208 Obama Takes On the big Banks

(1) Obama Moves to Limit ‘Reckless Risks’ of Big Banks
(2) US president reins in the big banks
(3) With Populist Stance, Obama Takes On Banks
(4) Joseph Stiglitz interview: 'We're More Strict With Our Poor Than With Our Banks'
(5) The Bogey of Inflation - Robert Skidelsky
(6) Haiti: debt-forgiveness needed, and grants not loans
(7) Robert Reich: The Bad Job Numbers and the Secret Second Stimulus

(1) Obama Moves to Limit ‘Reckless Risks’ of Big Banks
By SEWELL CHAN and ERIC DASH

Published: January 21, 2010

http://www.nytimes.com/2010/01/22/business/22banks.html?ref=economy

WASHINGTON — President Obama wants to cut down to size those too-big-to-fail banks. But his vow on Thursday to rewrite the rules of Wall Street left many questions unanswered, including the big one: Would this really prevent another financial crisis?

The president’s proposals to place new limits on the size and activities of big banks rattled the stock market, but banking executives were perplexed as to how his plan would work. Indeed, many insisted the proposals, if adopted, would do little to change their businesses.

Moreover, it was unclear if the twin proposals — to ban banks with federally insured deposits from casting risky bets in the markets, and to resist further consolidation in the financial industry — would have done much if anything to forestall the crisis that pushed the economic system to the brink of collapse in 2008.

Mr. Obama appeared to be leaving crucial details to be hashed out by Congress, where partisan tussling has already threatened another reform the president supports — the creation of a consumer protection agency that would have oversight over credit cards, mortgages and other lending products.

Wall Street figures, many caught off guard by the news, reacted cautiously.

“I am somewhat skeptical about how much the federal government can actually regulate,” said John C. Bogle, the founder of Vanguard, the mutual fund giant. “We need to try, but all the lawyers and geniuses on Wall Street are going to figure out ways to get around everything.”

Indeed, Mr. Obama acknowledged that “an army of industry lobbyists” had already descended on Capitol Hill, but vowed, “If these folks want a fight, it’s a fight I’m ready to have.”

Shares of big banks — potentially the biggest losers should the proposals be enacted — fell sharply, dragging the broader market down by about 2 percent. Even as the markets stumbled, Mr. Obama — still stinging from the Democrats’ loss on Tuesday of the Massachusetts seat formerly held by Senator Edward M. Kennedy — ramped up his populist rhetoric, one week after he proposed a new tax on large financial institutions to recoup projected losses from the 2008 bailout.

Mr. Obama said the banks had nearly wrecked the economy by taking “huge, reckless risks in pursuit of quick profits and massive bonuses.”

The administration wants to ban bank holding companies from owning, investing in or sponsoring hedge funds or private equity funds and from engaging in proprietary trading, or trading on their own accounts, as opposed to the money of their customers.

Mr. Obama called the ban the Volcker Rule, in recognition of the former Federal Reserve chairman, Paul A. Volcker, who has championed the proposal. Big losses by banks in the trading of financial securities, especially mortgage-backed assets, precipitated the credit crisis in 2008 and the federal bailout.

It was not clear, however, how proprietary trading activities would be defined.

Officials said that banks would not be permitted to use their own capital for “trading unrelated to serving customers.” Such a restriction would most likely compel banks that own hedge funds and private equity funds to dispose of them over time. Officials said, however, that executing trades on a client’s behalf and using bank capital to make a market or to hedge a client’s risk would be permissible.

Federal regulators have already leaned hard on banks to curb pure proprietary trading, and the banks expect that regulators will demand more capital if they keep making risky bets, making the practice far less profitable.

Some of the biggest firms, applying a narrow definition, say that pure proprietary trading constituted less than 10 percent of their revenue, and in some cases far less. Morgan Stanley, for example, already abandoned all but two proprietary trading desks last year.

The Buckingham Research Group estimated that the new rules would reduce revenue at Citigroup, Bank of America and JPMorgan Chase by less than 3 percent. Goldman Sachs, which typically derives a tenth of its revenue from such trading, said it would be able to contend with the new rules.

“I would say pure walled-off proprietary-trading businesses at Goldman Sachs are not very big in the context of the firm,” David A. Viniar, the firm’s chief financial officer, said in a conference call.

