumer credit and small business loans, from $200 billion to up to $1 trillion.

Geithner said the bailout plan would lead to “cleaner and stronger” bank balance sheets by imposing tough new standards and using government and private incentives to get the banks lending again. He said banks would be submitted to a “stress test” by government regulators to make sure they were healthy enough to lend before receiving additional financial aid.

The Treasury Department announcement also was to detail how it will spend the remaining $350 billion of the $700 billion financial rescue program started by the Bush administration last fall. But the plan goes well beyond that, envisioning big investors buying more than $1 trillion in troubled assets from the banks.

Senate approval of the $838 billion stimulus bill, which has solid Democratic support but is backed by only three Senate Republicans, was expected at midday after clearing a critical procedural hurdle Monday.

“It’s the right thing to do, even though I know it’s expensive,” Obama said of the legislation.

But once it passes the Senate, it faces what could be contentious negotiations with the House, which passed a different version of the legislation, one that includes fewer taxes and more spending than the Senate version.

“I’m reticent to get into the negotiating,” White House press secretary Robert Gibbs told NBC’s “Today” show Tuesday. “I will tell you this, the president is willing to do whatever it take with Democrats or Republicans to get something on his desk.” He said the American people need the help “right now.”

Not a single Republican voted for the bill in the House.

The Treasury Department plan called for a stepped-up role by private investors.

It would greatly expand an effort to unclog credit markets that provide loans to consumers and businesses. Up to $100 from the bailout fund could be used, according to administration officials.

That would be enough to support an additional $1 trillion in lending support through a Federal Reserve program that was announced in November but has yet to begin operations.

The administration also announced that the program would be expanded beyond consumer and small business loans to provide aid to the troubled commercial real estate sector.

The administration also announced a program to create a partnership between the government and the private sector to get private investors to buy toxic mortgage-backed securities that are currently infecting the balance sheets of banks.

Congress”fi 1/2¬ÿ¬”» ÊÓ-fiÓ ‰ ƒ‰” à »fi 1/2Ë-”Ê plan said that Treasury officials said it could involve between $250 billion and $500 billion in government support.

In his prime-time news conference, Obama depicted his administration’s rewrite of the bank bailout effort as a template for “restoring market confidence.”

“The credit crisis is real, and it’s not over,” Obama said.

He said failure to act quickly “could turn a crisis into a catastrophe.”

He placed the blame for this squarely on former President George W. Bush.

“But as we’ve learned very clearly and conclusively over the last eight years,” Obama said, “tax cuts alone can’t solve all of our economic problems, especially tax cuts that are targeted to the wealthiest few Americans. We have tried that strategy time and time again, and it’s only helped lead us to the crisis we face right now.”

Democratic Senate leaders were able Monday to rally the votes needed to clear a procedural barrier to open the way toward expected final passage Tuesday. The 61-36 vote, just one more than the 60 required, was heavily partisan, with only three Republicans — Sens. Susan Collins and Olympia Snowe of Maine and Arlen Specter of Pennsylvania — joining all Democrats in voting for the package, a blend of federal spending and tax cuts.

Senate Majority Leader Harry Reid of Nevada called it “the first step on the long road to recovery.”

The administration is counting on private investors to help rescue banks by buying up some of the bad assets held by banks. Hedge fund managers and other big investors are counting on the government to sweeten the deal before they open their checkbooks.

Obama criticized the way the first $350 billion was spent by the Bush administration: “We didn’t get as big of a bang for the buck as we should have.”

But he brushed aside a question on whether his administration would seek more funds for the Troubled Asset Relief Program. “We don’t know yet if we’ll need additional money, or how much additional money we’ll need,” Obama said.

Associated Press writers Martin Crutsinger, David Espo, Andrew Taylor, Matt Apuzzo and Stevenson Jacobs contributed to this report.

In this Jan. 5 file photo, Treasury Secretary-designate Timothy Geithner (left) looks on as President-elect Barack Obama meets with members of his economic team at his transition office in Washington. Geithner, President-elect Barack Obama's choice to run the Treasury Department and lead the economic rescue effort disclosed to senators Tuesday that he failed to pay $34,000 in taxes from 2001 to 2004, a last-minute complication in an otherwise smooth path to confirmation.

