President Obama’s team was hard at work weeks before his Jan. 20 inauguration, crafting an ambitious $825 billion economic stimulus plan, parlaying with the U.S. Treasury Department and Congress to ensure its speedy implementation, and assembling the team the nation’s 44th chief executive felt he needed to get the job done.

The current package, which has been endorsed by House Appropriations Committee, has yet to get overall congressional approval, but ultimately, the plan’s focus on job creation, infrastructure development, increased regulatory oversight, tax relief for businesses and America’s middle class, and aid to states struggling with budget shortfalls will remain intact.

In his inaugural address yesterday (Tuesday), President Obama made it very clear that he understands the scale of the challenge that his White House team faces. To a crowd that was repeatedly chanting “O-BA-MA, O-BA-MA,” the newly sworn-in president detailed the broad-ranging initiatives his administration plans to pursue.

“The state of the economy calls for action, bold and swift, and we will act – not only to create new jobs, but to lay a new foundation for growth. We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together,” President Obama told the gathered throng. “We will restore science to its rightful place, and wield technology’s wonders to raise health care’s quality and lower its cost. We will harness the sun and the winds and the soil to fuel our cars and run our factories. And we will transform our schools and colleges and universities to meet the demands of a new age. All this we can do. And all this we will do.”

Will Spending + Tax Cuts = Jobs?

The House bill contains $550 billion in federal spending and $275 billion in tax cuts. In an effort to spur job creation, House Democrats have slated $90 billion for highway, transit, and public works projects. On top of that, the bill allots $102 billion to helping workers find new jobs and retaining employer-provided healthcare.

“High unemployment and rising costs have outpaced Americans paychecks,” a summary of the bill read. “We will help workers train and find jobs and help struggling families make ends meet.”

Specifically, some of the plan’s highlights include:

• $79 billion for states to fund schools and educational programs.
• $18.5 billion for renewable energy and energy efficiency research and improvements.
• $16 billion in college financial aid and higher student loan limits.
• $13 billion in K-12 education spending.
• $6 billion for mass transit improvement and expansion.
• $5 billion for public housing construction and improvement.
• $10.1 billion in water-system improvements.
• $3.8 billion to build new military and veterans’ hospitals.
• $4.5 billion for defense-construction projects.
• $6 billion for federal building construction and repair.
• $4 billion for governments and housing agencies to deal with foreclosed and abandoned homes.

Hard-Hitting Parts of the Plan

Lawrence Summers, the director of the National Economic Council, said earlier this week that he expects the stimulus package will pass within a month. But he, along with many analysts, have been quick to point out that the road to recovery will be long, and the total effect of the stimulus will not be immediately felt.

“These problems weren’t made in a week or a month or a year and they’re not going to be fixed in a week or a month or a year,” Summers said. “There’s almost no question the economy is going to decline for some time to come.”

Less than half of the $30 billion in highway construction funds outlined by the plan would be funneled into the economy over the next four years, according to an analysis by the Congressional Budget Office (CBO). Less than $4 billion in highway construction money would reach the economy by September 2010, The Associated Press reported.

Only $26 billion, or 7%, of the total $274 billion dedicated to infrastructure spending would infiltrate the economy by Sept. 30, the end of the budget year.

However, other features of the plan will have a more immediate impact. The $275 billion in tax cuts the administration has planned for 95% of tax filers, and additional aid for social programs and state governments will take effect much faster.

“Some of the adjustments will take place almost immediately,” Summers explained. “People will see income in their paychecks, state and local governments will get support to prevent layoffs … and there are a ton of shovel-ready projects that are out there that aren’t going to have to be cancelled when this program passes.”

One of the first measures to be included in the plan will almost certainly be President Obama’s “Making Work Pay” tax perk, which provides $500 to individual taxpayers and $1,000 to couples. This measure is widely expected to take the form of a credit on payroll taxes.

“If you send people a check for $500, they can put it in the bank,” Clint Stretch, managing principal of tax policy at Deloitte & Touche USA LLP told MarketWatch.com. “If you raise everybody’s paycheck by $10 or $20 a week, they will spend it.”

The House proposal calls for tax credits to be extended to small businesses. The 2008 stimulus bill let small businesses to deduct as much as $250,000 of certain expenses, and the current stimulus package would temporarily extend that measure.

Also, companies could enjoy an extended bonus-depreciation provision, which would allow them to immediately write off one-half of the cost of certain capital expenses and deduct the rest over time.

The Obama administration has also pledged to keep stricter tabs on the $700 billion Troubled Assets Relief Program (TARP). The first $350 billion authorized by Congress has all but vaporized at this point. But there is no way to tell what effect the money has had, as the banks that refused capital infusions are refusing to disclose how they spent it.

