Martin Wolf, who wrote the book on our current economic troubles, has a thought-provoking and extremely worrying column in the Financial Times. Everyone should read it. Here's the basic argument:

We are in the grip of the most significant global financial crisis for seven decades. As a result, the world has run out of creditworthy, large-scale, willing private borrowers. The alternative of relying on vast US fiscal deficits and expansion of central bank credit is a temporary – albeit necessary – expedient. But it will not deliver a durable return to growth. Fundamental changes are needed.

Which might be a problem. Because:

What makes rescue so difficult is the force that drove the crisis: the interplay between persistent external and internal imbalances in the US and the rest of the world. The US and a number of other chronic deficit countries have, at present, structurally deficient capacity to produce tradable goods and services. The rest of the world or, more precisely, a limited number of big surplus countries – particularly China – have the opposite. So demand consistently leaks from the deficit countries to surplus ones.

In times of buoyant demand, this is no problem. In times of collapsing private spending, as now, it is a huge one. It means that US rescue efforts need to be big enough not only to raise demand for US output but also to raise demand for the surplus output of much of the rest of the world. This was a burden that crisis-hit Japan did not have to bear. ...

Given the persistent structural current account deficit, how large does the fiscal deficit need to be to balance the economy at something close to full employment? Assuming, for the moment, that the private sector runs a financial surplus of 6 per cent of GDP and the structural current account deficit is 4 per cent of GDP, the fiscal deficit must be 10 per cent of GDP, indefinitely.

Obama is making the right move by telling the country now that the deficit is going to get a whole lot larger, and that it will have to be like that for a while if we're to avoid serious economic consequences. Thing is, he's already encountering mild resistance to his $775 billion proposal. And that proposal might not be big enough.

Don't miss Martin Feldstein's Wall Street Journal op-ed calling for additional defense spending as part of next year's economic stimulus bill.

"World Markets Plunge as U.S. Auto Bailout Fails."

In other news, the dollar has fallen to a 13-year low against the Yen. Have a great day!

Jim Lindgren has two interesting ideas on how to reduce the gigantic federal debt. The most interesting: selling off large swaths of federal land to private owners. Individuals would develop the land, and the government would get a new revenue stream. What's not to like?

Chicago Bears fans are shoveling snow at Lambeau Field for money. That's a bad sign. (H/T Cheesehead.tv)

From Holman Jenkins in today's Wall Street Journal:

Maybe Washington will succeed in forestalling a deep and prolonged recession. Maybe all the money ($8 trillion by one count) being printed to acquire or insure mortgages, student loans, credit card receivables, commercial paper and banking shares will be seamlessly withdrawn once those assets are sold back to willing parties in the private sector when the panic has passed. Maybe taxpayers will even make a profit on the deal.

As Doug Flutie can testify, sometimes a 65-yard pass into the end zone lands in the hands of your own receiver.

Read it all.

The lead story in today's New York Times is headlined, "Recession Began Last December, Economists Say." The story reports that yesterday the National Bureau of Economic Research announced that the U.S. economy has been in recession since December 2007. Then you get to the second paragraph (emphasis mine):

"In declaring that the economy has been in a downturn for almost 12 months, the National Bureau of Economic Research confirmed what many Americans had already been feeling in their bones."

How does the Times know what many Americans have been "feeling in their bones"? Does Edmund L. Andrews, who wrote the story, also cover orthopedics? And isn't the appropriate saying here that Americans have been feeling recession pains "in their pocketbooks," not their bones? Based on anecdotal evidence, I can report that all that most Americans feel in their bones is the onset of arthritis and maybe a strange tingling right before a thunderstorm.

The National Bureau of Economic Research announced today that the economy has been in recession since December 2007.

Robert J. Samuelson on the many economic challenges facing Obama:

The temptation will be to press ahead with a 'bold' legislative agenda - to ape the New Deal. This would be a mistake. The psychology of bruising legislative battles will not bolster confidence. The country does need to face its health and energy problems as well as deficit-ridden federal budgets. But trying to do too much too soon risks doing none of it well. We - and he - are caught up in a web of contradictions. In the long run, we need to discipline our appetite for health care and energy; we need to reconcile our desire for government benefits and our willingness to be taxed. But Obama's first job is to avert an economic freefall.

