Bank failure list tops 45

NEW YORK (CNNMoney.com) -- Local banks in Georgia, Minnesota and California were closed Friday by state regulators, bringing the total number of failed banks this year to 45, according to the Federal Deposit Insurance Corporation.

The financial crisis has taken a heavy toll on small banks across the nation as losses in the housing market mount and unemployment dents household wealth. Analysts expect the trend to continue even as larger banks stabilize and the overall economy begins to recover.

Community Bank of West Georgia, which operated one branch in Villa Rica and another in Kennesaw, had total assets of $199.4 million and total deposits of $182.5 million, according to the FDIC.

The failed bank had roughly $1.1 million in deposits that exceeded the FDIC's $250,000 insurance limit for individual accounts. However, this amount is expected to change as the agency obtains more information from uninsured customers, the FDIC said.

The FDIC will mail checks to insured depositors of the failed bank on Monday morning. Direct deposits from the federal government, such as Social Security and Veterans' payments, will be transferred to United Community Bank of Blairsville, Ga.

Georgia regulators also shuttered the four branches of Neighborhood Community Bank, which is based in Newnan.

The FDIC said CharterBank of West Point will assume all of the failed bank's $191.3 million deposits and the majority of its $221.6 million assets.

So far this year, nine banks in Georgia have failed.

In Minnesota, Horizon Bank of Pine City was closed and will be taken over by Stearns Bank, NA of St. Cloud. It was the first bank to fail in the Gopher State this year.

The failed bank, which operated two locations, had total assets of $87.6 million and total deposits of about $69.4 million. Stearns Bank paid a premium for all of Horizon Bank's deposits and agreed to acquire $84.4 million of its assets. The remaining assets will be sold by the FDIC later.

Meanwhile, the sole branch of Irvine, Calif.-based MetroPacific Bank was closed Friday and Sunwest Bank, of Tustin, Calif., agreed to assume all of its non-brokered deposits.

MetroPacific had total deposits of approximately $73 million. Sunwest Bank will purchase nearly all of the failed bank's $80 million worth of assets, the FDIC said.

The FDIC said it would pay about $6 million directly to brokers for deposits held in MetroPacific brokered accounts.

Later Friday, the FDIC said Mirae Bank of Los Angeles was closed. The bank's five offices will reopen Monday as branches of Wilshire State Bank. Mirae Bank had total assets of $456 million and total deposits of approximately $362 million.

Wilshire State Bank will buy about $449 million of the failed bank's assets. The FDIC will hold the remaining assets to dispose of later.

California has had six banks fail so far this year.

The FDIC said it entered a loss-share agreement with the acquiring banks for a portion of the failed banks' assets. The agreement is intended to maximize returns on the assets and minimize disruptions for loan customers, the FDIC said.

The total cost of Friday's bank failures to the FDIC is $264.2 million, bringing the total for this year to $11.94 billion. That compares with $17.6 billion in all of 2008.

The number of bank failures so far this year has already exceeded last year's total of 25, with an average of 7 failures per month.

Over the next 5 years, the FDIC expects roughly $70 billion in losses due to the failures of insured institutions.

The FDIC, which is funded primarily by fees paid by banks, insures individual deposits up to $250,000. The amount was increased from $100,000 late last year in response to concerns about the stability of the nation's banks. 

Cost of rescues: $835 billion this year

NEW YORK (CNNMoney.com) -- The federal government is likely to spend $835 billion this year fighting the crises in the financial system and the economy, according to a new report by the Congressional Budget Office.

That spending represents about 6% of the nation's gross domestic product.

Of that amount, $340 billion is going toward the Troubled Asset Relief Program, which is being used primarily to bail out banks, insurers and the auto industry. Another $290 billion in 2009 outlays is being used to prop up mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500).

In addition, $187 billion is being used for economic stimulus and relief efforts such as extended unemployment insurance.

As expensive as that seems, the CBO notes that "the current recession has little effect on long-term projections of non-interest spending and revenues."

Not that the country won't see whopping deficits as a result of the crises that have unfolded in the past year. In fiscal years 2009 and 2010, Uncle Sam will rack up the largest annual deficits as a share of GDP since World War II.

And those annual deficits will, of course, exacerbate the total debt the country has accumulated over time. The agency estimates that federal debt will reach 60% of GDP by the end of fiscal year 2010. That's well above the 41% recorded for 2008.

