– This opinion piece was written by C.M. Sennot for GlobalPost. The views expressed are his own. It was originally published here on GlobalPost. –

The last time America had to borrow money to finance a war was during the Revolution and a cash-strapped Continental Congress took loans from France to fund a surge against the British.

That worked out pretty well.

But it’s hard to feel the spirit of 1776 in President Obama’s journey to China. He went as a representative of a borrowing nation to its primary lender amid a call for yet another costly military surge in the Long War that is escalating in Afghanistan even if it is hopefully winding down in Iraq.

As the president completes his journey to Asia, he returns to Washington to face what is the most consequential foreign policy decision of his presidency, a decision that this administration has not yet fully thought through.

That is whether to heed the counsel of his top commander in Afghanistan, General Stanley McChrystal, and call for a surge of 40,000 more troops in Afghanistan.

Obama is said to also be pondering a middle ground of calling up somewhere between 10,000 and 30,000 more troops.

Or, and this is shaping up as a long shot, he and his team of rivals in the Pentagon and the State Department could decide to rebuff McChrystal. In this scenario, Obama would refocus the mission but still hold to the general counterinsurgency plan that he originally spelled out in March and which increased U.S. troops by 21,000 to a total U.S. presence of 68,000 troops. That surge was just completed this fall.

From my experience talking with counterinsurgency experts and meeting with U.S. and coalition counterinsurgency leaders and trainers in Afghanistan over the summer, I am hoping Obama chooses to hold to the existing troops level. I am hoping he does that while refocusing his original plan to be more targeted on counterterrorism than the wider goal of classic counterinsurgency against the Taliban. He should stick to his guns and hold at the troop levels he has and make the troops who are there better and more effective and provided with better equipment and intelligence assets to get the job done. As I said in an earlier column, less is more right now in Afghanistan.

Every empire in history has regretted an escalation in Afghanistan and it is hard to see how America would be any different.

I do not envy the president and his team in making a very difficult and costly decision at a very hard time economically in America. Few presidents in history have had to face so many fateful decisions in their first year in the White House.

But despite all the pondering the president has given to whether to increase troops, it seems he has given far too little consideration to the overall cost of escalating the war and how it will undercut his ability to fund the ambitious domestic policy agenda he has set out from bank bailouts to health care reform.

With all the debt piling up, it seems to me there is a clear connection between his trip to China and these war costs in Afghanistan.

If you think about it, the hundreds of billions we borrow from China every year will go at least in part to fund the enormous cost of an escalation of troops in Afghanistan, a cost — in terms of lives and treasure.

The war in Iraq will end up costing this country more than 2 trillion dollars, according to the conservative projections of Linda Bilmes, an economist at the Harvard’s Kennedy School of Government. The cost is higher still if you include interest on the debt, interest which will in a large measure be paid to China.

Bilmes has worked closely with the Nobel Prize-winning economist Joseph Stiglitz to do the long math on the wars in Iraq and Afghanistan, to factor in not just the military budget and the interest on the debt but also the extraordinary high cost on every level of soldiers who are wounded physically and mentally by war.

Bilmes is credited with highlighting the failure of the administration of President George W. Bush to give an accurate cost assessment of a war that escalated several hundred times beyond the original projection of just $50 billion to $60 billion made by the Pentagon at the start of the war in 2003. She’s been proven right and she’s worried that the Obama administration may be fatefully making another miscalculation on the cost of war in Afghanistan.

And we’ve hit a profound turning point in Afghanistan. In this new budget year, which started Oct. 1, for the first time, the war in Afghanistan will cost Americans more than the war in Iraq.

And, as Bilmes points out, fighting in Afghanistan is more costly than it is in Iraq because of the terrain and the difficulty in supplying troops and evacuating the wounded. She estimates that Afghanistan is as much as 1.6 times more expensive per soldier than Iraq.

“While this administration has brought great military expertise to thinking this through, there needs to be a greater focus on the cost. How are we going to pay for this? People are still not looking at the long term costs,” said Bilmes.