At the end of a nearly seamless transition, President-elect Barack Obama has been buffeted by a string of embarrassing jolts within the space of two weeks.

The disclosure Tuesday that his choice for treasury secretary, New York Federal Reserve chief Timothy Geithner, failed to pay $34,000 in taxes and employed a housekeeper without proper immigration papers was another jarring distraction just days before Obama’s inauguration – and raises fresh questions about his team’s judgment, vetting procedures and political sensitivities.

It follows New Mexico Gov. Bill Richardson’s sudden withdrawal on Jan. 4 from consideration as commerce secretary, citing a federal investigation into how his political donors landed a lucrative transportation contract.

Senate Democratic leaders and Obama transition officials immediately voiced confidence in Geithner and called for his quick confirmation once Obama is sworn in and is able to formally nominate him – citing the important role Geithner will play in dealing with one of the nation’s severest recessions in decades.

But the delinquent-tax part of the new disclosure, in particular, is a huge liability for Geithner, given that as treasury secretary he would oversee the Internal Revenue Service.

It’s also one of those issues that ordinary Americans can readily understand – the consequences of not paying taxes properly and on time. You don’t mess with the IRS.

At issue is Geithner’s failure to pay appropriate Social Security and Medicare taxes when he worked for the International Monetary Fund between 2001 and 2003.

He had paid some of the back taxes in 2006 after the IRS sent him a bill. When the Obama transition team discovered he owed even more back taxes, Geithner paid those additional taxes days before Obama announced his choice in November, according to the Senate Finance Committee considering his nomination.

Obama’s staff told senators about the tax issues Dec. 5.

Geithner also didn’t realize a housekeeper he paid in 2004 and 2005 did not have current employment documentation as an immigrant for the final three months she worked for him, according to the materials released by the committee.

As a result of the new controversy, Geithner won’t be able to be confirmed in time to take office next Tuesday, when Obama will be sworn in, as Democratic leaders and Obama aides had hoped.

Finance Committee Chairman Max Baucus, D-Mont., on Wednesday rescheduled a confirmation hearing to next Wednesday after a GOP objection was lodged to his plans to hold it this Friday.

It was clearly unwanted news to a team that had prided itself on efficiency and raw talent.

Incoming White House spokesman Robert Gibbs called Geithner’s missteps “honest mistakes, which, upon learning of them, he quickly addressed.” But serious issues were raised about the performance of Obama’s team in vetting Geithner that are not likely to go away soon.

In another jarring episode, Obama and Senate Democrats also were outmaneuvered by disgraced Illinois Gov. Rod Blagojevich and Roland Burris, the man he chose to fill Obama’s vacant Senate seat.

Obama at first endorsed the hard line taken by Senate Majority Leader Harry Reid, D-Nev., and other Senate Democrats that they never would accept an appointment from Blagojevich.

But Burris, a black politician who had an unblemished reputation, made a goodwill overture to Senate Democrats. Illinois constitutional law seemed to be on his side. Both Reid and Obama reversed course and signaled to Senate leaders that they should seat Burris.

“These are very smart people. But they’re not reading the politics carefully,” said Paul C. Light, professor of government and public service at New York University. “They’ve allowed themselves to be backed into a corner by a disgraced governor of Illinois and hoodwinked by several of their own nominees and perhaps by their own hubris.”

Obama’s team may be brilliant and experienced, “but what they lack is common sense,” Light said.

On a less consequential matter, Obama also stumbled when he failed to notify incoming Senate Intelligence Committee Chairwoman Dianne Feinstein, D-Calif., that he was about to name fellow Californian Leon Panetta, who had been President Bill Clinton’s budget director and chief of staff after a long congressional career, to the job of CIA director.

Although popular and experienced as an administrator, Panetta lacked an intelligence background and the surprise selection put Feinstein in a difficult position.

The jarring bumps in the road to Obama’s inauguration are “really quite stunning for a transition team that has so carefully studied everything that might go wrong, and which was faultless up until about a week ago,” said Stephen Hess, an authority on presidential transitions at the Brookings Institution.

The disclosures on Richardson and Geithner are “stunning news,” Hess said. “And coming so close to the inauguration, it’s harder to put the pieces back together.”

Baucus, the Senate Finance Committee chairman, said Tuesday after a closed-door committee meeting on the subject that, while he was disappointed with the new information, Geithner had taken steps necessary to fix the problems, and the mistakes he made “do not rise to a level of disqualification.”