But over the long-term, CBO said, much greater pressure will bear down on the federal budget -- raising "fundamental questions about economic sustainability." That's because, barring any changes, federal debt is on track to greatly outpace economic growth over time.

The main culprits are the growth in federal spending on Medicare and Medicaid and, to a much lesser degree, Social Security. The growth rate in spending on those entitlement programs is due to two factors: the growth rate in health care spending and an increasing number of Americans growing old.

Today roughly 5% of GDP is spent on Medicare and Medicaid. By 2035, the CBO estimates, that number will double. The jump in Social Security spending is projected to rise from under 5% of GDP today to 6% by 2035.

The government faces no easy choices in trying to rectify the fiscal problems. CBO notes that if spending continued to grow as expected -- and lawmakers raised tax rates to compensate -- "tax rates would have to reach levels never seen in the United States."

That, in turn, would seriously compromise the prospects for economic growth and make it harder to repay debt.

And on it goes.

Addressing the situation would require a combination of tax increases, spending cuts and a slowing in the growth rate of health care costs. The longer lawmakers wait, the more painful and sudden the solution will need to be.

Congress is addressing health care reform. That is likely to cost another trillion or so, but it's a cost President Obama has insisted be paid for.

He has also called on Congress to reinstate what's called "statutory pay-go" -- which would legally require lawmakers to pay for any new programs they propose without borrowing money.

But pay-go wouldn't be enough to get the federal budget onto a sustainable path, said former CBO Director Alice Rivlin, a senior fellow at the Brookings Institution.

"The biggest threat to future budget solvency is not new legislation. It is the budgetary consequences of legislative decisions already made -- both with respect to mandatory spending and the tax code," Rivlin said in written testimony for the House Budget Committee on Thursday.

The Concord Coalition, a deficit watchdog, echoes that call, noting that pay-go is meant to stabilize the deficit rather than reduce it. And lawmakers are still allowed to exempt certain measures from pay-go -- meaning they can decide a new expensive program or tax cut need not be paid for. 

Jobless claims up in setback for recovery

NEW YORK (CNNMoney.com) -- The number of Americans filing for initial unemployment insurance rose unexpectedly last week, to the highest level in more than a month, according to government data released Thursday.

There were 627,000 initial jobless claims filed in the week ended June 20, up 15,000 from a revised 612,000 the previous week, the Labor Department said.

The number was above the consensus estimate of 600,000 from economists surveyed by Briefing.com.That's the highest level of initial claims since the week ended May 16, when 636,000 were filed.

Despite the increase, economist Ian Shepherdson of High Frequency Economics said he still believes "the underlying trend in claims is downwards, but it is slow and uneven."

The 4-week moving average of initial claims was 617,250, up 500 from the previous week's revised average of 616,750.

Continuing claims: The government said 6,738,000 people continued to file unemployment claims in the week ended June 13, the most recent data available.

That's up 29,000 from the preceding week's revised 6,709,000 ongoing claims.

The 4-week moving average of continuing claims fell to 6,759,750, down 3,250 from the prior week's revised average of 6,763,000.

State-by-state data: In the week ended June 13, the most recent data available, 14 states reported that initial claims decreased by more than 1,000.

Michigan had 5,414 fewer initial claims, which a state-issued comment attributed to fewer layoffs in the automobile industry.

A total of 6 states reported new claims increased by more than 1,000. Florida reported the most new claims, at 8,383, which a state-supplied comment attributed to layoffs in the construction, trade, service and manufacturing industries.

Have you exhausted your unemployment benefits? We want to hear about your experiences. E-mail your story to realstories@cnnmoney.com and you could be part of an upcoming article. For the CNNMoney.com Comment Policy, click here.  

Fed sees signs of hope

NEW YORK (CNNMoney.com) -- The Federal Reserve kept its key interest rate near zero Wednesday, and said in a statement that although the U.S. economy remains weak, there are signs of a recovery.

The central bank said that the pace of the nation's economic decline is slowing and that household spending is showing signs of stabilizing.

It also said conditions in financial markets have generally improved in recent months, and that while businesses continue to cut back staff and spending, their inventories are coming into line with demand.

The Fed noted recent commodity price increases but said it saw little threat of inflation in the near term. The Fed also dropped the language it used in its last statement that indicated concerns about falling prices hurting economic growth.

Even though this was the first official statement from Fed policymakers to hint at signs of stabilization in the economy, Keith Hembre, chief economist at First American Funds, said Chairman Ben Bernanke and other Fed members have been suggesting signs of improvement in individual speeches in recent months.