And so as the president stares out the window of Air Force One pondering the dark skies in the long journey back to Washington, one can only hope that he has thought through the extraordinary cost — on every level — of calling for an escalation of troops in Afghanistan.

More on Afghanistan from GlobalPost:

America’s farmer-soldiers in Afghanistan

Afghanistan’s only pig quarantined? Must be bad

Afghanistan: Waiting for the dust to settle

Troops’ deaths shatter trust in Helmand

Pictured above: U.S. President Barack Obama tours the Great Wall of China at Badaling, November 18, 2009. REUTERS/Jason Reed

(James Saft is a Reuters columnist. The opinions expressed are his own)

Easy money in the United States, a falling dollar and growing flows of funds seeking better returns in emerging markets are touching off a new round of capital controls in hot emerging markets, a trend that could accelerate and will at the very least increase market volatility.

It shouldn’t be a surprise, really; loose money in the developed world is helping to spur investment into emerging markets, driving currencies up and making local exports less competitive for countries which, unlike China, aren’t hitching a free ride as the dollar declines.

Inflation may be a threat for many of these, but with the global economy still struggling, it certainly won’t feel that way to policy makers.

Russia on Wednesday joined the list of countries eyeing new measures to stem currency speculation and appreciation. Moscow was careful to say it would not impose actual capital controls, which seek to regulate flows of funds into or out of an economy, but the measures they are considering would have exactly that effect, making it tougher or more expensive for money borrowed abroad to be brought into Russia.

Kazakhstan, which has been intervening actively to slow the ascent of its tenge currency, has introduced legislation allowing capital controls, but so far has not used them.

Indonesia said this week it will consider curbs on foreign holdings of short-term official debt, sending its rupiah into a brief swoon until central banker Hartadi Sarwono damped things down by saying currency moves based on such flows were so far manageable.

Elsewhere all across developing Asia central banks have been intervening to cap gains in the value of their currencies, with Taiwan going so far as to ban foreign funds from investing in local time deposits.

Brazil last month announced a 2 percent tax on foreign investment in stocks and fixed-income securities to limit the strengthening of the real.

International Monetary Fund chief Dominique Strauss-Kahn gave the fund’s standard line to the Financial Times: “The IMF would not recommend them as a standard prescription … as they carried costs and were usually ineffective”.

FIGHTING OVER SCRAPS

Ineffective over the long run they may be, but tempting they are in the short term. The very fact that India and China have emerged relatively well from the crisis and have resumed growth in strong fashion gives courage to those considering their own measures. And really, the very idea of an orthodox allegiance to free flowing markets ensuring the best outcome for all now looks pretty 1999. Malaysia attracted a firestorm of criticism when it imposed controls in the wake of the Asian crisis in the 1990s. There was much talk of how investors would go away and not come back, how development would be retarded and Malaysia ultimately would rue the day. None of that has come to pass, and those same investors proved quite willing to come back if the returns looked good enough, as indeed they did.

But Malaysia, along with Chile, were outliers when they imposed capital controls. What will it mean if it becomes not a tool of desperation but a standard policy when hot money flows? There must be a risk that capital controls become part of an escalating series of beggar-thy-neighbor steps taken by countries fighting over the scraps of a diminished U.S. and European appetite for imported goods.

If, in other words, these controls are a temporary phase to ease the transition to stronger currencies, the risks might not be that high. I’d worry that developed market interest rates are going to stay low for a very long time. That means that the grand emerging markets carry trade of borrowing in dollar to speculate for appreciation elsewhere will, as it did in Japan, build and build.

At the same time you have to look at why interest rates will stay so low for so long. My bet is that it is because consumption in the developed world will be under structural pressure as debts are repaid. So the money flows into emerging markets and drives up currencies, but unless domestic consumption in China and India really takes off there will not be a very good market for exports. That will make newly strong emerging market currencies all the harder for those countries to tolerate, economically and politically. If China does not do its part and allow its currency to appreciate, the argument will be all the more stark.

It may or may not be a good idea, but one thing I would not count on is coordinated and globally sanctioned capital controls, as espoused by Arvind Subramanian, a senior fellow of the Peterson Institute.

The U.S. simply won’t wear it.