Mr. Obama also is seeking to limit consolidation in the financial sector, by placing curbs on the market share of liabilities at the largest firms. Since 1994, the share of insured deposits that can be held by any one bank has been capped at 10 percent.

The administration wants to expand that cap to include all liabilities, to limit the concentration of too much risk in any single bank. Officials said the measure would prevent banks at or near the threshold from making acquisitions but would not require them to shrink their business or stop growing on their own.

The Obama administration said the new proposals were in the “spirit of Glass-Steagall” — a reference to the Depression-era law that separated commercial and investment banking, which was repealed in 1999.

Economists have debated whether the repeal of that act contributed to the crisis. The two big investment banks that imploded, Bear Stearns and Lehman Brothers, were not commercial banks, and Goldman Sachs and Morgan Stanley converted to bank holding companies only after the system started to come unglued.

The industry was left buzzing with questions about timing and scope. Officials said the new restrictions would apply to overseas firms, like Barclays and UBS, with large American operations, but it was not clear how — or whether — foreign governments would go along. Officials also said the proposal called for a “reasonable transition period” for firms to comply with the rules, but the timetable was not specified.

Timothy F. Geithner, the Treasury secretary, and Lawrence H. Summers, the president’s chief economic adviser, developed the proposals at the request of the president and worked closely with Mr. Volcker, according to White House officials. The plan was completed over the holidays and submitted to the president with a unanimous recommendation from the economic team.

While Mr. Geithner and Mr. Summers debated concerns that proprietary trading was not at the heart of the recent crisis, they concluded that reforms needed to address potential sources of risk in the future.

Reaction on Capitol Hill also was muted, partly because neither party wanted to be seen as beholden to unpopular banks. The House bill passed last month would consolidate oversight, require stronger capital cushions for the largest banks and impose regulation of some derivatives. In many ways, the new White House proposal amplifies provisions in that bill that would have left regulators discretion over proprietary trading and excessive liability.

Sewell Chan reported from Washington and Eric Dash from New York

(2) US president reins in the big banks

http://www.radioaustralianews.net.au/stories/201001/2798723.htm?desktop

Kim Landers, Washington

Last Updated: Fri, 22 Jan 2010 10:06:00 +1100

Stocks on Wall Street plunged after US President Barack Obama announced plans to limit the size and power of America's biggest banks.

In a very public swipe at Wall Street, Mr Obama blamed banks for sparking the worst economic crisis since the Great Depression and said common sense reforms were needed.

"Never again will the American taxpayer be held hostage by a bank that's too big to fail," he said.

Wall Street gave an immediate thumbs down to the plan, with the Dow Jones industrial index sinking 2 per cent as the president delivered his announcement.

Mr Obama says the financial system is far stronger today than it was a year ago, but is still operating under the same rules that led to its near-collapse.

Now he wants to ban banks from proprietary trading operations, where a firm makes bets on financial markets with its own money.

"Banks will no longer be allowed to own, invest or sponsor hedge funds, private equity funds or proprietary trading operations for their own profit, unrelated to serving their own customers," he said.

"These firms should not be allowed to run these hedge funds and private equities funds while running a bank backed by the American people."

The plan is the latest attempt by the White House to harness popular anger at massive Wall Street bonuses and tight credit markets as Congress heads to a crucial election year.

The plan has to be approved by Congress, and Mr Obama is vowing to make sure it happens, even if Wall Street deploys an army of lobbyists to try to block it.

"If these folks want a fight, it's a fight I'm ready to have," he said.

Banks threatened

The plan means that some of America's biggest banks, such as Bank of America and JP Morgan, may have to be broken up.

But the director of financial regulation studies at the Cato Institute, Mark Calabria, says the president is unfairly vilifying banks.

"To say that these banks held the taxpayer hostage is just ridiculous," he said.

"It was the decision of policy-makers who voted to spend public money to bail out these banks.

"I cannot find one single example of where some institution took insured deposits and used it to gamble on the stockmarket.

"Where is the example, where does this make a difference? All this seems to be is some misdirection at something that never made a difference to begin with."

The industry lobby group for banks says Mr Obama is trying to return the US to the past.