“There’s going to be a very different level of rigor in the evaluation of institutions,” Summers said. “The institutions that are healthy and don’t need [the money] to survive are going to be expected to lend.”

Summers said the new administration intends to create a Web site that will detail where the bailout money has gone, as well as details of the banks’ repayment obligations and the expected repayment schedule.

President Obama on Jan. 12 asked Congress for the second half of the bailout funds.  Summers insisted the administration would take a “more proactive approach” to managing the funds, ensuring they are not focused “on the needs of banks, but on the need of the economy for credit.”

David Axelrod, another top advisor to the Obama administration, echoed those claims on ABC television program “This Week,” saying Obama would “have a strong message for the bankers.”

“We want credit flowing again,” he said. “We don’t want them to sit on any money that they get from taxpayers.”

The administration is also expected to clamp down on executive pay for companies in line for bailout funds.

Said Axelrod: “We have to make sure the money doesn’t go to excessive CEO pay and dividends when it should be going to lending.”

Key Cabinet Members

President Obama has already made many of his key appointments – crucial if his new administration is to hit the ground running. Now those nominees must run the gauntlet of U.S. Senate confirmation.
The Senate confirmed six cabinet members yesterday afternoon, but delayed the confirmation of Sen. Hillary R. Clinton as the U.S. secretary of state. Those confirmed, and their new posts, consisted of:

• Steven Chu, energy secretary.
• Tom Vilsack, agriculture secretary.
• Arne Duncan, education secretary.
• Ken Salazar, interior secretary.
• Janet Napolitano, secretary of homeland security.
• Peter Orszag, head of the White House budget office.

Sen. Clinton’s confirmation was held up by the objections of a single Republican senator, John Cornyn, R-Tex., who continues to have concerns over non-Americans who might be making large donations to the charitable foundation run by Clinton’s husband, former U.S. President Bill Clinton, the Canadian Broadcasting Corp. reported late yesterday.

That means there will be a roll call vote today to confirm Clinton as Obama’s foreign envoy, the CBC said. Last week, the U.S. Senate foreign relations committee voted 16-1 to endorse Clinton as the next secretary of state. A Republican senator from Louisiana on the committee cast the only vote against her nomination.

Clinton was President Obama’s chief rival during the Democratic presidential primary.

Among the other nominees who must still be confirmed, the key nominees may well be Mary Schapiro, Barack Obama’s choice to head the U.S. Securities and Exchange Commission, and Timothy Geithner, the president of the New York Federal Reserve who has been tapped to take over as U.S. Treasury secretary, succeeding Henry M. “Hank” Paulson Jr., the architect of much of the Bush administration bailout plan. Money Morning has reported extensively on both nominees.

Schapiro, currently the chief executive of the Financial Industry Regulatory Authority, the securities and brokerage industry’s self-policing organization, has been tapped to head the SEC – just as the embattled agency is being called on to help restore investor confidence shattered by the worst financial crisis since the Great Depression.

Although she’s a seasoned regulator, critics question her toughness: Schapiro nevertheless spent much of last year cracking down on small brokerages and minor players – even as the mortgage storm swirled and Bernie Madoff’s Ponzi scheme went undetected, The Wall Street Journal reported.

Schapiro – regarded as a “strong investor advocate” – told the Senate Banking Committee last Thursday that her tenure would “have a laser-like focus on fraud and investor protection,” Reuters reported. “With investor confidence shaken, it is imperative that the SEC be given the resources and the support it needs to investigate and go after those who cut corners, cheat investors and break the law.”

Money Morning experts wonder if she’s not being brought in to merge one or more other regulatory agencies with the SEC in order to create a “super-agency” with unified oversight of the U.S. financial-services industry.

On the Geithner matter, Stuart Levey, the Treasury Department’s undersecretary for terrorism and financial intelligence, has agreed to stay on until the Senate confirms a permanent successor, published reports state.

Revelations that Geithner failed to pay $34,000 in taxes while employed by the International Monetary Fund (IMF) several years ago derailed Senate Democrats’ plans for a speedy approval for Geithner. Bipartisan backing was still strong, but the delay in his confirmation hearing always opens up the possibility that opposition could build.

Senate Republicans, who have been mostly deferential to Obama’s nominees, were blocking efforts to fast-track Geithner’s nomination, with at least one Finance Committee member saying the tax questions deserved greater scrutiny.

Obama had hoped for approval by yesterday, but the GOP objections made that impossible, meaning Geithner’s confirmation hearing will be held today.  Two Republicans formally objected to scheduling the hearing this Friday after the panel disclosed that Geithner had failed to pay some taxes he owed between 2001 and 2004.