Look then for more unilateral controls and more volatility as speculation of all kinds grows.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)

(James Saft is a Reuters columnist. The opinions expressed are his own)

With just a few short weeks until the end of the year, look for many fund managers to take on more risk in an effort to salvage their annual return figures.

This is not about fundamentals, this is about something far more important: career risk.

Hedge Fund Research’s Global Hedge Fund index, which is broadly representative of the industry, is up just 11.9 percent year to date, while its Equity Hedge index is scarcely doing better, up 12.6 percent. The HFR Macro Fund index is actually down 8 percent, indicating the best paid minds in the business did not see the astounding emerging markets rally and dollar fall coming.

Given that global emerging markets are up something on the order of 60 percent this year, that all global shares are up 30 percent and even the S&P 500 is up 22 percent, we can conclude that a lot of managers are heading into the year-end reporting season with a lot of ground to make up.

There are also lifeboats full of institutional fund managers and mutual fund managers in the same position.

What all who have missed the rally have in common is not a common failure of analysis — there are lots of different ways to get it wrong — but a collective vulnerability to finding themselves waving their clients goodbye. Letters detailing 2009 performance will have to be posted, ranking lists of funds will be published and there will be consequences.

It must be hugely tempting for managers who are behind — and remember a lot of these people are not committed bears — to pile in and hope the momentum trade can bring their returns back to respectability.

It all adds up to a supportive background for risky assets through the new year. There can be no assurances that fundamentals, which are pretty poor, won’t reassert themselves. There is no telling too that policy makers might put a foot wrong and scare the markets, though I doubt it. They have a very large interest in a merry year end. Even if they didn’t, inflation is not an issue and unemployment is, so don’t look for any telegraphs from Washington, London or Frankfurt bearing tidings of rising rates.

COME BACK CHUCK PRINCE, ALL IS FORGIVEN
Individual investors who missed the rally are less likely to pile in right now. Their temptation will be to pass over the business headlines and go straight to sports. And besides, the holidays provide distractions of their own and you are highly unlikely to be fired by yourself as your own investment manager, now matter how richly you deserve the boot.

Professionals however are usually not so lucky as to be related to the client.

Of course, there must be many managers who are ahead of the market. Why won’t they trim their sails and protect their gains? I don’t know the answer to that but in my experience it just doesn’t work that way. People tend to think of gifts as entitlements and it’s a rare, and valuable, manager who having been aggressive when most were timid now gives up the habits of a lifetime.

It is all very reminiscent of good old Charles Prince, the former Citigroup chief who said about the leveraged buyout market, “As long as the music is playing, you’ve got to get up and dance,” just as the world began to unravel. Prince wasn’t a fool, he was expressing a core truth. If you are head of a bank or a mutual fund and you sit out a boom which you see as too risky you are taking on another, perhaps more persuasive risk; that the very clients you seek to protect will call you a stick-in-the-mud and take their business elsewhere.

This is not a specious argument about “cash on the sidelines” or money market funds. Numbers showing huge cash in money market funds are misleading; most of it will never end up in equity markets. This is simply about the self-fulfilling psychology and mechanics of rallies, especially rallies with official support.

The authorities, in their wisdom, have broken the circuit of a crash by flooding the market with enough money to drive up asset prices. This is intended to bring money out from under mattresses and force people to take risks again, to make them dance even if they feel like a fool.

That is unlikely to last forever or to work forever, but a reversal is less likely before January 1 than after.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)

(Editing by James Dalgleish)

Sweeping new U.S. breast cancer guidelines released on Monday recommend against routine mammograms for women in their 40s, and suggest women 50 to 74 only get a mammogram every other year.

The new guidelines by the U.S. Preventive Services Task Force, an influential panel of independent experts, would sharply curtail the number of breast mammograms done in the United States, sparing women the worry of false alarms and the cost and trouble of extra tests.

But U.S. cancer experts say the altered schedule may mean more women will die from breast cancer.

Should you and your loved ones get mammograms? What are the implications for health care reform, with members of Congress looking for ways to cut costs?

