Today's column discusses the current debate over health-care reform, focusing on why many Americans feel comfortable with their current health care coverage -- and why they probably shouldn't.

A brief review: A cap-and-trade system to regulate carbon emissions is one in which, to emit a ton of carbon, you have to have a permit - these are the "allowances." Those permits can be traded on an open market. The point is that because the allowances have a market price, they create an incentive for firms to emit less carbon. Say I emit 100 tons of carbon, I have 100 permits, and permits trade at $20 each; if I can reduce my emissions by 10 tons, I can sell those permits and make $200; so if I can make that emission reduction by investing less than $200, then I will do so. (Without cap and trade that investment would be a pure cost, so I wouldn't do it.) In any plausible cap-and-trade bill, the total number of allowances will start high and go down over time; this is how emissions get reduced.

A fair amount of economic research has shown that how you distribute allowances can have distributional effects (obviously) but also efficiency effects. To take the example I know best, Sylvia Brandt of the University of Massachusetts, Amherst, (who happens to be my wife) has shown that when firms anticipate a particular allocation formula, they will take strategic action in anticipation of regulation, which may affect outcomes. For example, because fishing firms expected that tradable permits would be allocated based on the number and size of vessels in the fleet prior to the regulatory change, they had an incentive to re-introduce old, inefficient vessels into the fleet, simply because it would increase their share of the permits being given out.

The fight, then, is over what to do with the hundreds of billions of dollars that the carbon emission allowances are potentially worth. The House bill, which was most closely defended by Nathaniel Keohane of the Environmental Defense Fund, distributes most of those allowances to firms in ways that are designed to promote specific economic objectives. According to his analysis (see especially pages 6-7), 43 percent of the total value will go to consumers, either as tax refunds or because energy distribution companies will be forced to pass on the benefits of their allowances to consumers; 29 percent will go to industry or small business, much of it to protect energy-intensive sectors against job loss; and 27 percent will fund programs such as energy research and environmental protection.

Alan Viard of the American Enterprise Institute, by contrast, takes the relatively "purist" stance that messing around with allowances is inefficient and that the right answer is a carbon tax - something that many environmentalists have advocated for but that the Democratic leadership presumably thought was politically unachievable, because it includes the word "tax." Given a cap-and-trade system, Viard's preference would be to simply auction off the allowances and use the revenue to reduce marginal tax rates or, alternatively, to subsidize low-income consumers who will be most affected by rising energy prices.

Dallas Burtraw of Resources for the Future also argues for modifying the House bill to provide direct tax rebates to households rather than funneling benefits through local energy distributors. One issue he focuses on is how to provide incentives to households to reduce energy consumption; he worries that if households do not see the cost of emission allowances showing up on their energy bills, they will not respond as necessary by reducing consumption.

Given that cap and trade seems the likely outcome - unless we end up with nothing - how this debate is resolved will have a major impact on who gains from the ultimate legislation. After hogging the spotlight on health care, the Group of Six is prepared to grab it once again.

The House proposal would cut the Fed out of the job of systemic risk regulation. Since many of the members of this committee would be directly responsive to the president, there shouldn’t be any problem with that, though the House has called this committee an "independent establishment in the Executive Branch," just to make things confusing. (Is it independent? Part of the executive? This is the sort of thing over which administrative lawyers obsess.)

Others have suggested creating an entirely new agency to be responsible solely for systemic risk – both Henry Paulson and Paul Volcker hinted that this might be the way to go. That sort of proposal has the most to fear from an adverse precedent in the Free Enterprise Fund case.

The Supreme Court usually stays out of economic regulation – it has done so since a disastrous set of interventions in the beginning of the Great Depression almost destroyed the court’s authority. But with Free Enterprise Fund, it could play a real role in shaping what the next round of financial regulatory reform looks like.

-- David Zaring is an assistant professor of legal studies at the Wharton School of Business. He also blogs at the Conglomerate.