"They'd be out of step with reality and the data flow if they didn't make that statement," Hembre said.

The Fed has now kept its federal funds rate, an overnight lending rate that impacts rates on various consumer and business loans, in a range of 0% to 0.25% since December.And despite suggesting that there are signs of progress, the Fed reiterated that "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

The Fed has done much more than cut short-term rates to pump money into the economy, however.

0:00/3:43'Green shoots' or weeds?

In March, the central bank unveiled plans to buy $300 billion of U.S. Treasurys and increase its purchases of mortgage-backed securities in order to keep longer-term interest rates low. It did not announce any changes to those plans Wednesday.

But yields on Treasurys have been creeping up in recent months, rising by more than a full percentage point since the Fed's March announcement.Bond prices fell Wednesday following the Fed's statement, pushing yields higher again. (Bond rates and prices move in opposite directions.)

Economists said there's not much the Fed can really do to control the benchmark U.S. 10-year yield and mortgage rates that are pegged to it.

For this reason, Sung Won Sohn, an economics professor at California State University Channel Islands, said the Fed is caught between a rock and a hard place.

"If it buys more bonds trying to limit the rate increase, it could fuel the budding inflation psychology pushing up the interest rate," he said.

Some Fed watchers have been looking for signs from the central bank about when it may begin to unwind its positions in Treasurys and mortgage-backed securities, a so-called exit strategy from this period of massive stimulus.

The Fed did not give any guidance though, saying only that it is monitoring its balance sheet and will make adjustments as warranted.

Several economists said the Fed likely has had discussions about an exit strategy, even if details weren't spelled out Wednesday. But economists added that it is too soon for the Fed to be detailing such plans to fight inflation since the economy remains weak.

"I was surprised the market was really anticipating they would do something more in the statement," said Michael Strauss, chief economist of Commonfund, a fund manager for nonprofit institutions. "There's no reason for them to do anything at this point."

Kurt Karl, chief U.S. economist for Swiss Re, added that "the exit strategy will be a slow process" since there won't be any significant economic growth until next year.

Still, some Fed watchers were critical of the Fed for not spelling out its strategy.

"The drumbeat for the Fed to lay out more details of its exit strategy is growing louder by the day," wrote Kevin Giddis, managing director of fixed income at Morgan Keegan, in a note late Wednesday afternoon. "The Fed statement failed to address this important issue."

Giddis added that the uncertainty about what the Fed will do next could lead to a continued sell-off of bonds and even higher rates. 

Durable orders in surprise gain

WASHINGTON (Reuters) -- New orders for long-lasting U.S. manufactured goods rose by a much stronger-than-expected 1.8% in May, Commerce Department data showed Wednesday, providing further evidence that the battered U.S. economy was finding its feet.

Analysts polled by Reuters had forecast durable goods orders would decline 0.6% last month. May's increase, the third gain in 4 months, followed a revised 1.8% gain in April, previously reported as a 1.7% rise.

New orders excluding transportation advanced 1.1% last month, compared with a forecast for a 0.4% decline, buoyed in part by a 7.7% rise in new machinery orders. This was the largest percentage increase in that category since March 2008, the Commerce Department said.

Orders excluding defense were 1.4% higher, versus a Reuters' poll prediction for a 0.4% drop.

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, jumped 4.8% in May, the largest gain since September 2004, when they were up 8.2%. May's sharp rise compared with analyst forecasts for a 0.6% drop, and followed a revised 2.9% fall in April.

In one area of particular weakness, orders for motor vehicles and parts dropped 8.1% in May, the sharpest fall since August.

The Commerce Department said shipments of durable goods fell 2.1% in May, after falling 0.5% the month before.

This was the 10th straight decline in shipments, and the longest streak of consecutive monthly decreases since records began in 1992, the Commerce Department said. 

Health reform FAQ: Cutting through the noise

NEW YORK (CNNMoney.com) -- Rx: Health reform.

Warning: Headaches may result from trying to figure out what's going to come out of the debate on Capitol Hill.

The proposals under consideration are incomplete. But the rhetoric is rich. So if you're having a hard time making sense of it all, we hope this will help.

Here are 5 common concerns about overhauling the health care system and what we know ... so far.

Would a public plan hurt private insurers?Would a public plan kill employer coverage?How much would health reform really cost?Can we afford not to do health reform?Would reform improve my health care?Would a public plan hurt private insurers?