Join us for a live online on breast cancer screening and mammograms on Tuesday, Nov. 17, at 12pm ET. The event will be moderated by Reuters Health Executive Editor Ivan Oransky and joined by Reuters’ editor in charge of health and science, Maggie Fox.

Our confirmed participants:

Heidi Nelson, research professor of medical informatics and clinical epidemiology and medicine at the Oregon Health Sciences University, who has led systematic evidence reviews for the U.S. Preventive Services Task Force.
Daniel B. Kopans, professor of radiology at Harvard Medical School and director of breast imaging at the Massachusetts General Hospital.

You’ll be able to follow the discussion by listening in on the conference call line below or via the live blog here (it’s also embedded lower on this page.) If you have any questions for the participants, please leave them in the comments below. We’ll ask a selection on your behalf.

Update: Thanks to everyone who participated. You can hear a recording of the call here

– John Kemp is a Reuters columnist. The views expressed are his own —

Both Goldman Sachs and Morgan Stanley reduced the size of their commodity trading books during the third quarter, according to their latest filings on Form Y-9C (”Consolidated Financial Statements for Bank Holding Companies“):
While the gross fair value of physical commodity inventories held on their balance sheets rose — sharply in Goldman’s case — the gross fair value of the commodity contracts was down.

Most of the shrinkage came from smaller positions in exchange-traded futures contracts, as well as a reduction in over-the-counter (OTC) options. OTC swap positions also fell.

But the gross notional value of forwards was little changed.

– Peter Morici is a Professor at the Smith School of Business, University of Maryland, and former chief economist at the United States International Trade Commission. The views expressed are his own. —

From Berlin to Bangkok, governments are screaming about the falling dollar, because they can no longer rely on reckless American consumers to power their economies.

From the late 1980s to 2007, the global economy enjoyed The Great Moderation-low inflation and sustained growth interrupted by brief recessions. Driving global growth was an eight fold increase in the U.S. trade deficit, facilitated by a doubling of the value of the dollar against other currencies from 1989 to 2002.

Deregulation and new technologies powered U.S. growth, and Americans flush with success bought whatever the world had to sell. However, when imports substantially exceed exports, Americans must consume more than they earn producing good and services, or demand for what they make is inadequate, inventories pile up, and layoffs and recession follow.

From 2003 to 2007, the U.S. trade deficit averaged $665 billion, and Americans massively borrowed from abroad to keep the U.S. economy going. They posted as collateral overvalued homes financed on shaky mortgages. When mortgages failed, banks failed, home prices dropped, and retail sales tanked. The U.S. economy was thrust into the worst recession in 70 years and pulled the rest of the world into crisis.

Imports of oil and consumer goods from China account for the lion share of the U.S. trade deficit. Americans drive big cars powered by thirsty engines. They sit on vast untapped deposits of natural gas but burn too much heating oil in the winter. Simply, conservatives in Congress are unwilling to submit to genuine energy conservation, and liberals teach developing domestic fossil fuels resources is evil.

For nearly two decades, China has maintained an undervalued currency. The Chinese government tightly regulates private trading in the yuan, and each year, purchases more than 400 billion U.S. dollars with newly printed currency to keep the yuan artificially cheap against the dollar. That is 10 percent of China’s GDP and 20 percent of exports to make Chinese goods artificially inexpensive on U.S. store shelves and juice Chinese exports.

China amasses huge trade surpluses that power its impressive growth, and the rest of the world suffers slower growth to compensate. An economic miracle sold to the world as policy genius but really built on currency mercantilism and beggar-thy-neighbor protectionism.

Japan has propped up its economy by purchasing dollars and permitting private investors to borrow yen at near zero interest rates and trade those for dollars-denominated Treasury securities. Now, Tokyo signals it will not let the yen drop much below 90 per dollar when a market equilibrium value would be closer to 80.

Other Asian export powerhouses have practiced variants of the Chinese and Japanese currency model too. It is no wonder the dollar was so strong for so long.

In recent years, private investors have grown wary of massive American borrowing. They have turned to the best substitutes available for the dollar-the euro, yen and gold-and driven up their values and pushed the dollar down against every major currency but the Beijing regulated yuan.