During the Great Health Care Debate, a great deal of attention has been focused on the issue of physician incentives. Atul Gawande's article in the New Yorker on discrepancies in per-insured Medicare spending, which President Obama made required reading in the White House, highlighted the economic incentives that physicians have to order additional tests and procedures - especially when they can order those services from for-profit companies of which they are owners.

One proposed solution, reportedly favored by Peter Orszag and Obama, is to shift toward paying physicians for performance. The basic concept is simple: physicians' compensation would be linked to their patients' health outcomes, and therefore they would have the incentive to do what is most likely to produce a successful outcome at a reasonable cost. This idea seems obvious to many economists and policymakers. But when you look closely at the dynamics of illness, health care and household behavior, the picture becomes murkier.
Pay for performance faces some major drawbacks, especially where the treatment of chronic illness is concerned. Childhood asthma, an important chronic illness that has been the subject of my research for several years, is a good example.

Whether a family takes these necessary steps depends not on the physician's instructions, but on that family's subjective perceptions of asthma and, perhaps most importantly, the resources available to it. It is one thing for a middle-class, suburban mother with a washer and dryer to wash her child's sheets on hot water weekly; it is another thing for a mother who has to walk to a laundromat in a unsafe neighborhood after a day of earning the minimum wage. In addition, for a large group of illnesses, it is increasingly clear that environmental factors beyond the control of families and physicians alike play a determining role. A child living next to a diesel bus terminal or rail station is likely to have worse respiratory health outcomes regardless of individual household behavior.

As a result, whether a child requires repeat hospitalization for an asthma exacerbation - something that should rarely happen, given proper medical care - is a function less of the behavior of the physician than of the behavior of the family and of environmental factors. This, in part, is what makes the problem of childhood asthma so difficult to solve; it is not simply a matter of inventing a new drug. In this context, a pay-for-performance plan could penalize physicians who are doing the best job they can. In addition, it would actually discourage physicians from serving those low-income populations that have the highest incidence of childhood asthma, precisely because they are less likely to be able to manage asthma appropriately (among other reasons, because caregivers have less time and money available). The end result could be even fewer medical services where they are needed most.

This problem is not confined to asthma, but is common to many chronic illnesses whose proper treatment is no mystery to modern medicine. Obesity, for example, has been estimated to produce $147 billion per year in direct health care costs, yet physicians have only limited influence on health outcomes. Of greater importance are neighborhood characteristics – such as parks or sidewalks - that make it easier or harder to get exercise. Diabetes is another example. For this class of common, widespread, expensive illnesses, pay for performance risks creating exactly the wrong incentives.

Many chronic illnesses, including asthma and diabetes, afflict poor people much more than the rest of society. Universal health insurance coverage will certainly help combat these illnesses, since it will at least ensure that people have access to the basic medical care that they need. But simply seeing a doctor is not enough; families need the money and time to make necessary health care investments – or to move to a non-polluted environment for their children.

The only comprehensive way of improving outcomes for people suffering from these illnesses is to combat poverty itself. Unfortunately, poverty seems to have slipped off of the national political agenda sometime in the 1980s. In the meantime, a simpler solution to the problem of physician incentives, at least for management of chronic illnesses, is to pay doctors a good salary, with additional financial assistance to repay student loans and therefore reduce the pressure on medical students to go into high-paying, procedure-driven specialties. This will eliminate the incentive to order unnecessary tests and procedures, which is one component of the health-care cost problem.

When it comes to the primary-care physicians who treat childhood asthma, my experience and research lead me to believe that they do not need any additional monetary incentive to do the best they can, and monetary incentives could have perverse consequences. For other types of medicine, of course, it is possible that pay for performance could have beneficial effects.

--Sylvia Brandt is an assistant professor in the Department of Resource Economics and the Center for Public Policy and Administration at the University of Massachusetts, Amherst. Her research focuses on the economics of health and household behavior.
Disclosure: Brandt is married to James Kwak.

The other side of banks losing money on their risky investments, of course, is homeowners losing their houses through foreclosure. In the dark months of September to February, it was common to say that the financial crisis would not end until the foreclosure crisis ended. Recently, however, as major banks have reported death-defying profits, one hears that sentiment less often; perhaps the financial sector can recover even as the foreclosure wave continues to crash down on communities across the country.