President Obama and Democratic leaders have proposed setting up a national insurance exchange. The exchange would serve as a supermarket of plans and let consumers comparison shop for the policy that best suits their needs.

One of the options on offer would be a government-run public plan. Since it's not clear how much public plan premiums would be or what services the plan would cover, it's not clear how many people using the exchange would opt for the public option over a private one.

Insurers and other opponents say a public plan would be the first step to nationalized health care. The public option would have such large economies of scale and such low administrative costs that private insurers couldn't hope to compete, they say. And, they add, the government would set rules for all insurers, and could subsidize the plan with taxpayer dollars if it needed to.

"Regardless of how it is initially structured, a government plan would use its built-in advantages to take over the health insurance market," the insurance lobbying group America's Health Insurance Plans (AHIP) and the BlueCross BlueShield Association said in a joint letter to Sen. Edward Kennedy, D-Mass.

Supporters say a public plan option would compete with private insurers on a level playing field. It would have to abide by the same set of rules as private insurers, it would have to be self-supporting and it would have to negotiate prices with providers, rather than dictating them.

Robert Reich, who served as secretary of labor during the Clinton administration, said if the point of reform is to reduce the growth in health care costs, having a new competitor that can negotiate lower prices will force private insurers to reduce their costs as well.

"It gives private plans a new set of benchmarks and provides them with incentives to get new deals," Reich said in a conference call with reporters.

That insurers don't like the idea isn't surprising, he said. "It would squeeze their profits and force them to make several reforms."

Those that don't might go out of business. But without knowing specifics about the public plan, it's impossible to place odds on how many insurers would be priced out.

Would a public plan kill employer coverage?

The majority of Americans are insured through their employers' plans. Several reform proposals under consideration would impose a "pay or play" requirement on many businesses.

Translation: A company that didn't provide insurance for its employees would have to pay money to subsidize its workers' purchase of health insurance on the national insurance exchange.

Opponents of a public plan say it would sound the death knell for the employer-sponsored system.

"A government-run plan would dismantle employer-based coverage, significantly increase costs for those who remain in private coverage, and add additional liabilities to the federal budget," AHIP and BlueCross wrote to Kennedy.

Obama says repeatedly that if you like the plan you have, you would be able tokeep it. "What I'm saying is the government is not going to make you change plans under health reform," he said on Tuesday.

That doesn't mean, however, that some employers might not opt to drop the coverage they offer and instead opt to pay money to subsidize their workers' purchase of insurance on that exchange.

How many? "I don't think anyone has an answer to that. The details really do matter," said Roberton Williams, a senior fellow of the Tax Policy Center.

Much will depend on how a "pay or play" mandate is set up.

"If the cost of paying [into the exchange] is high enough, employers are more likely to play," Williams said. Conversely, if it's low enough, it may make more financial sense to drop coverage and send employees to the exchange to pick their own plan.

How much would health reform really cost?

Preliminary estimates have placed the cost in the $1 trillion range. But that's based on estimates of discrete portions of proposals. The real estimated cost of reform will depend on how all portions of the final plan are expected to interact with each other.

But it's a cost that Obama has insisted lawmakers pay for so that health reform will be deficit neutral. So if a bill is estimated to cost $1 trillion, lawmakers will have to come up with $1 trillion to pay for it through spending cuts and tax increases. No borrowing allowed.

But making a bill deficit neutral on paper is different from making it deficit neutral in practice.

A number of health reform measures have never been tried before. So whether they work and how quickly they work will affect the ultimate price tag.

So, too, will lawmakers over the next several years if they opt to tweak the health reform policies they put in place today.

Can we afford not to do health reform?

There's a lot of disagreement over how to reform health care. But there is agreement that something must be done to curb the growth rate in health care costs.

That growth rate has outpaced inflation and wage growth by wide margins for 40 years.

Barring any changes, the United States is on track to spend 20% of its gross domestic product on health care in the next 10 years. The numbers just grow worse from there.

The country's already record high debt is set to swell to unsustainable heights due largely to rising health care costs, which expand federal spending on Medicare and Medicaid.

That can slow economic growth and jeopardize the United States' creditworthiness in the eyes of foreign investors. Those investors may start demanding higher interest rates when they buy U.S. Treasurys. That, in turn, would make the country's debt picture even grimmer.

So health reform is critical. But it will only help if it succeeds.

Would reform improve my health care?

Hard to say.

To the extent that reform succeeds in providing access to more affordable health care, those who can't afford health insurance now might be better off physically and financially.