The Financial Services Roundtable says the better idea would be to modernise the regulatory framework and not take the industry "back to the 1930s".

(3) With Populist Stance, Obama Takes On Banks
By JACKIE CALMES

Published: January 21, 2010

http://www.nytimes.com/2010/01/22/business/economy/22policy.html

WASHINGTON — The tougher approach to financial regulation that President Obama outlined on Thursday reflected a changed political climate, the rebound in big banks’ fortunes after their taxpayer bailout and a shift in power within the administration away from those who had been seen as most sympathetic to Wall Street.

Paul A. Volcker, the former Federal Reserve chairman, had urged the president to restrict behavior at banks that led to the crisis.

In calling for new limits on the size of big banks and their ability to make risky bets, Mr. Obama was throwing a public punch at Wall Street for the third time in a week, underscoring the imperative for him and his party to strike a more populist tone, especially after the Republican victory Tuesday in the Massachusetts Senate race.

In announcing his proposals Thursday at the White House, Mr. Obama said if the financial industry wanted a fight over new restrictions, it was a fight he was ready to have.

The new approach was welcomed by the White House political team and Vice President Joseph R. Biden Jr., and delivered by a less enthusiastic economic team on orders last month from Mr. Obama.

It was also a victory for Paul Volcker, the former Federal Reserve chairman and outside adviser to Mr. Obama. Until Thursday, when he stood beside the president at the White House announcement of the new policy, Mr. Volcker truly had been on the outside of administration decision-making — and, in frustration, increasingly vocal about the need for the administration to clamp down on what he described as the same sort of casino-like operations at the big banks that nearly destroyed the financial system in the first place.

In adopting the tougher line, Mr. Obama set aside a more limited approach to regulation that had been championed since last year by his economic team, led by Treasury Secretary Timothy F. Geithner.

Yet even Mr. Geithner of late has been moving toward a tougher stance on Wall Street, in part out of anger that big banks, having ridden a taxpayer bailout back to comfortable profitability, are now rewarding themselves with big bonuses and fighting harder in Congress against the administration’s initiative to tighten regulation of the financial system.

The issue reignited speculation, common in the administration’s early months, that Mr. Geithner and perhaps Lawrence H. Summers, the senior White House economic adviser, were not long for the Obama world given broad public perceptions that they remained too close to the financial industry.

But numerous administration officials said that Mr. Geithner especially had earned the trust and confidence of Mr. Obama, who believed they had not received credit for stabilizing a financial system that by all accounts was on the verge of collapse when the president first took office.

His pique on that score came through in his televised interview with ABC News on Wednesday, after the loss in Massachusetts, even as Mr. Obama empathized with Americans’ anger about the bailout effort, the Troubled Asset Relief Program, that he inherited from George W. Bush.

“Now if I tell them, ‘Well, it turns out that we will actually have gotten TARP paid back and that we’re going to make sure that a fee’s imposed on the big banks so that this thing will cost the taxpayers not a dime,’ that’s helpful,” Mr. Obama said. “But it doesn’t eliminate the sense that their voices aren’t heard and that institutions are betraying them.”

To change that, he added, “We’re about to get into a big fight with the banks.”

That fight is sure to continue testing Mr. Geithner, as well as Mr. Summers and lesser-known members of the economic team who are seen by others in the West Wing as politically tone-deaf. Yet Mr. Geithner, in an interview, said he foresaw no problems.

“Just because things seem populist doesn’t mean they’re not the right thing to do,” he said.

The administration’s new tack suggests just how much big banks have miscalculated Americans’ intensified resentment against the bailout — anger stoked by persistent high unemployment, banks’ stinginess in lending to small business and the revival of Wall Street’s bonus culture.

They have become the perfect foil for the White House as it tries to lead the Democratic Party out of its post-Massachusetts morass — and to change the channel from the seemingly unending debate over health insurance. As the White House hopes to define the fight, the enemy is not big government but big money.

One problem for the Obama team, as some Congressional Democrats lament, is that its moves of late look poll-driven and overly reactive to the Democrats’ implosion in the Bay State race. To be sure, worse for the White House than Scott Brown’s win is the fact that the Republican won as an agent of change just as Mr. Obama did in 2008 — only this time, of course, the change was not from Bush administration policies but from Mr. Obama’s.