Today the Joint Economic Committee held a hearing on the foreclosure crisis, featuring a new report by the Government Accountability Office. And the evidence shows that the foreclosure crisis is very much not over, even if it is fading from the front pages.

Foreclosures matter for three reasons. First, being forced out of a house, and losing any equity in that house, is, at minimum, a major economic blow to a family. Second, foreclosures generate economic externalities: They lead to increased crime and depress property values, even for neighbors who are current on their mortgages. Third, foreclosures create economic losses for lenders because the foreclosure process itself destroys value, in turn hurting the value of those mortgage-backed securities and putting increased pressure on banks.

Throughout the crisis, the government has shown great interest in reason number three. The Treasury Department and the Federal Reserve have taken dramatic action whenever the financial system as a whole was in danger, ranging from guarantees of money-market funds and bank debt to the unprecedented bailouts of AIG, Citigroup and Bank of America. As a result, when Treasury Secretary Timothy Geithner introduced the administration’s Financial Stability Plan on Feb. 10, only three weeks after President Obama took office, foreclosure prevention was one of the main pillars of the plan.

Yet the centerpiece of that effort, Making Home Affordable, has been a disappointment. As The Post's Renae Merle reported earlier this month, the administration has acknowledged that loan servicers have made little progress in modifying loans at risk of default. Those modifications that have occurred are largely of the “extend and pretend” variety, whereby missed payments and fees are simply added to the balance owed. Only 1.8 percent, by contrast, included a reduction of principal.

Given the weak and deteriorating state of the job market, these “modifications,” while enabling loan servicers to pad their statistics, are highly likely to end in re-default. And as Merle reported today, this is simply because lenders often prefer foreclosure to modification.

The political question is whether, now that the large banks seem able to generate enough profits from trading and fees to offset their deteriorating loan portfolios, the administration will put additional effort into stemming the tide of foreclosures. Now that reason number three for reducing foreclosures no longer seems compelling, are numbers one and two enough to prompt action? Or will the administration decide that millions of foreclosures are acceptable so long as the financial system remains intact?

--Martin Baily of the Brookings Institution and Peter Wallison of the American Enterprise Institute are the co-chairs of the Pew Financial Reform Project. Charles Taylor is the project’s director.

Long-term care costs are important. As the refrain goes, if we fail to do anything, Medicare (and to a lesser extent Medicaid) will consume all of the federal budget at some point in the next few decades. And the administration has good ideas on this score, such as the Independent Medicare Advisory Council, which would have the power to modify reimbursement rates to create the incentives that lead to better patient outcomes at reduced costs.

The other "health-care issue" is that close to 50 million people have no health insurance at all, and the rest of us have a lot less than we think. I don't just mean the fact that your health insurance policy may not actually pay for the care you need, as described by Karen Tumulty. I mean the fact that you have your body until you die, and you only have your insurance until you lose your job, or the next time you have to get medically underwritten.

It's easy to call this a moral problem, but it's also an economic problem. The current system distorts the labor market by restricting mobility and penalizes companies that do want to provide decent health care for their workers. It also pushes sick people into the public system (Medicaid), sapping government resources and pushing up taxes in the long term.

If we could simply have a health-care bill that creates a health insurance option open to anyone and subsidizes the cost for poor people - perhaps by taxing rich people - that would look like a major accomplishment to me. (Health insurance for poor people has to be subsidized one way or another, or else they will simply die; unlike a car or a house, you can't save money on insurance by trading in for a cheaper, healthier body.) Universal coverage used to be the goal of health-care reform. Now that we are deep into the legislative trenches, it has been replaced by fiscal concepts such as budget neutrality and reducing long-term cost inflation. But it seems to me the value of universal coverage was forgotten somewhere, and it is certainly something worth paying for.

Instead we have the following political situation. Moderate Democrats and Republicans can posture on the grounds of costs and incentives, without having to come out against universal coverage. President Obama has insisted on a budget-neutral bill, playing into the hands of the Blue Dog Democrats. Republicans are united in hoping to block any bill at all to weaken the Obama presidency.