And a lot of the proposals to curb costs could, in theory, ultimately improve care.

For instance, reformers want to start reimbursing health care providers for better health outcomes rather than paying them a la carte for the number of visits, hospital stays and tests conducted. In other words, they want to pay for quality of care rather than quantity.

The chances of achieving those better outcomes could be fostered by other reform measures: making health records electronic so your bevy of doctors will all know your medical history and prior care. And there are proposals to compare different treatment regimens being employed across the country for similar conditions and then come up with a best-practices recommendation that doctors can use as a reference.

But there is no way to predict whether their promise will become reality.

"Unfortunately little reliable evidence exists about exactly how to implement those types of changes," Congressional Budget Office Director Douglas Elmendorf said in a letter to the Senate Budget Committee.

That doesn't mean they can't be implemented well. But it may take time and experimentation, to say nothing of attention.

So far much of the public debate has been focused on financing reform and covering the uninsured.

"It's not been too much on how we pay for hospitals and doctors," said Paul Fronstin, director of the health research program at the Employee Benefit Research Institute.

But that will be the trick to improving care, he said. "It's not going to be insurance reform. It's going to be delivery reform." 

Madoff says 12 years is plenty

NEW YORK (CNNMoney.com) -- The lawyer for Bernard Madoff, the confessed Ponzi scammer who faces a maximum of 150 years in prison, requested a 12-year sentence from the judge set to mete out his sentence on Monday.

Madoff defense attorney Ira Lee Sorkin made the request in a letter to Judge Denny Chin of U.S. District Court in Manhattan.

Sorkin focused on the age of his septuagenarian client, as well as his "non-violent nature" and his "voluntary surrender" to authorities.

"Mr. Madoff is currently 71 years old and has an approximate life expectancy of 13 years," wrote Sorkin, whose letter was released on Tuesday. "A prison term of 12 years - just short of an effective life sentence - will sufficiently address the goals of deterrence, protecting the public and promoting respect for the law."

Sorkin also wrote that "we seek neither mercy nor sympathy" and recognized that "terrible losses have been suffered as a result of Mr. Madoff's conduct."

Madoff is scheduled to be sentenced on June 29. He has been locked up in the Metropolitan Correctional Center since March 12, when he pleaded guilty to masterminding the largest Ponzi scheme of all time. He pleaded guilty to 11 criminal counts, including fraud, money laundering and perjury.

Madoff perpetrated the scheme through his firm, which he founded in 1960. Thus far, federal investigators have identified 1,341 investors in Madoff's firm, with losses exceeding $13 billion.

Victims recently wrote letters to the judge detailing the extent of the damage that Madoff had inflicted upon them. Many of the victims said they were financially wiped out, and requested that Judge Chin make sure that Madoff never gets out of jail alive.

"For what Mr. Madoff has done to us and to thousands of others like us, he deserves at best to spend the rest of his life in prison just as we will spend the rest of our lives in financial ruin and emotional and physical devastation," wrote one of the victims, Leonard Forrest of Port St. Lucie, Fla.

0:00/4:18Inside Bernie's house of cards

Sorkin, in his letter to the judge, said he had "advised Mr. Madoff of [the letters'] tenor and their heart-wrenching stories of loss and deprivation. At sentencing, Mr. Madoff will speak to the shame he has felt and to the pain he has caused."

Jerry Reisman, an attorney representing 16 of Madoff's victims, said Madoff deserves the maximum sentence and should do hard time.

"He destroyed peoples' lives and didn't care," said Reisman. "He's a sociopath. He didn't care who he destroyed. He would put his arm around you, comfort you and take your money."  

Obama defends the Fed

WASHINGTON (CNNMoney.com) -- President Obama offered a passionate defense of the Federal Reserve on Tuesday, explaining his proposal to put the central bank in charge of monitoring broad risks facing the financial system.

Obama, speaking at a midday press conference, defended the performance of Fed Chairman Ben Bernanke after the financial crisis.

Bernanke has done a "fine job" and "performed well," the president said.

In addition, Obama answered criticism, some of it resonating from members of his own party in the Senate, that giving the Fed authority to monitor systemic risk would endow it with too much power.

"If you look at what we've proposed, we are not so much expanding the Fed's power as we are focusing what the Fed needs to do, to prevent the kinds of crises that are happening," Obama said.

Obama last week presented an 88-page list of proposals to revamp parts of the system that regulate financial firms and products.