Now, with Americans no longer able to borrow madly to prop up global growth, protests are shouted around the world about a “cheap U.S. dollar.”

The hard facts are the dollar became overvalued earlier in this decade, in no small measure thanks to the currency policies of China and other Asian governments. Now, as private traders flee the dollar, its average value has fallen near the middle of its trading range for the 1990s.

The dollar has fallen too much against the euro and some other currencies, because China, Japan and other Asian exporters have been unwilling, in varying measures, to abandon currency mercantilism and let their currencies rise in value as free markets would require.

If China and others ceased subverting currency markets, the yuan would rise at least 40 percent, other Asian currencies would appreciate too, the U.S. trade deficit would shrink dramatically, and the new demand for American goods would rocket the U.S. economy.

With higher incomes, Americans would need to borrow less, and the global economy could go forward, embracing free trade in goods and currency.

– Nancy Birdsall is the president of the Center for Global Development. Arvind Subramanian is a senior fellow at the Center and at the Peterson Institute for International Economics and a regular columnist for the Business Standard, India’s leading business newspaper. The views expressed are their own. –

Efforts to cut emissions of the heat-trapping gases are gridlocked over a misunderstanding about what is fair. This misunderstanding is hindering climate change legislation in Congress and threatens to torpedo international negotiations in Copenhagen next month.

We propose a new way of thinking about climate fairness that focuses not on emissions cuts but on meeting developing countries’ energy needs in a climate-friendly manner. This simple narrative can provide a framework for U.S. legislation and open the way for international collaborative efforts to avert climate catastrophe.

At present, many people in the United States focus on the large and growing emissions of the developing world, especially China, which in absolute terms is now the world’s largest source of greenhouse gases, and India, which is growing fast and like China relies heavily on coal. They argue that it would be unfair to force emissions cuts at home without similar cuts in developing countries. A recent poll found that 60% of Americans believe that in any climate agreement China should cut its emissions the most.

It is true that developing countries already account for roughly half of all greenhouse gas emissions, and that their large populations and rapid economic growth are boosting emissions fast enough to create a planetary crisis by 2050-even if today’s rich countries had never existed.

But meanwhile a quarter of humanity — including millions in China and India — live without any electricity, and one-in-three people on the planet rely on straw, brush, charcoal and animal dung for their cooking needs. The resulting indoor air pollution kills 1.5 million people a year — about 4,000 per day — mostly children. Power for small businesses, irrigation networks, clinics and schools is sorely lacking.

Developing countries point to these unmet energy needs and to large disparities in per capita emissions to argue that the rich world must move first. They note that the 20 tons of CO2 that Americans emit annually is five times the world average, well above both China (5 tons per capita) and India (below 2 tons per capita).

They see emissions as inseparable from economic growth and argue for the developing world’s “right to pollute.” Some argue that because most of the extra heat-trapping gasses in the atmosphere were put there by the United States, Europe, and other industrialized countries, wealthy nations should pay “reparations” for the damage inflicted on poor countries.

Rarely in history have we seen constructive solutions come out of such blame games.

We believe that both sides should shift their focus from negotiated emissions cuts to a joint effort to find ways to rapidly meet the developing world’s legitimate energy needs at low cost in a carbon-constrained world. How can we change to this mindset, adopt a story line that would lead ordinary people in rich and poor countries, and the politicians and negotiators who do their bidding, to do the right thing?

Wealthy nations, starting with the United States, should affirm that, for any given income, people in developing countries have the same rights to energy-based services as those in the rich world-and then offer to help them obtain those energy-based services at the lowest possible cost and with the lowest possible CO2 emissions.

This should apply not only to existing technology, but to a war-footing approach to the development and deployment, at home and abroad, of new emissions-reducing and efficiency-enhancing technologies — solar, wind, tides, algae-based biofuels, smart grids and buildings — similar to the technology push of World War II.

The long-overdue climate speech by President Obama, explaining why action is urgently needed and why the U.S. must lead, would be a good place to start, and could help to open the way for progress in Congress and in Copenhagen.