I'm not paid to write about politics (actually, I'm not paid at all), but I think Nancy Pelosi might have this one right. She says she doesn't need a single Republican vote. Clearly the Republicans don't want anything to pass. But if there is a bill that provides universal coverage, and other benefits and risks that won't be clear until after the 2010 election, would you rather have voted for it or against it? I think the answer to that is pretty clear, which is why the Democrats should be able to pass this with zero Republican support. Of course, that assumes they can remember why they thought health-care reform was so important in the first place.

This report has many of the House Financial Services subcommittee on oversight and investigations members ready to take matters into their own hands. Democratic subcommittee members Mary Jo Kilroy (Ohio), Alan Grayson (Fla.), and Jackie Speier (Calif.) have introduced legislation to force the U.S. Treasury to auction the TARP warrants of banks receiving greater than $250 million in TARP monies.

Prominent economists -- Brad Delong and Simon Johnson, and "Mad Money" star Jim Cramer among them -- have argued that auctions are a great idea. An auction to third-party buyers will provide a true market price, increase transparency, reduce the potential for corruption and avoid draining bank capital. My analysis of the 1983 auction of the taxpayers’ warrants issued by Chrysler Motors indicates that auctions lead to higher prices for taxpayers than negotiations.

We should be looking to see if Allison offers up any timeline for the J.P Morgan warrant auction. The auction of J.P. Morgan’s 88.4 million warrants promises to be the largest warrant auction in U.S. history. The billion-dollar-plus warrants of Goldman Sachs and Morgan Stanley are still under negotiation and “tacky” Goldman Sachs is too hot to handle right now. Look for lots of grandstanding on Wall Street pay in front of the Allison, the ex-president of Merrill Lynch. Recently, Goldman Sachs set aside over $700,000 per employee on an annualized basis for compensation, and Morgan Stanley is due to report second-quarter earnings (and compensation) this morning I’m sure Allison’s predecessor and ex-Goldman Sachs investment banker Neel Kashkari is happy to be watching at home.

I estimate that taxpayers got about $200 million less than fair market value in most recent warrant buybacks of BB&T, U.S. Bancorp, and State Street. These repurchases were shrewdly, from Treasury’s point of view, consummated after the COP report was released July 10. Thus, I expect little discussion of these very expensive deals for U.S. taxpayers.

Allison will wisely beat a retreat before his accusers step up to the microphone: the aforementioned Warren of the COP; Neil Barofsky, the ex-prosecutor who heads of the Special Inspector General’s office on the TARP (SIGTARP); and Thomas J. McCool, director of the Center for Economics at the Government Accountability Office. While Warren’s report will probably steal the limelight, I expect the representatives of SIGTARP and GAO will land some jabs. The latest SIGTARP report doesn’t have much to say about the warrants and even stopped listing the strike prices at which the stock can be bought. Yet, I expect for calls by Barofsky for the Treasury to post the market value of the investments on a monthly basis. The Treasury has this information, but it refuses to disclose it. McCool, based on his agency’s report, is likely to join Warren in calling for Treasury to disclose the formal bids in the warrant negotiation process.

I would personally like to see the Treasury disclose when a bank has exited warrant negotiations. Right now there is no reliable way to tell which banks have warrants that will be auctioned. This is something that investors would definitely like to know. More time for investors to price the warrants will likely lead to higher auction prices, benefiting taxpayers.

The hearing on “TARP Oversight: Warrant Repurchases and Protecting Taxpayers” is at 2 p.m. today in 2128 Rayburn House Office Building and will be webcasted live.

--Dr. Linus Wilson is an assistant professor of finance at the University of Louisiana at Lafayette. He tracks the TARP warrants and has written several research papers on the bank bailouts, including government plans to buy toxic assets and the effectiveness of common as opposed to preferred stock in encouraging lending. He also occasionally writes articles on the TARP at Seeking Alpha.