On Tuesday, Obama said that one of the reform proposals actually removes one Fed power: enforcing consumer protection. He wants to create a new agency to enforce consumer protection of financial products like mortgages and credit cards.

However, under Obama's plan, the Fed would be charged with making sure giant banks and insurance companies have enough capital to back up the big financial bets they're making.

Republicans and some key Democrats, such as Banking Committee Chairman Sen. Chris Dodd, D-Conn., are still perturbed that the Fed didn't do enough to monitor risk among the banks it already had under its watch.

0:00/5:01The Fed's heavier hand

Obama on Tuesday acknowledged the criticism. He said even the Fed would be the "first to acknowledge in dealing with systemic risk and anticipating systemic risk, they didn't do everything that needed to be done."

But Obama said he believed the Fed did better than most other regulators before the crisis started.

"I would say that all financial regulators didn't do everything that needed to be done to prevent the crisis that happened," he said. "That's why we put forward the boldest set of reforms in financial regulations in 75 years -- because there were too many gaps."

But the president went further in explaining why he wants Bernanke to be the one in charge of systemic risk. He said he believes the Fed has "the most technical expertise and the best track record in terms of doing that."

Obama's regulatory reform proposal still needs Congressional approval. This Thursday, the House Financial Services begins meeting regularly to work on regulatory legislation. The White House hopes to have a regulatory reform bill passed by the end of the year. 

Stay-at-home mom, six-figure salary

NEW YORK (CNNMoney.com) -- Desperate for a job? How does CEO with a six-figure salary and flexible hours sound?

With fewer jobs available and more people feeling shut out of the labor market, many would-be 9-5ers chose to go out on their own.

Challenging economic times can encourage entrepreneurial capitalism, according to a recent study by the Ewing Marion Kauffman Foundation. More than half, or 51%, of the companies on the Fortune 500 list this year began during a recession or bear market or both, according to the study.

And while it may be difficult to get off the ground, some start-ups are flourishing in the current economic climate.

Julie Trade became her own boss after her husband was laid off in 2007. With a background in marketing, the former stay-at-home mom, 40, launched her own marketing communications business from a spare bedroom in Scottsdale, Ariz., drafting advertising and press materials for her clients.

Since her husband struggled for nearly a year to find another full-time job and they had a young baby, "I figured the best solution was to work from home."

Trade thought she could earn a little extra cash for the family while her husband searched for a new job. But as the recession worsened, her business began to take off.

"I thought I'd get a couple of clients to make ends meet while he was looking for work," she said. "But what happened was my business kind of went crazy."

Trade got up to speed on email and IM and learned about new marketing techniques, such as search engine optimization.

"I started to think about ways I could offer a variety of services, learn new technologies," she said. "I found ways to make myself appear larger than just a stay-at-home mom in a back bedroom."

Soon she was writing press releases and ads for established companies including British Telecom and Argent Software. "Companies that I never thought in a million years would need my services suddenly did. I was a cost effective source," she explained.

Now Trade logs 40 hours a week, mostly between the hours of 4:00 a.m. and 8:00 a.m. plus evenings and weekends, while her sons, ages 2 and 5, are asleep. "During the day I'm still a stay-at-home mom," Trade said.

That's a stay-at-home mom with a six-figure salary.

Trade estimates that she now makes twice what she did when she was working full-time before having children.

Stepping out on your own

The worst job market in 26 years may be the perfect time to start a business, according to Tim Kane, a senior fellow in Research and Policy at the Kauffman Foundation.

"It's very easy to waste half a year on a job search," he said. "Whether it's a good time to start a business depends on your personal situation. It's a great time if you've always wanted to start a company and you are stuck in a job search."

Because of the increased flexibility in terms of scheduling and location, working for yourself is a particularly "viable option for women who want to work and raise kids," according to Victoria Colligan co-author of "Ladies Who Launch: Embracing Entrepreneurship and Creativity as a Lifestyle."

Thanks to tools like social media and email marketing, entrepreneurs can build relationships online and reach many prospective contacts and clients.

But before venturing out on your own, Colligan suggests "side launching" for starters. If you are already employed, "don't quit your day job," she said.

Last year Fresia Rodriguez, 32, side-launched Kingley&Posh, a plus-sized women's fashion label while she was still employed as a magazine journalist in D.C.

Rodriguez says the business is forecasting a profit after the fall season.The first collection, due this fall, will be represented in about a dozen boutiques nationwide.