But the panel’s senior Republican, Sen. Charles Grassley of Iowa, raised questions about the disclosures.

Geithner may have one thing going for him: The public may be more far more concerned about the economy at this point than over the would-be treasury secretary’s past mistakes.

Tom Raum has covered Washington for The Associated Press since 1973, including five presidencies.

Out of power, Republicans appear to be retreating to familiar old ground. They’re becoming deficit hawks again.

GOP lawmakers didn’t seem to mind enjoying the fruits of government largesse for the past eight years while one of their own was in the White House.

Now they’re struggling to regain footing at a time of economic rout, a record $1.2 trillion budget deficit and an incoming Democratic president claiming a mandate for change.

It might not be the best time for running against more government spending. But that hasn’t stopped Republicans from casting themselves as protectors of the public purse, striving for relevancy as Congress tackles President-elect Barack Obama’s stimulus legislation.

“Congress cannot keep writing checks and simply pass IOUs to our children and grandchildren,” says Sen. John Cornyn, R-Texas. Asks House Minority Leader John Boehner, R-Ohio: “How much debt are we going to pile on future generations?”

Senate Minority Leader Mitch McConnell, R-Ky., gets more specific: “We would like, on the spending side, obviously, to avoid funding things like a mob museums or water slides.” Mob museums?

Las Vegas’ effort to include in the stimulus legislation federal money to set up a museum to showcase Nevada’s colorful and storied past in organized crime has suddenly become the cited example of wasteful spending for some Republicans, including McConnell.

Perhaps they hope the proposed project in the home state of Senate Majority Leader Harry Reid, D-Nev., can divert attention from the “Bridge to Nowhere,” an Alaska project that was initially a Republican initiative and which became the target of Democratic scorn.

Obama has pledged that the economic aid legislation be free of such pork-barrel and “earmark” spending; Republicans have said they agree.

GOP lawmakers also are seeking to change the mix in Obama’s proposal to include more tax breaks. But they know they can only go so far in trying to throw up obstacles to the new president.

“We all understand the need to do something – and to do it quickly,” McConnell said late last week. “We intend to work with the new president . . . and try and get this right.”

Republicans “seem to be on a funny tightrope on which they’re trying to enunciate a Republican position,” said Fred Greenstein, a presidential scholar at Princeton University. “They’re saying, ‘Yes it is a crisis’ and ‘Yes, a lot has to be done. But it shouldn’t be too much. And it shouldn’t be imprudent.’ They seem to be stuck with platitudes and truisms.”

Greenstein said the distinguishing traits now are “the intensity of the crisis” and Obama’s ecumenical outreach to experts and political leaders in both parties.

Obama said he is seeking good ideas from all quarters for what will be the biggest public spending program since World War II, one he hopes will save or create 3 million jobs.

“I want this to work. This is not an intellectual exercise. And there’s no pride of authorship,” Obama said.

For Republicans, finding a politically sustainable position that balances the need for action with calls for fiscal discipline is a difficult balancing act.

“It’s hard to oppose fixing the economy right now,” said Stanley Collender, a former congressional budget analyst now with Qorvis Communications, a Washington consulting firm. Collender said the depth of the crisis makes it difficult for fiscal conservatives in either party “to say that deficits are something that should be addressed right now.”

“If you say that, you kind of lose credibility,” Collender said.

Republicans also are mindful they can overplay their hand, as they did in late 1995 when the government was shut down in a budget confrontation between House Speaker Newt Gingrich, R-Ga., and President Bill Clinton.

Republicans expected voters to blame Clinton and his Democrats for the shutdown. They didn’t. They blamed Gingrich’s GOP troops and telegraphed that sentiment in 1996 when Clinton was handily re-elected and Democrats increased their numbers in Congress.

“It is somewhat disingenuous on the part of Republicans to be totally concerned about the debt and the deficit at this point, because they were there when the debt went up,” said James Thurber, director of the Center for Congressional and Presidential Studies at American University.

When Bush took office in 2001, the government had a projected $5.6 trillion, 10-year surplus.

Obama has suggested his plan will come close to $800 billion, with roughly $300 billion in tax cuts for middle-income individuals and businesses.