Samuelson is right (as usual). But he provoked a raised eyebrow when he mentioned "bruising legislative battles." Two factors - Obama's honeymoon and the decrepit state of the congressional GOP - suggest that there won't be a "legislative battle" over Obama's stimulus plan next year. For the GOP to oppose Obama so early on in his presidency, at a moment of national economic crisis, would further degrade the public's impression of the party. Not that this would stop the GOP, of course.

In his column today, Paul Krugman notes that trying to budget-balance in the middle of a "liquidity trap" is a bad idea. He gives two examples (emphasis mine):

The first took place in 1937, when Franklin Roosevelt mistakenly heeded the advice of his own era’s deficit worriers. He sharply reduced government spending, among other things cutting the Works Progress Administration in half, and also raised taxes. The result was a severe recession, and a steep fall in private investment.

The second episode took place 60 years later, in Japan. In 1996-97 the Japanese government tried to balance its budget, cutting spending and raising taxes. And again the recession that followed led to a steep fall in private investment.

So, in both cases, government cut spending and prolonged a recession. But that's not all! In both cases, government also raised taxes and prolonged a recession. Funny, Krugman doesn't focus much - doesn't focus at all, in fact - on this part of his evidence.

A "liquidity trap," according to Krugman, is a situation in which "the monetary authority had cut interest rates as far as it could, yet the economy was still operating far below capacity." A situation a lot like today, in other words. The chances that the Bush tax cuts remain in place after 2010 just got a little bit higher.

Is Tim Geithner, Barack Obama’s choice to succeed Hank Paulson at Treasury, worth 500 points on the Dow? So it seems. No surprise say the professional traders: Markets hate uncertainty, and by making up his mind about this key economic post, Obama has removed a great deal of uncertainty. Plausible, but not persuasive.

One thing was certain since the day Barack Obama became our president-elect. Someone would replace Paulson, and that person would implement the Obama agenda. Whether that person turned out to be Paul Volcker, Larry Summers, Timothy Geithner or some reincarnation of Adam Smith, that person would be an implementer of policy. Yes, he--no plausible “she” was ever in the frame--would also be a key adviser to the new president. But would the advice of Larry Summers be very different from that of his long-time buddy, Geithner? Not likely. So where was the uncertainty that was dispelled by the naming of the new secretary of the Treasury?

Also, just what uncertainty has been eliminated? We knew no more about Obama’s plans and priorities on Friday afternoon, after the Geithner appointment was announced, than we did that morning. There will be a stimulus package of undetermined amount, there will be a GM bailout containing undetermined conditions, there will some day be an end to the secret ballot in union elections but we have no idea when--all known for some time. No uncertainty eliminated, no certainty substituted for the vagueness that has so far been the Obama hallmark.

The real significance of the market pop on the Geithner announcement is that we are shifting, at least for now and for the foreseeable future, from a market-driven economy to a government-policy driven economy. When Hank Paulson announced that he had changed his mind and would not buy the rotten IOUs that litter bank balance sheets, the market tanked. Nothing about the prospect for the economy changed--earnings will be whatever they will be in this recession, so will unemployment and other variables. Only policy changed.

So, too, on Friday. The economy was in as bad shape in the afternoon as it was in the morning. But a new policy player was inserted into the game. It didn’t take a genius to understand Paulson when he said that he would put the remaining $350 billion into a lockbox, to be opened by his successor--or sooner, with the blessing of that successor. Nor did it take a genius to figure out that this weekend’s deliberations about what to do about the sinking ship that is Citigroup--some wags are suggesting that CEO Vikram Pandit ask for a bailout by cash-rich Somali pirates who undoubtedly would like to move from their Mafia-like existence to financial respectability as the Corleones did when they shifted to Las Vegas--would now include Geithner as the “decider”, rather than merely as an advisor.

In short, policymaking changed on Friday afternoon, and the market likes what it thinks is the new direction more than it likes Paulson’s recent moves. The economy is no different. Obama might have intended to keep his hands off policy until he is inaugurated so as to distance himself from the Bush administration. But the policy-driven economy waits for no man, not even one who claims to be able to cool the planet and turn back the flood waters.

We are now in an era in which Washington trumps New York. When the economy is creating wealth, Wall Street and Main Street are the centers of the action; Washington has little or nothing to contribute. When attention shifts to redistributing wealth, the center of the action shifts to Pennsylvania Avenue, Capitol Hill and K Street. That’s where it is now.