"When you start a business it always takes longer than you think to become profitable," Colligan said. "Plan for at least 12-18 months for laying that foundation."

Also, be prepared for the hefty start up costs that are often required to get a business off the ground -- although marketing businesses like Trade's generally have lower overhead and less risk, she said.

For those with greater initial costs and little funding, consider creative ways to finance your venture, Colligan suggested. "People will work with you in exchange for revenue sharing, partnerships, bartering and trade."

Rodriguez, for example, offered up her writing skills in exchange for accounting services. She also negotiated for a custom Web site and printing services.

"Creativity is at an all-time high," Colligan said. When it comes to the traditional rules of starting a business, "people are willing to think out of the box."

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SEC charges 4 with helping Madoff

NEW YORK (CNNMoney.com) -- The Securities and Exchange Commission on Monday charged a brokerage firm and several individuals with raising money from investors to feed Bernard Madoff's Ponzi scheme.

The SEC brought a civil enforcement action against Cohmad Securities Corp., its chairman Maurice Cohn, chief operating officer Marcia Cohn and registered representative Robert Jaffe with securities fraud. The SEC filed the case in U.S. District Court in Manhattan.

0:00/4:18Inside Bernie's house of cards

The Cohns and Jaffe are accused of courting investors for Madoff's massive scheme, which used fresh investments from unsuspecting investors to make payments to more mature investors and creating the false appearance of legitimate returns.

Separately, the SEC charged California-based investment adviser Stanley Chais with securities fraud. Chais is accused of operating feeder funds that poured money into Madoff's Ponzi scheme.

The defendants helped Madoff "cultivate an air of exclusivity by pretending that he was too successful to trouble himself with marketing to new investors," while providing "a constant in-flow of funds to sustain his fraud," said Robert Khuzami, director of the SEC's enforcement division, in a prepared statement.

Both SEC complaints seek injunctions, financial penalties and court orders requiring the defendants to turn over ill-gotten gains.

Over two decades, the Cohns and Jaffe raised billions of dollars from hundreds of investors for Madoff and were paid $100 million for their troubles, according to the SEC. The SEC accuses the defendants of being fully aware that Madoff was operating a Ponzi scheme.

Defense lawyers for Jaffe called the SEC complaints "baseless."

"The complaint filed today, which we learned about only from the press, smacks of impulsiveness and efforts at self-justification," Jaffe's lawyers at the firm Arkin Kaplan Rice said in a statement. "It is unfair, baseless in the law, and is inaccurate in its understanding of the facts and of Mr. Jaffe."

Lawyers for the Cohns were not immediately available for comment.

The SEC described Chais as an investment adviser for 40 years who "has held himself out as an investing wizard, purporting to execute a complex trading strategy on behalf of hundreds of investors, despite in actuality being an unsophisticated investor who did nothing more than turn all of the investors' assets over to Bernard Madoff."

Between 1995 and 2008, Chais charged $269 million in fees, and withdrew $546 million from Madoff accounts, said the SEC. The government agency said Chais was "a close friend of Madoff since at least the 1960s."

But Chais' lawyer, Eugene Licker, said that Chais is actually a victim, not a perpetrator, of Madoff's scheme.

"The complaint filed today by the SEC paints a distorted and false picture of Stanley Chais, borrowing liberally from baseless allegations by private plaintiffs trying to benefit themselves," wrote Licker, in a statement to CNNMoney.com. "Like so many others, Chais was blindsided and victimized by Bernard Madoff's unprecedented and pervasive fraud. Mr. Chais and his family have lost virtually everything - an impossible result were he involved in the underlying fraud."

Madoff has been locked up in the Metropolitan Correctional Center since March 12, when he pleaded guilty to masterminding the most massive Ponzi scheme of all time. He orchestrated the scheme through his firm, Bernard L. Madoff, which he founded in 1960.

Madoff's maximum sentence is 150 years in a federal prison, based on his guilty plea to 11 criminal counts, including fraud, money laundering, perjury, false filing with the Securities and Exchange Commission and other crimes. Madoff is set to be sentenced on June 29.

Thus far, investigators have identified 1,341 investors in Madoff's firm with losses exceeding $13 billion. 

Bailout watchdog: Who's the boss?

WASHINGTON (CNNMoney.com) -- The watchdog charged with investigating fraud in the government bailout programs is feuding with the Treasury Department about who he answers to.