That itself was partly a concession to Republicans calling for more tax relief – and drew predictable complaints from liberal Democrats who want fewer tax cuts and more in public works projects.

“Even though Obama is very popular with his mandate for change, now we’re figuring out just what the ‘change’ is – in a separated system where Congress has the right to stand up and say what it wants, as does the minority party,” said Thurber. “So it’s messy.”

Tom Raum has covered Washington for The Associated Press since 1973, including five presidencies.

Stimulus will increase debt, but failure to act could sink economy

President-elect Barack Obama, flanked by Budget Director-designate Peter Orszag (left) and Deputy Budget Director-designate Rob Nabors, speaks to reporters Tuesday. "Unless we take decisive action, even after our economy pulls out of its slide, trillion-dollar deficits will be a reality for years to come,"Obama said.

WASHINGTON – It’s a painful choice. The expected growth of the federal government budget deficit to $1.2 trillion this year could swamp future generations with a tidal wave of debt. But failure to spend huge piles of money on stimuli could capsize an already foundering economy.

The deficit projected Wednesday by the nonpartisan Congressional Budget Office is an unprecedented number of dollars. As a percentage of the U.S. economy, it would be the largest since World War II.

And the $1.2 trillion deficit is just for the budget year that began Oct. 1.

The proposed deficit will grow even more if President-elect Barack Obama’s sweeping stimulus package is enacted. That could add nearly another $1 trillion or more to the red ink over two years.

If you add in what the federal government still owes from past years, the total national debt now stands at $10.64 trillion.

That’s roughly $37,000 for every man, woman and child in the United States. And with spending rising and tax revenues falling, the total debt is expected to approach $12 trillion by year’s end.

Yet there’s a consensus, shared by Democrats and many Republicans, that some form of major stimulus – either new spending, tax cuts or a mix – is needed to tame what is already the worst recession in a generation and to prevent it from widening into another Great Depression. Republicans generally argue for larger tax cuts as part of the stimulus brew.

“I’ve never seen harder days to be a deficit hawk,” said Robert Bixby, the executive director of the Concord Coalition, a nonpartisan group that advocates fiscal restraint.

Still, he said, “a credible case can be made that you need some stimulus,” so long as it is short term and doesn’t include permanent new spending programs.

It’s hard to believe that just eight years ago – as President Bill Clinton was leaving office and Texas Gov. George W. Bush was preparing to be sworn in – there was a projected $5.6 trillion 10-year budget surplus.

Instead, the bursting of the technology bubble, big Bush tax cuts, the 9/11 attacks, wars in Afghanistan and Iraq, increased spending on homeland security, a mild recession in 2001 and the heavy one now intervened.

Heavy public spending is a traditional antidote for healing severe recessions, regardless of the impact on deficits. The big-spending, FDR-type programs of the 1930s are often held up as an example.

Many economists note that when President Franklin D. Roosevelt turned cautious in 1937, cutting spending and raising taxes in an attempt to get the deficit under control, it backfired and touched off a new sharp downturn that lasted through 1938.

“The prevailing opinion is that, if we have to increase the deficit, let’s increase the deficit. We’ll fix it later,” said former congressional budget analyst Stanley Collender.

Some conservative economists argue that major spending on public works projects in Japan in the 1990s did little to shorten that nation’s decade-long recession.

President-elect Barack Obama mentioned the new gloomy CBO deficit projection at his Wednesday news conference. “We know that our recovery and reinvestment plan will necessarily add more,” he conceded.

Obama’s plan is designed to create some 3 million jobs. He said he would seek longer-term, offsetting cuts in unnecessary spending and changes in Social Security and Medicare to help bring government spending in line. He named a management consultant to head a new White House position on eliminating government waste and improving efficiency.

Among the risks of ever-expanding deficits: Interest payments on the debt will become a larger and larger slice of the government’s total budget pie, eventually squeezing out other crucial spending. That could mean draconian spending cuts, big tax increases or both.

Ever-increasing deficits would also pressure the U.S. to borrow more and more from overseas creditors, principally China, Japan and Britain. If any of those countries decided to flee Treasuries or other dollar-denominated assets, it could send shock waves through the global economy – and sharply force up U.S. interest rates.

Tom Raum has covered Washington for The Associated Press since 1973, including five presidencies.