Despite the timing, however, all three of Mr. Obama’s recent policy stands have been in the works for some time. That is not to say they were not politically motivated; for some months the administration has been concerned about Mr. Obama’s slipping support in the polls and many Americans’ perception of his administration as too cozy with Wall Street.

The president’s proposal last week for a tax on about 50 of the nation’s biggest banks to recoup any losses from the bailout began taking shape at the Treasury Department last August for inclusion in the budget that Mr. Obama will send to Congress in February, administration officials said.

Aside from its value as a way to raise $90 billion over 10 years, a time frame in which Mr. Obama is eager to cut deficits, the bank tax helped mute long-running criticism of Mr. Geithner for his opposition last summer to European leaders’ calls for taxing bank bonuses and transactions.

Earlier this week, with action heating up in the Senate over legislation for regulating banks, administration officials spread the word that Mr. Obama’s proposal to create an independent consumer protection agency was “non-negotiable.” Industry lobbyists have made killing the agency a priority, while liberal groups have made its creation a test of Mr. Obama’s leadership.

Mr. Obama personally weighed in with a lengthy meeting at the White House on Tuesday with the panel’s chairman, Senator Christopher J. Dodd, a Democrat from Connecticut.

Until now, the president has had a low profile on the banking bill, though the House debated its version most of last year before passing it in December. Some Democrats complain that the White House was too absorbed by the health care issue, but they acknowledge the banking issue was widely seen as an insider’s game over arcane issues like derivatives trading that have little resonance with the public.

Now that has changed. As Thursday’s call for new bank limits showed, the president personally is taking the lead as First Populist. “Never again,” he said, “will the American taxpayer be held hostage by a bank that is too big to fail.”

(4) Joseph Stiglitz interview: 'We're More Strict With Our Poor Than With Our Banks'

From: ReporterNotebook <RePorterNoteBook@Gmail.com> Date: 21.01.2010 02:50 PM

HuffPost Interviews Joseph Stiglitz: 'We're More Strict With Our Poor Than With Our Banks'
JANUARY 20, 2010

During the economic turmoil of the last few years, Nobel Prize-winning economist and Columbia University professor Joseph Stiglitz has been one of the most strident and incisive critics of the historic bailout of the banking sector.

Never one to mince words, Stiglitz, who served as the Chief Economist at the World Bank and on President Clinton's Council of Economic Advisers, has said the meltdown has resulted in a kind of "ersatz capitalism" in America. He has also repeatedly called for a second round of fiscal stimulus to support struggling Americans.

We recently sat down with Professor Stiglitz to discuss his new book "Freefall: America, Free Markets And The Sinking of The World Economy", and how the Obama administration should go about reshaping our economy.

With so much talk of a recovery, where is our economy right now?

The way I put it is that, if you look back before the crisis, the American economy was basically supported by a housing bubble, which supported a consumption boom. In one year, we had $950 billion in mortgage equity withdrawals. That got reflected in the statistics and our savings rate went to zero.

The implication is that post-crisis, even if we have our banking system work, it is not likely that we will go back to a zero savings rate in the U.S. If we don't go back to a zero savings rate, it's going to be hard to have a robust recovery unless you find something else to fill in the gap. ==

http://www.huffingtonpost.com/2010/01/20/joseph-stiglitz-interview_n_429437.html

HuffPost Interviews Joseph Stiglitz: 'We're More Strict With Our Poor Than With Our Banks'

Huffington Post | Ryan McCarthy

January 20, 2010

During the economic turmoil of the last few years, Nobel Prize-winning economist and Columbia University professor Joseph Stiglitz has been one of the most strident and incisive critics of the historic bailout of the banking sector.

Never one to mince words, Stiglitz, who served as the Chief Economist at the World Bank and on President Clinton's Council of Economic Advisers, has said the meltdown has resulted in a kind of "ersatz capitalism" in America. He has also repeatedly called for a second round of fiscal stimulus to support struggling Americans.

We recently sat down with Professor Stiglitz to discuss his new book "Freefall: America, Free Markets And The Sinking of The World Economy", and how the Obama administration should go about reshaping our economy.

With so much talk of a recovery, where is our economy right now?