For their part, developing countries should stop talking about a “right” to emit CO2, emissions are after all merely a waste product. Instead, they should insist on their right to energy-based services appropriate to their level of development — to light, and heat, and refrigeration, for starters, and then, as per capita incomes rise, to elevators, climate-controlled homes and workplaces, computers and, yes, flat-screen TVs.

To make this level of energy services possible without destroying the planet, developing countries should press the rich world for massive public funding of green energy research, and for full and rapid access to all resulting new technologies.

Framed this way — in terms of a U.S.-led push for equality of energy opportunity — it’s hard to see how Americans and others in the rich world could fairly object. We think they would agree, because it’s the fair thing to do and because it’s in their own best interest.

–  Bernd Debusmann is a Reuters columnist. The opinions expressed are his own. –

Prophetic words they were not. “By God, we’ve kicked the Vietnam syndrome once and for all…The specter of Vietnam has been buried forever in the desert sands of the Arabian Peninsula.”

Thus spoke a euphoric President George H.W.Bush early in March, 1991, shortly after the 100-hour ground war that chased Iraqi forces out of Kuwait, the oil-rich U.S. ally they had invaded and occupied in the summer of 1990.

The specter of Vietnam, far from being buried in the Arabian sands, has risen again as President Barack Obama and his advisers are considering the course of the war in Afghanistan, now in its ninth year, increasingly unpopular, and considered unwinnable even by America’s senior soldiers if it is fought alongside a corrupt government that lacks legitimacy in the eyes of the population.

That the Vietnam syndrome is alive and well is obvious by the proliferation of analyses and commentaries drawing parallels, or dismissing them as nonsense, since Obama declared Afghanistan a war of necessity. (Type “Is Afghanistan Obama’s Vietnam” into the Google search box and you get more than nine million references).

The cover of the latest edition of Newsweek magazine is taken up by an iconic photograph of the Vietnam war, people clambering up a ladder to a U.S. helicopter waiting to evacuate them off the roof of a Saigon building the day before the city fell to communist forces on April 30, 1975. The story inside: what to learn from the lessons of Vietnam.

The answers to that question differ widely and the Vietnam analogy has come up routinely whenever the United States resorted to military action in the past three decades, from Lebanon and Somalia to Bosnia, Kosovo and Iraq.  Obama himself has dismissed the parallel.

“You never step into the same river twice,” he said in October, “and so, Afghanistan is not Vietnam. But the danger of overreach and not having clear goals and not having strong support from the American people, those are all issues I think about all the time.”

Both in scale and geopolitical context the difference between the two conflicts is vast: at the height of its involvement in Vietnam, the United States had more than half a million troops there, fighting both Viet Cong insurgents and North Vietnamese army regulars who could count on aid from China and the Soviet Union.

In Afghanistan, the United States has some 68,000 soldiers, a number that is likely to grow to 100,000 or more (depending on what decision on reinforcement is taken) by the end of Obama’s term. Neither the Taliban insurgents nor al-Qaeda can count on the kind of outside support America’s antagonists in Vietnam commanded. In Vietnam, more than 58,000 soldiers died. The U.S. death toll in Afghanistan stood at 916 in the first week of November.

VIETNAM SYNDROME AND FLAGGING SUPPORT

But there are also parallels, and the Vietnam syndrome the elder President Bush had declared kicked is doubtless one of the reasons why public support for the war in Afghanistan has been declining steadily, despite Obama’s assertion that the American commitment would not be open-ended. The latest poll, by CNN, showed that 58 percent of those questioned were opposed to war.

And the parallels? In the words of Senator John Kerry, a Vietnam veteran who turned into a war critic after his deployment, “Once again, our enemy blends in with the local population and finds sanctuary in a neighboring country. Once again, the danger of being perceived as an occupying force by a war-weary population remains perilous.

“With Afghanistan, as with Vietnam, we have a president facing pressure from the military.”
President Lyndon Johnson, Kerry wrote, failed to stand up to his military commanders when they warned that the U.S. was facing defeat without additional forces - the argument that the U.S. and NATO commander in Afghanistan, General Stanley McChrystal made when he put forward options to Obama, including up to 40,000 more troops.