The New York Times editorial page endorses the Colombia Free Trade Agreement.

Miami -- In an interview after her speech at the Republican Governors' Association meetings here today, Alaska Governor Sarah Palin criticized the Bush administration for exacerbating voter "distrust" by shifting money from the $700 billion bailout from buying bad bank assets to purchasing additional stock in banks. In response to the proposed changes, announced yesterday by Treasury Secretary Henry Paulson, Palin expressed frustration on behalf of a weary electorate and offered a stern warning.

"No more surprises," she said. "I think the surprises make the electorate distrust elected officials and their ability to appoint people who are to be looking out for the public’s interest."

The brief interview took place in a meeting room at the Miami Intercontinental Hotel. I asked her the question today because when Wolf Blitzer asked her a similar question yesterday, she struggled to give him an answer.

She initially told him that "there is going to come a point here where absolutely the federal government must play an appropriate role in shoring up some of these industries that are hurting and will ultimately hurt our entire economy and the world's economy if there aren't some better decisions being made." But then she spoke of the need for "personal responsibility" and worried about setting a bad precedent. Blitzer pressed her:

Blitzer: So, sorry, I'm still waiting for the answer, should the government bail out the big three automakers?

SP: Well, that -- it's in debate right now and I'm listening closely to the debate and there is a lot of information that even you and I certainly aren't privy to, to understand all of the ramifications if federal government were going to step in and bail out.

But we do know that the auto industry is that important that certainly it needs to be considered. But, you know, I'm not getting to ignore the debate again that I think needs to lead to the personal responsibility, the management decisions that have been made in some of these companies and corporations that have also led us to where we are.

Blitzer: So I hear you saying you need more information right now.

SP: Yes, I do. Yes.

In her speech this morning, Palin alluded to the bailout and voiced her growing concerns about Washington's addiction to, as she put it, "opium" -- O.P.M. - other people's money. During a panel discussion following her speech, TWS editor Bill Kristol lamented the fact that there had not been a serious alternative to the $700 billion bailout and Congressman Mike Pence explained his opposition to the bailout. In her interview with TWS, Palin seemed more skeptical of the a potential bailout of the automakers than she had been yesterday. The exchange with Palin follows.

TWS: Where are you on the possible bailout of the automakers?

SP: Not real enthused about looking at this next package if this entails additional dollars – beyond the $700 billion – and if it at all would suggest in this new proposal that these would be grants, not loans. And because Paulson just came out yesterday and again this morning kind of shifting gears on Americans in terms of what had just been proposed in the first bailout. It kind of lends to some distrust to the solution here that’s being proposed. So we all need more information on what exactly is it this time – the second bailout package that would evidently be very beneficial for manufacturing, for the auto industry. If that’s important we have to consider it. But no more surprises. I think the surprises make the electorate distrust elected officials and their ability to appoint people who are to be looking out for the public’s interest.

TWS: Given that reality…

SP: And the other Republican governors, too. I don’t hear a whole lot of them real enthused about the second idea.

TWS: Given the changes – and the fact that they’re suddenly shifting – do you have any regrets for supporting the initial bailout?

SP: No, because I think that we had to do something there. And Bill Kristol and others up there were saying also there had to be action taken by the federal government to start shoring up some of the elements here of the economic collapse – especially in the housing market. But now, with talk of a second, a third, a fourth stimulus or bailout package that’s being considered right now without all of the details – and was suggested up there also, all three pages of the $700 billion bailout. Well, not regret for the action that was taken. But certainly Americans need to know what we’re talking about when we’re talking about these solutions that aren’t obviously solely based on free enterprise solutions. We need more information.

And we also need to get to the point where we’re not reacting in crisis mode but we can be proactive here. That entails of course greater oversight of the entities and the players involved in all this. But with this second bailout plan that would evidently exclusively assist one segment of the manufacturing industry we want to know – Americans want to know that there is accountability here also. And if there were poor management practices and actions taken by the corporations and companies themselves that led to this collapse – it shouldn’t be about a blank check handed to them as a reward for perhaps some poor judgment and poor decisions made. There’s got to be accountability, otherwise, you know, there’s going to be a line of entities, states, people with their hands out sayin’: ’I want some of that, too.’ And what about those who have been wise and made sound decisions based on the circumstances that they were in?