The way I put it is that, if you look back before the crisis, the American economy was basically supported by a housing bubble, which supported a consumption boom. In one year, we had $950 billion in mortgage equity withdrawals. That got reflected in the statistics and our savings rate went to zero.

The implication is that post-crisis, even if we have our banking system work, it is not likely that we will go back to a zero savings rate in the U.S. If we don't go back to a zero savings rate, it's going to be hard to have a robust recovery unless you find something else to fill in the gap.

A recovery is predicated on the financial sector working, but obviously the sector isn't working. And there is another set of problems: Small businesses can't get loans. We are in that dynamic process now, where some of the things that we did [to steady the economy] have the characteristics of stretching out our economy's adjustments. These steps buoyed the economy in the short run, but may be more likely to extend the length of the downturn.

Our response to the crisis was party based on a fundamentally flawed theory. The theory was that we were having a psychological problem, and that if we could only restore confidence then the economy would go back to normal. Of course, we had a psychological problem, which was the bubble, but we're back to reality now.

This approach is having profound implications that are likely to last. In 2010, the projections say that there will be between 2.5 to 3.5 million foreclosures, more than the 2 million that occurred in 2009. So, that's an example of the dynamics going the wrong way, probably because we put in place the wrong policies.

In your book "Freefall", you suggest that the U.S. economy needs structural changes, rather than just cosmetic changes. Do you get the sense that the Obama administration shares that sensibility?

I think there are differences of view among those in the administration, as in any administration. But I think that one can read the proposal last week of a tax imposed on large banks on the basis of leverage to be a recognition that there is need to do more than a cosmetic change.

I think most people would say the tax has enhanced the equity of the bailout. But it's also an efficiency measure in two ways: first NOT to have the banks pay is subsidizing the financial sector, and that leads to a bloated financial sector. Second, the fact that the tax focuses on liabilities means that the Obama administration recognizes that part of the problem is excess leverage.

Does it go far enough?

No, it doesn't go far enough in several respects. First, as I point out in my book, this is not the first bailout that's come at the expense of American taxpayers or at the expense of taxpayers abroad. The banks have had an impressive record of bad lending all around the world. So, it is clear that the sector has been subsidized and is over-bloated. But, secondly, it's also clear that the sector proposes large externalities on the economy and the incentives structures at the organizational and individual level are such as to exacerbate the problem.

The tax is backward looking and is just attempting to recover [the costs] of this particular crisis. It doesn't look at all the other crisis, past crises and it doesn't create a fund for future crises.

(5) The Bogey of Inflation - Robert Skidelsky

From: Robert Skidelsky's Website <mosleyl@parliament.uk> Date: 22.01.2010 01:16 PM

The Bogey of Inflation

Robert Skidelsky

Posted: 21 Jan 2010 07:20 AM PST

LONDON – How real is the danger of inflation for the world economy? Opinion on this matter is divided between conservative economists and official bodies like the IMF and OECD.

The IMF and OECD project very low inflation rates over the next few years. But former US Federal Reserv e Chairman Alan Greenspan warns of inflationary dangers. Some bond markets, too, seem to expect sharply higher inflation.

Which view is right has big implications for policy. If inflation has succeeded recession as today’s main problem, governments should withdraw their stimulus policies (money out of the economy) as soon as possible. If recession remains the problem, the stimulus policies should stay in place, or even be strengthened.

Everyone expects some inflation. During the low-inflation era, which dates from the early 1990’s, developed-country annual inflation rates averaged 2.4%. Central bank inflation targets are now normally set at 2%.

Monetarists hail the low-inflation era as their great achievement. They take pride in the expert “management of expectations” by central banks.

But monetary policy had little to do with it. Low inflation resulted from a combination of cheap supply and low demand. There was huge downward pressure on manufacturing prices from low-wage Asian economies, while unemployment in the developed world averaged 5-6% – about twice as high as in the earlier post-war decades. Inflation was on the rise before the recession of 2008 struck, mainly because of spiking commodity prices.

This is the background against which to judge the reality of today’s inflation threat. The first thing to notice is that, as a result of the slump, capacity utilization is lower than it was 15 months ago: global output has declined by roughly 5% since 2008, and developed-country output by 4.1%.