“Look, is this an embarrassment for him? Yes. He said so himself. But it was an innocent mistake,” Obama said when the tax troubles surfaced a week ago. “My expectation is that Tim Geithner will be confirmed.”

According to recent published reports, several Democrat and Republican senators on the Finance Committee voiced strong support for Geithner, who actually placed phone calls to individual senators, hoping to persuade them his tax problems were the result of innocent errors. Many members of Congress on both sides of the aisle believe he’s the very best candidate for this job – which is going to take someone with superlative skills and qualifications, given that the financial crisis continues to grow in complexity with each passing week.

Source: The Obama Blueprint for Solving the U.S. Financial Crisis

Buenos Aires, Argentina May 26, 2008

Upon my arrival at home last Friday, my wife approached me with the following question: “What is the UNASUR?” Initially, I really did not know how to respond… I already have answers to some of her questions related to domestic issues such as why she cannot spend more money, why I have my clothing all messed up, who ate something, and others … but explaining the UNASUR really left me with no immediate answers at all.

To give you a little background, last Friday twelve South American countries formally ratified the Union of South American Nations Treaty (UNASUR), a regional integrative initiative going back informally to 2004. UNASUR hopes to strengthen Latin American and Caribbean unity by working together to create solutions to persistent regional problems while at the same time respecting the sovereign rights and territorial integrity of the individual member states. UNASUR hopes to achieve these goals through the development and implementation of policies addressing a diversity of issues such as those related to politics, economics, social and cultural issues, the environment, energy, infrastructure development and more. It is hoped that through addressing these concerns, solutions will also be found for the ongoing problems related to persistent poverty, social exclusion and inequality.

The members of UNASUR are Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Guyana, Paraguay, Perú, Surinam, Uruguay and Venezuela. To give you an idea of the importance of the region constituting this union: it includes 388 million citizens with a combined GDP of $ 1.9 billion, (3.5% of the world’s GDP).

UNASUR will be headquartered in Quito, Ecuador and consist of four main bodies: the Council of Heads of State and Government, the Council of Ministers of Foreign Affairs, the Council of Delegates, and the General Secretariat. It will also create a South American Parliament, seated in the city of Cochabamba, Bolivia.

One of those most delighted by the creation of this new union was Brazilian President Lula who pointed out that: “we shall move forward with innovative projects and will fully attain the goal of financial and energetic integration, as well as that of realizing the improvement of regional infrastructure, and the creation of a social cooperation agenda.” Lula, as always, has in mind ambitious ideas where of course, Brazil takes the lead in initiatives.

In reality, the creation of UNASUR has taken many by surprise as it has happened at a moment in history when the union of so many countries seems unimaginable.

Relating to this idea, we should be mindful that this union was created at a time when many Latin American countries have reached a powerful level of macroeconomic and institutional consolidation; achieving international recognition as having gained the much desired investment grade for many of its countries.

The establishment of regional blocks is more viable now with the consolidation of the economy and institutions within these countries, coupled with a long-term vision. The regional blocks of the past have not reached significant achievements in the long run due to difficulties within their individual countries, recurrent crisis and political instability. Mercosur serves as a prime example of these kinds of problems.

In the instance of UNASUR, there is a political and ideological fragmentation among many of the signatory countries. There are countries with serious internal problems such as Bolivia. Venezuela and Argentina are plagued with internal issues as well, but to a lesser extent. There are also member state conflicts such as those between Colombia, Ecuador and Venezuela. Additionally, there are ideological divisions between several countries that make it very difficult to imagine how those countries could go forward with the successful coordination of policies.

UNASUR’s successful unification of regional forces having benefits realized by all member states will depend in part on the influential leadership of Brazil coupled with the lessening of individual differences between countries.

This brings us to the question: what benefits could UNASUR bring investors in the region? I think that there are no short-term benefits. However, if UNASUR is able to successfully establish itself, it can then contribute to the development of the regional financial market (one of its main stated goals) creating one with stronger depth and liquidity than other financial markets of the region. More importantly, UNASUR can contribute to the strengthening of the regional economies, underpinning their growth and development which will benefit the investor who will then find less risk and more profitability in their investments in the region.

The UNASUR has just been born. It will be necessary to give it time to grow and develop. We hope that the countries comprising this new group allow this to happen.

We will meet again tomorrow,

Horacio Pozzo

Editor’s Note: A new community in South America is born with a variety of diverse and complex objectives spanning cultural, social and economic realms… another aim is the social inclusion, the civic participation, the strengthening of democracy for all… Horacio’s wife is asking questions and Horacio finds he does not know how to respond. If you want to know, keep on reading… Enjoy, and send your comments to the editor here: paola@latinforme.com