History does not repeat itself but the similarities between Obama in 2009 and Johnson in 1963 are striking. Both inherited a war that became their own at a time when they were pushing far-reaching and costly domestic reforms. Johnson’s Great Society programs ranged from reducing poverty to improving medical care. Obama’s key project is universal health care.

Most of Johnson’s reforms were enacted in the first two years of his presidency, with Democratic majorities in both houses of Congress. By 1968, the war in Vietnam had eroded his popularity to such an extent that he decided not to run for re-election.

The House of Representatives passed Obama’s health care bill this month, the Senate is expected to vote on its version soon. Polls show Obama’s popularity has been slipping, though his approval rate is still above 50%. Where it will be in a year’s time, halfway through his term when the U.S. goes to the polls for mid-term elections, will partly depend on how the war in Afghanistan is going.

The ghost of Vietnam hangs over the White House.

You can contact the author at Debusmann@Reuters.com.

– George A. Cloutier, a graduate of Harvard Business School, is the founder and CEO of American Management Services, one of the nation’s largest turnaround and management services firms specializing in small and mid-size companies. The opinions of George Cloutier are his own and do not represent those of the United States Conference of Mayors or Partner America. –

President Obama gets an “F” for his small business program. The SBA has guaranteed a paltry 50,000 loans  to the nation’s 29 million small businesses – that’s .0017. Loan volume is down 36 percent from 2008 and 50 percent from 2007. Obama and his advisers have actually done the unimaginable; they have reduced the flow of aid to small businesses in the face of a deep recession. The program’s bank lenders have left $15 billion on the table due to “regulatory problems.” Even an administration plan to provide lending to 70,000 vehicle dealers has no takers and failed.

Administration “experts” allocated less than 1 percent of the stimulus bill to small business. It’s mind-boggling that Washington ignores the biggest economic sector in the country employing 60 million people, producing 50 percent of GDP, and creating 70 percent of new jobs.

In the past several weeks, I have had the honor to lead events for small businesses in 15 cities (including Philadelphia,  Kansas City, Missouri and Baton Rouge, Louisiana) directly engaging with 2500 small business owners (employers only). Ninety-five percent of these business owners feel the administration’s stimulus plan and program has badly mistreated small businesses compared to Wall Street and Detroit.

On October 21st, President Obama announced a second stimulus for small business. His new plan must have been a political speech since it lacked specifics as to how many businesses would be helped, how much money would be allocated and distributed, and when the money would actually start flowing.

Recently, the House passed a bill that purports to offer $40 billion to small businesses. The banks, having left billions of dollars on the table, astoundingly were selected again as the prime source of lending.

The bill mentions authorizing the SBA as a lender of “last resort” if certain loans are not funded by the banks, with a complicated process yet to be determined. No amount of authorization is mentioned and the process to achieve “last resort” status has no definition or timeframe. Much of the lending purported in the $40 billion will be achieved by raising the limit on certain types of loans; this way more money can be loaned to fewer businesses providing political cover for Congress and the president.

Here’s a program the president should mandate.

Create a $50 billion pool for direct loans. Mandate that it should be working within 60 days. Make sure everyone understands that you need to go down the “risk curve” just as the administration did for Wall Street and Detroit.

Select a George Patton-like leader to organize a 24-7 program starting now.

Let’s move small business from the “kid’s table” to the Cabinet. Create a full Cabinet post for small business and entrepreneurship.

Let’s get some real accountability on the success of these programs into the public domain. Your administration should publish a weekly report with the number of loans made, the banks providing the loans, the amounts of those loans and where the banks are located. It’s time to hold the bureaucrats’ feet to the fire.

Energize the SBA’s current outreach and guarantee program. The SBA Administrator should be on the road 5 days a week promoting the “Get-A-Loan” program across the country with the SBA’s public relations operatives to promote it. SBA employee and office hours should be reconfigured to include after hours and Saturday hours when small business owner have the time to apply and discuss lending. Make sure the participating banks are present. Telemarketing centers should be set up to contact small businesses directly to discuss new lending programs since most are simply not aware. A large number of SBA employees should be put on cold calling programs to introduce lending programs to small businesses. Have “Get-A-Loan” days twice a week with open houses. Forget direct mail, fancy brochures, and ill-attended conferences that usually write only a few loans if that. Forget websites directed toward emergency preparedness and focus on more immediate loan priorities.  Make sure that calls looking for help do not disappear into voicemail hell.