RealtyTrac released data last week showing that the foreclosure rate in the second quarter hit yet another record high, 11 percent above the first-quarter pace. Foreclosures are now running at a rate of close to 2 million a year.

It has been almost two years since the foreclosure crisis first became headline news. In this period, President Bush, Congress and most recently President Obama have put forward a variety of programs. None of them has had much impact on stemming the tide of foreclosures. It is time to try a different tack.

There is a simple solution that requires no taxpayer dollars, requires no new bureaucracy and can immediately help millions of people facing foreclosure. Congress can simply temporarily alter the rules on foreclosure to allow homeowners facing foreclosures the right to stay in their home for a substantial period of time (e.g. seven to 10 years) as renters paying the market rent.

The logic of this change is straightforward. Due to the housing bubble, ownership costs grew out of line with rents. As a result, in many bubble-inflated markets, mortgage payments plus taxes, insurance and other costs could easily be twice as high as the cost of renting a comparable unit. “Right to rent” legislation would allow homeowners who cannot meet their mortgage payments the right to stay in their home as long as they pay the market rent.

This rule change would provide homeowners with a large degree of housing security. If they like their current home, their neighborhood, their kids' schools, they would have the option to remain there for a substantial period of time. Furthermore, by making foreclosure a less attractive option for lenders, a right to rent law should give lenders much more incentive to pursue mortgage modifications as an alternative to foreclosure.

This change should also be beneficial for neighborhoods that are plagued by large numbers of foreclosures. Keeping former homeowners in their homes will keep homes occupied, preventing the blight that often comes from vacant homes that are not maintained.

Needless to say, lenders will not be happy about a right-to-rent rule. It alters the balance of power between lenders and homeowners in the homeowner’s favor. The banks will undoubtedly object that changing enforcement rules interferes with their contract rights. Of course, they did not raise any issues about contract rights when Congress changed enforcement rules in their favor with the 2005 bankruptcy reform law. That reform applied more stringent bankruptcy rules to debt that had been contracted under the old bankruptcy law. With bankruptcy reform, the retroactive changing of the rules was never even raised as an issue.

The country is faced with an extraordinary crisis. The banks, the auto industry, and many other businesses have already rushed to federal government for bailouts. Right-to-rent rules are a way to help the homeowners who are suffering because of the failure of the Fed to rein in the housing bubble and bad mortgage practices. It does not provide any windfalls – foreclosed homeowners will still lose their homes – but it does provide housing security to millions of families who desperately need it.

--Dean Baker is co-director of the Center for Economic and Policy Research. He is the author of books including "Plunder and Blunder: The Rise and Fall of the Bubble Economy" and editor of
"Getting Prices Right: The Debate Over the Consumer Price Index." He blogs at Beat the Press.

[T]he designers of derivative securities effectively collaborated with the rating agencies, such as Standard & Poor’s and Moody’s, that were relied upon (often through government mandate) by pension funds and other gigantic repositories of wealth with identifying the securities safe enough to invest in. A situation in which creators of derivatives provide the monetary compensation for the very agencies that are tasked with determining the riskiness of their securities hardly constitutes a competitive market. Indeed, it constitutes dangerous collusive behavior.

Much has been said about the Federal Reserve’s exploding balance sheet, which jumped from about $800 billion to more than $2 trillion in the wake of the Lehman Bros. collapse as the Fed pumped money into credit markets to prevent further failures. Less appreciated is the amount of risk suddenly taken on by the central bank, which has a long history of holding only Treasury securities, gold and other super-safe assets. Using calculations contained in a working paper by IMF economist Peter Stella, we at the Economic Policy Institute charted the growth of risk in the balance sheet, as shown below.

This risk-taking is an indication and an outcome of the Federal Reserve’s expanded role as credit market intermediary, and is among reasons many are calling for greater transparency from the notoriously secretive central bank.