One would expect inflation to fall with the decline in output, and this is exactly what happened. OECD inflation fell from an annual average of 3.7% in 2008 to around 0.5% in 2009. It has now started to rise again, but from a low level, mainly as a result of a turnabout in commodity prices. Moreover, the IMF and OECD estimate that global inflation will remain below the pre-2008 average for years. In other words, the low-inflation era will become the lower-inflation era.

But what about the vast quantitative easing (printing of money) that has been occurring? Since the start of the crisis, the Bank of England has pumped $325 billion into the British economy, the Fed has expanded the US monetary base by close to $1 trillion, and the People’s Bank of China originated a record amount of $1.4 trillion in loans. These measures alone correspond to 4% of global GDP. Surely that means that inflation is just round the corner unless the money is withdrawn fast, right?

For those who have had a couple of lessons in the Quantity Theory of Money, this seems a plausible conclusion. The quantity theory states that the general price level will rise proportionately to the increase in the money supply. So if the money supply increased by 5% globally in the last year, world prices will rise by 5% after a short lag.

But, as John Maynard Keynes never stopped pointing out, the Quantity Theory of Money is true only at full employment. If there is unused capacity in the economy, part of any increase in the quantity of money will be spent on increasing output rather than just buying existing output.

This is only half the story, however. By “quantity of money,” experts normally mean M3, a broad measure that includes bank deposits. Flooding banks with central-bank money is no guarantee that deposits, which arise from spending or borrowing money, will increase in the same proportion.

In the 1990’s, the Japanese central bank injected huge amounts of money into banks in an attempt to boost the money supply. At one time, central-bank money was up by 35% in one year, yet M3 was rose by only 7%. Data from Europe and the US show that M3 has been falling for most of 2009, despite exceptionally low interest rates and quantitative easing.

What matters is not printing money, but spending it. It is when money is spent that it becomes more than an inert bundle of useless paper. A central bank can print money, but it cannot ensure that the money it prints is spent. It may pile up in bank reserves or savings accounts, or it may produce asset bubbles. But in such cases, little or no increase in the money supply occurs. The new money simply replaces the old money, which has been liquidated by economic collapse.

That is why official data points to extremely low inflation rates over the next few years, despite the monetary and fiscal stimulus. But this should be a warning signal: to say that with unemployment now much higher, inflation is expected to remain low is really to say that there will be little recovery over the next five years. After all, when economies recover from recession, they usually grow above trend. This means that prices will rise above trend. The fact that there is no evidence of higher prices in the pipeline means that there is no real evidence of economic recovery.

Our economies are still on life support. To withdraw the stimulus at this point would kill the patient. To talk about the dangers of inflation is scaremongering. Instead, we should be thinking of ways to restore the patient’s health.

To be sure, different economies are at different phases of convalescence, and faster growth in some regions – for example, China and India – will help feebler ones like Europe and America. But, unless firmer evidence of recovery comes in the next quarter, European and American officials should prepare to accelerate and expand their spending programs. Otherwise, their economies

(6) Haiti: debt-forgiveness needed, and grants not loans

From: Sadanand, Nanjundiah (Physics Earth Sciences) <sadanand@mail.ccsu.edu> Date: 21.01.2010 02:11 PM

IMF/USA to cancel Haiti's debt

Together, we can convince global creditors to cancel Haiti’s $1 billion international debt.
Please click here to sign ONE’s petition calling for cancellation of Haiti’s debts:
http://www.one.org/us/actnow/drophaitiandebt/o.pl?id=1403-2267651-L4LfaZx&t=2

As Haiti rebuilds from this disaster, please work to secure the immediate cancellation of Haiti’s $1 billion debt and ensure that any emergency earthquake assistance is provided in the form of grants, not debt-incurring loans.
Haiti needs a sustained international effort as it seeks to recover from this earthquake. Beyond the current emergency response, we’ll need to ensure that money saved from debt relief is invested in long-term development, and that assistance to Haiti isn’t given in the form of new loans that would exacerbate the debt problem.
But here and now, there is a very clear goal: let’s get rid of this crippling debt.