On October 10, 2008, you stated, “Main Street needs relief and you need it now.” It’s time to stop sending breadcrumbs and deliver the beef.

(James Saft is a Reuters columnist. The opinions expressed are his own)

New studies from the Federal Reserve and European Central Bank show that, whatever else, a recovery in the economy is not being supported by a resumption in bank lending, raising concerns about how exactly growth will become self-sustaining when official stimulus ebbs.

The ECB last week released its loan survey showing banks tightened credit yet again for businesses and consumers, though at a less severe rate than in the previous quarter. Much was made of the fact that banks said they expected to ease terms to businesses, but not individuals, slightly in the last three months of the year.

Days later the Fed was out with its own survey, and again the news is getting worse more slowly, which must mean it is time to pop open the tap water. Banks are tightening terms and conditions to large firms, though fewer are doing so than before. Of course we should be thankful for small mercies, but the fact remains that this is a relative rather than an absolute survey, which means that even if fewer are being tougher the vast majority are being just as tight with money as they were three months ago when things were very tight indeed.

But wait, I can almost hear you ask, banks are making money again. If not making loans, what are they doing with it? Funny you should ask, they are lending it to the government. According to Fed data October marked the first time in years that banks held the same amount in Treasuries and Fannie Mae and Freddie Mac bonds as they did in commercial and industrial loans. Business loans have plunged 18 percent in a year, while Treasury and agency bonds are up 8 percent.

Banks are choosing to lend to the government and to government-backstopped mortgage firms because they see it as the best way to survive: hunker down, take fewer risks and content yourself with the thin gruel and thin margins of taking deposits and lending to the entity insuring those deposits. It’s a good way to get solvent but it will take a terribly long time.

Falling demand for credit is a factor too. Firms are concentrating on expanding margins by cutting back on costs, rather than positioning themselves for an upswing in demand. That means they want fewer loans to support capital expenditure. It also sadly means that they are not yet hiring.

OF JOB GROWTH AND SMALL FIRMS

The question becomes will the loans be there when companies do decide that it is time to tool up and hire again. There can be no certainty. Banks are still in pretty poor shape, more will fail and few look likely to expand.

If you believed in markets you would believe that this is simply setting the stage for new entrants to come in and make loans that the banks won’t. I’d like to believe this, but here we run into one of the terrible side effects of too-big and too-connected to fail. Who on earth wants to set themselves up in competition with government-backed firms? Some will do extremely well in making loans opportunistically to commercial real estate and industry over the next two years, but fewer than would be the case if there was a truly level playing field.

Two groups are doing reasonably well, but only because they don’t have to rely on bank credit: large credit-worthy borrowers and house buyers. Fannie and Freddie are still cranking out mortgages, and loans backed by the Federal Housing Authority have boomed. Rates are low, and though fees are high and terms tighter it has to be said that the decision to officially support the housing market by tax breaks and subsidized lending is making a difference. It may not be good policy, but it is effective poor policy.

Small firms seem to be getting particularly tough treatment; the Fed survey shows that terms, conditions, pricing and availability were all deteriorating more rapidly for the small than the large and medium-sized companies. Annaly Capital points out that while middle market firms paid only a slight premium in the loans market in 2007 and 2008, the difference between benchmark loans and middle market is now almost 6 full percentage points, meaning they pay nearly double.

A prepackaged bankruptcy for CIT Group and a chastened GE Capital will not improve things.

Two possibilities suggest themselves for how things play out. Banks may get their balance sheets in order and begin to lend again in force next year, meeting a need for investment as economic growth takes root, if indeed it does.

If demand rises and banks can’t meet it, look for more official arm-twisting, more ritual abasement by bankers called before Congress and, ultimately, more official interference in the process, probably in the form of insurance or even mandates.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)