This morning starting at 9:30, an EPI forum will examine the implications of the Fed’s balance sheet and the prospects for reform. Opening the event will be Sen. Bernie Sanders of Vermont, a longtime advocate for greater transparency and sponsor of S604, the Federal Reserve Sunshine Act of 2009. A panel discussion follows with Jon Faust, director of the Center for Financial Economics at Johns Hopkins University and a high-level Fed economist for nearly two decades; George Goehl, executive director of National People’s Action, a grassroots organization that convinced Fed Chairman Ben Bernanke to hold a series of field hearings across the country this summer; Dean Baker, co-director of the Center for Economic and Policy Research, who has written extensively about the housing bubble and the Federal Reserve’s failure to take action to prevent it; and William Greider, veteran journalist and author whose 1987 book on the Federal Reserve, “Secrets of the Temple,” is still in print and more relevant than ever.

The Federal Reserve forum is the second in a series of monthly discussions on the financial crisis organized by EPI’s Bailout Analysis Project. Further information and videos of past events can be found at www.epi.org and www.bailoutwatch.net.

--Nancy Cleeland is a former reporter with the Los Angeles Times and the director of the Bailout Analysis Project at the Economic Policy Institute, based in the District.

The failure of servicers to make modifications in the volumes expected by the administration probably has one of two causes. First, it could be that they don't have the systems and processes in place, although the appropriate response to that excuse is: "Why not?"

Second, and more likely in my opinion, it could be that the incentives just aren't big enough.

The main concern is that the plan does not go far enough. This is because the main proposal for struggling homeowners is to provide cash incentives to lenders. It is impossible for the policy wonks in Washington to predict just how many mortgages will be modified with the bonuses offered.

If they are acting rationally (I know, a big if), the lenders have already done a calculation on every delinquent mortgage they hold, and they have already decided not to modify the vast majority of them. So the question is, will a few thousand more dollars ... tip the equation toward modification? And in how many cases?

This administration's approach is always to try to provide economic incentives to get the behavior it wants, and if it isn't happy with the volume of foreclosures, that implies that the incentives aren't big enough. The problem is aggravated by the fact that the lenders who hold these loans (whose interests the servicers are supposed to protect, and who are sometimes identical to the servicers) have distorted incentives.

Instead of maximizing the economic value of the loans they hold, accounting regulations encourage them to maximize their accounting value, which means putting off writedowns for as long as possible. As Joe Nocera put it, "Sure, foreclosure ultimately costs the bank more money than a modification would. But foreclosures these days take a long time — as much as 18 months in some states. And all that time the banks can keep the loans on their books at inflated values."

Not only that, but banks now are hoping that they will never have to take writedowns from those inflated values. They may be hoping that an economic recovery will bail them out of their toxic loans. But more important, the administration's behavior since taking office has sent the signal that the administration truly, deeply, desperately wants the banks to earn their way out of their problems.

This implies that if Citigroup or Bank of America is looking at large writedowns in 2011, the administration will find a way to help it avoid that problem, or to otherwise keep it afloat. If I'm a bank and I think I can count on that kind of assistance should I need it, I'm going to do everything I possibly can to avoid a writedown today -- and that includes dragging my feet on mortgage modifications.

President Obama's economic team is one of the smartest ever assembled, and they have memorized the chapter on using economic incentives to influence behavior. But ironically, their biggest policy bet -- deciding that no large bank or its managers would ever have to face the consequences of their actions -- has itself distorted banks' incentives across the board by encouraging them to depend on the implicit government guarantee. Set against that distortion, a couple thousand dollars for a loan modification doesn't go very far.

Might that independence be altered by the coming financial reform legislation? There are two challenges before Congress to Federal Reserve independence, and it will be tricky for the Fed to manage them both in a way that preserves its independence, even though that independence has, for the most part, been a good thing.

Why is the Fed so independent? Part is statutory – the Fed has a great deal of flexibility in setting monetary policy, and Congress wrote its governing legislation to give it that flexibility. Part of it lies in the controversial (for a whiff of the controversy, see the dissent in this potential blockbuster of a case, which the Supreme Court will review next year) fact that Fed governors essentially cannot be fired, by the President or anyone else.