(7) Robert Reich: The Bad Job Numbers and the Secret Second Stimulus

From: ERA <hermann@picknowl.com.au> Date: 17.01.2010 02:40 AM

The Bad Job Numbers and the Secret Second Stimulus
by Robert Reich
Friday, January 8, 2010

The Labor Department reports that 85,000 jobs were lost in December. The official rate of unemployment (which measures how many people are looking for jobs) held steady at 10 percent nonetheless. That's because so many more people have stopped looking. Reportedly, 661,000 Americans dropped out of the labor force last month, deciding there was no hope of finding a job. Had they continued to look, the official unemployment rate would have been 10.4 percent.

These statistics mask an even more troubling reality. Since the start of the recession in December 2007, around 8 million jobs have been lost. But this doesn't include all the people who, in a growing national population, would have entered the labor market had there been jobs for them. These "never entereds" amount to an estimated 2.5 million. So, in truth, the national economy is down by 10.6 million jobs overall. There's no way to make this up for years.

The most painful political truth for Democrats is the nation won't possibly be out of this jobs hole by the presidential election of 2012, even if the recovery is vigorous. Do the math. In order to get out of the hole, we'd need an average monthly increase of 400,000 jobs between now and then. But even at the peak of the 1990s jobs boom, the highest we ever got was 280,000 jobs a month. At the peak of the last recovery, in 2005, we got no higher than 212,000 jobs a month. Bottom line: Obama will be going into an election year with a higher total level of unemployment than before the Great Recession. He will have to argue that, were it not for his policies, things would be even worse. Counter-factuals like this do not sit well on bumper stickers.

Almost 40 percent of the jobless have been without work for over six months. That's a record. People who have been out of the labor force for more than six months have a particularly hard time getting back in. Many never do.

What worries me most about all this is the trend line. If we were coming out of a recession with any potential strength in the job market, we'd at least see growth in the length of the average workweek. But there's no sign of any growth. The average workweek held steady in December at 33.2 hours. Employers aren't even giving their own workers more hours.

Big American companies are more profitable, to be sure. But there's a massive disconnect between profitability and employment. Companies are increasing profits by cutting their costs (including payrolls), outsourcing more jobs abroad, and selling more abroad. But American workers - and, therefore, American consumers - are still stuck in a deep recession.

Only two things are keeping unemployment from rising more: The stimulus package, which is approaching its peak spending; and the Fed, which continues to keep a loose rein on the money supply and buy up mortgage-backed securities. After December's discouraging job's report, don't expect the Fed to tighten any time soon - probably not until after the middle of 2010, at the earliest.

What about fiscal policy? A second stimulus? Yes, to this extent: Democrats are looking into the cross-hairs of a mid-term election that won't be pretty, to say the least. Pelosi has to hold on to 40 seats. In the Senate, Dodd's and Dorgan's departures pose a huge problem. Without 60 reliable votes, the Senate Dems won't be able to do much of anything. Rarely in history have the Republicans in both chambers been so relentlessly united. The dismal jobs picture makes Republicans salivate over 2010 and 2012. Dems know they have to do something to show voters they're focused on jobs. A victory on health care won't cut it.

So expect the Dems to move toward more spending - more unemployment benefits, more cash for clunkers, more help for small businesses, maybe a new jobs tax credit. A larger defense budget will also be part of the stimulus. But don't expect any of this to be dressed up as a "second stimulus package." That would give Republicans too much ammunition to attack Dems as big spenders and try to focus the public's attention on the widening deficit and growing federal debt.

The truth, of course, is that the most important fiscal indicator is the ratio of the debt to the GDP. And the most important issue there is how quickly America can get jobs back and the GDP growing again. More spending in the short term is the only way to accelerate a jobs recovery, and reduce the debt-GDP ratio over the longer term. In other words, more deficit spending is a good thing to do now, a but a bad thing three or four or five years from now when the economy is back to normal. (I should admit at this point that I don't think we'll ever get back to "normal" because I believe "normal" got us into the pickle we're now in, but I'll save this for another time.) Yet Republicans will demagogue the deficit and debt like mad in coming months.

I hope the President doesn't take the bait and begin talking about deficits and debts, when he should be talking only about creating more jobs. How issues are framed for the public makes all the difference. ##

Robert Reich is Professor of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He has written twelve books, including The Work of Nations, Locked in the Cabinet, and his most recent book, Supercapitalism. His "Marketplace" commentaries can be found on publicradio.com and iTunes.