This independence is, as Kohn noted in his testimony, not necessarily a bad idea. He observed:

Operational independence -- that is, independence to pursue legislated goals -- reduces the odds on two types of policy errors that result in inflation and economic instability. First, it prevents governments from succumbing to the temptation to use the central bank to fund budget deficits. Second, it enables policymakers to look beyond the short term as they weigh the effects of their monetary policy actions on price stability and employment.

Kohn pooh-poohed this idea, but essentially, he wants to keep the Fed just as insulated from oversight by Congress while doing new work – regulation, this time of systemically important institutions – that other financial regulators do with more vigorous legislative control. Whether you think that is a good idea depends on whether you think the Fed is an institution in thrall to its member banks or is the smartest of our regulators. In my view, the Fed’s people are pretty smart.

The other reform proposal on the table is to subject the Fed to audits by the Government Accountability Office. The GAO has done a lot of work on TARP and even the Fed’s own efforts to pour liquidity into the troubled financial system. If the GAO helps Congress keep an eye on these programs, shouldn’t it keep an eye on everything the Fed does, including monetary policy?

Kohn wants the GAO as far away from the Fed as possible, and his testimony today was designed to parade a few horribles around with regard to Fed independence. The GAO might leak market-damaging information if it gets too involved in Fed supervision, he observed, and the markets will not like a congressional investigatory arm sniffing around monetary policymaking.

In disputing GAO oversight, he is probably also right. The Fed is an independent agency like no other, but it worked closely with two Treasury secretaries during the financial crisis, which suggests that Fed independence has not become Fed unresponsiveness. Moreover, the Fed is much less opaque now than it was before Alan Greenspan headed the bank – it publishes the minutes of its Open Market Committee and has fought to make its international initiatives more transparent.

It may be frustrating for Congress to be asked to give the Fed still more power, in exchange for much less oversight than it would get for anyone else. But the Fed has earned some trust here.

-- David Zaring is an assistant professor of legal studies at the University of Pennsylvania's Wharton School of Business. He also blogs at The Conglomerate.

The written testimony from Jon Greenlee, of the Federal Reserve, is particularly disheartening. There is currently about $3.5 trillion of debt associated with commercial real estate, about half of which is on the books of banks. He suggests that the Fed has been following this situation closely and has stayed on top of banks’ exposures to the sector. He also has some rhetoric about the recent stress tests. Why do I not find this reassuring?

James Helsel, on behalf of the National Association of Realtors, is even more negative. He argues that this sector supports 9 million jobs and many of these are now in jeopardy. Of course, he is looking for a bailout of some kind (who isn’t?) but still he is right about emerging problems in and around the retail sector.

Jeffrey DeBoer, of the Real Estate Roundtable, has a similar line – as he sees the numbers, commercial real estate is 13 percent of the economy and it’s in trouble because there is not enough credit to go around. He wants – of course – more cheap government credit for this sector; and he has an extensive blueprint/Christmas list of items.

I’m not convinced by the economic merits of their bailout cases, but it’s good to have these lobbyists making their case out in the open – this is a refreshing change from the banking sector, which prefers to work behind closed doors.

Across all these sectors, it’s amazing to see such free market (and even some libertarian) interests come together and – with one voice – clamor for government subsidies.

The Federal Reserve, of course, is already supporting a large part of the credit market. It would not be a surprise if it moves more of this support toward commercial real estate over time, but it’s hard to see how we can afford to risk the kinds of measures Mr. DeBoer proposes at this stage.

The underlying problem here is that consumers and businesses are spending less – mostly because they feel the need to be more careful and to increase their savings. Until private-sector spending finds a sustainable level, measures to directly support commercial real estate are likely to have little impact.

There will be defaults and debt restructurings. This is an unavoidable part of our current slowdown, but watch out for the further damage to banks’ balance sheets that lies ahead.

-- Simon Johnson

NOTE: Testimony can be found on the committee's Web site.

Predictably, of course, the government is repeating that it has no intention to intervene in the operations of GM, despite its 61% ownership share. Here's the way the issue is framed in the Post story:

"If Washington owns it, it just can't keep its hands off," said Sen. Lamar Alexander (R-Tenn.) in an interview yesterday.

(Tennessee, I believe, has an enviable record of attracting factories through tax breaks and other targeted government policies, but no matter.)

The economic logic behind skepticism about government intervention is sound. The purpose of a free-market system is to allocate resources in the most efficient way possible, which means that, for example, companies' decisions about where to build factories and what cars to build should be determined solely by market forces. Even if you believe there is a valid role for government in the economy, according to this line of thinking, government should intervene in as clean and simple a way as possible. For example, even if you support policies that favor fuel-efficient cars, instead of having government "bureaucrats" (how come a middle manager with no individual profit motive is a "bureaucrat" if he is employed by the government but just a "middle manager" if he works for a corporation?) review and pick models to build, the government should use less intrusive means such as CAFE standards or a gasoline tax.

This argument makes sense, but it suffers from at least one serious flaw: It is predicated on the assumption that the government will be able to go ahead and implement those ideal, "clean and simple," technocratic policies. However, it should be clear to everyone by this point that even an administration with a battery of smart economists and policy wonks and relatively large majorities (by recent standards) in both houses of Congress cannot simply dictate sensible policies; while we're discussing taxes on fossil fuels, look at the misshapen sausage known as Waxman-Markey (which, for the record, I would vote for if I could).

In the real world, if you are a democratically elected and relatively popular president, and Congress is doing a mediocre job passing the legislation that you honestly believe is crucial to the future of the country, why shouldn't you use your 61% ownership of GM to pursue important policy goals, such as increased fuel efficiency? (Pause to allow readers to compose flaming comments.) Sure, it's not the perfect solution that Cass Sunstein would have designed, but it's a solution.

I think there are two main valid objections to this line of thinking. The first is that this type of intervention would result in an inefficient allocation of resources - for example, building too many fuel-efficient cars for a market that doesn't want them. (The quick answer is that you just lower the price to the point where the market does want them, but it's still a valid objection.) However, this is really an issue of degree. Companies that make capital-intensive products are always making guesses about where they think the market will be in several years' time; GM decided to build the Chevy Volt long before it started taking government money. And those guesses help to shape markets. At my company, seven years ago, we guessed that lots of insurance companies would pay money for better claims systems; because we made that guess, the market for new claims systems is now a lot bigger than it would have been otherwise. Maybe private companies are better at making these sorts of guesses than the government, but it doesn't seem unreasonable to me for President Obama to say, "I want you to be among the top X manufacturers of fuel-efficient vehicles by 2015, and I'm willing to lose $Y dollars to get there, because I think it's in the national interest."

The second objection is that companies that are managed toward policy objectives rather than profit objectives will become politicized and internally inefficient. For example, if you are willing to absorb losses for some period of time to serve the national interest, this will create a different kind of culture within the company - one where managers care more about conforming to political interests than about making money. Again, I think this is a valid point, but it's a question of degree. First, the link between the profit motive and the behavior of most people inside a large corporation is a tenuous one at best, as anyone who has actually seen the inside of a Fortune 500 company can attest. Second, major sectors of our economy, such as defense contracting, are run in only very distant approximations of the profit motive, but we accept that as justified by the particular circumstances. Third, the solution is to set high-level objectives for GM - for example, "I want you to be in the top X manufacturers of fuel-efficient vehicles by 2015, without losing more than $Y billion per year in the process" - and give managers financial incentives to achieve those targets. That would do roughly as good a job at encouraging internal efficiency as the current shareholder governance structure.

For both of these reasons, I think that government intervention has serious costs and risks. But where I seem to differ from most people is that I think those costs and risks need to be balanced against all the other costs and risks we face in the economic sphere. We need to bear in mind that the private sector we have is nothing like the perfect competitive market of economics textbooks, and we also need to bear in mind that the alternative to a flawed policy is often not a perfect policy, but no policy at all. In certain circumstances, government economic intervention can be an appropriate policy tool. And it would be better if the Obama administration could assess that tool rationally, instead of having to ritually chant "government intervention is bad" every time the issue arises. But perhaps that is where our political discourse is today.