The question revolves around whether Treasury should play any role supervising Neil Barofsky, the special inspector general overseeing the $700 billion Troubled Asset Relief Program.

Since Barofsky took the job in December, he has launched at least 20 criminal investigations and six audits looking for wasted dollars.

There's no question the TARP law makes clear that Barofsky reports to the president, who has the power to appoint and dismiss him, and Congress, to whom he must give quarterly reports.

But does Barofsky also report to Treasury Secretary Tim Geithner? Treasury believes the law is unclear on that point and is seeking a legal opinion to clarify it, a department official said Monday.

Barofsky asserts that he would lose some of his investigative muscle if he has to report to Treasury.

That "could potentially have a serious impact on the independence of our agency and our ability to carry out our mandate," Barofsky said in a June 19 letter to Sen. Charles Grassley, R-Iowa, and Rep. Darrell Issa, R-Calif.

A Treasury official asserts that the question of who oversees the TARP inspector general was first raised last December by "career, nonpolitical" staff.

Barofsky sees the origin of the dispute differently.

In a letter to lawmakers, Barofsky said the question came up in early April when he sought to interview a Treasury attorney about the department's role in controversial bonus payments made to the unit of American International Group (AIG, Fortune 500) responsible for that company's downfall.

In the days before the AIG audit interview, Treasury and attorneys working with Barofsky swapped several emails over whether Geithner supervises the inspector general, according to a Barofsky memo.

Most federal inspectors general ultimately report to the heads of the department they inspect, according to the Inspector General Act of 1978.

0:00/3:14TARP cop on the case

Treasury notes that the provision that created the special IG post cites the 1978 inspector general law. Yet, it doesn't spell out that Treasury has a role overseeing the inspector general. And it doesn't use the word "independent."

Barofsky maintains that his office is different and reports to the president and to Congress -- period.

Treasury has asked the Justice Department's Office of Legal Counsel to weigh in. It wants an opinion on whether Barofsky also reports to the Treasury in addition to the president and Congress.

In his June 19 letter, Barofsky assured lawmakers that Treasury has not withheld any documents from his office and has made its staffers available for questioning.

But the tiff -- and the interest of some lawmakers in it -- underscores the continuing political sensitivity surrounding TARP. Many lawmakers, especially Republicans, have been critical of the $700 billion program, even introducing legislation to bring TARP to an early end.

Republicans have pounced on the squabble, which comes on the heels of a dustup over Obama's dismissal of an inspector general unrelated to the Treasury Department.

"At a time when the Treasury and Federal Reserve are exercising unprecedented powers intervening in our economy, the independence of the SIGTARP is one of the few checks and balances that remain," Rep. Issa said in a statement. 

Moody's: USA still AAA - for now

TOKYO (Reuters) -- Moody's Investors Service said on Tuesday that the U.S. government's triple-A credit rating was safe but added that it could be at risk if Washington were unable to bring its public debt back to a downward trajectory.

Financial markets have repeatedly been spooked this year by concern that triple-A rated governments such as the United States and Britain could face credit ratings downgrades as they borrow heavily to spend their way out of recession.

"The U.S. government triple-A is safe," Pierre Cailleteau, team managing director of Moody's Sovereign Risk Group, said at a media briefing on sovereign credit ratings held in Tokyo.

Moody's has a stable outlook on the U.S. rating, which indicates a change is not expected over the next 18 months.

Replying to a question about the sovereign rating of the United States, Cailleteau said the U.S rating "remains a solid triple-A".

0:00/2:29Stimulus blasted as wasteful

But he added that there were possible risks that could lead to a downgrade.

"That will happen for two reasons. Either our assumptions in terms of debt reversibility prove to be wrong. That is, in fact the U.S. government is unable to bring public debt back to a downward trajectory," he said.

The other reason would be if the United States' ability to raise a large amount of debt at a low cost were to be put at risk, Cailleteau said.

"It could be put at risk if the U.S. dollar was severely challenged as the main international reserve currency," he said.

But the possibility of the dollar being replaced as the main international reserve currency in the near future was a "pretty remote risk", he added.

Debate has flared in the past few months about the dollar's status as the world's reserve currency at a time when the United States' debt issuance is ballooning to pay for financial and economic rescue programs.

The bulk of the world's foreign exchange reserves are held in dollars, and Russia, the holder of the world's third-largest reserves after China and Japan, has repeatedly called for less global reliance on the dollar.

Moody's Investors Service said in May that it was comfortable with the triple-A sovereign rating on the United States, but it was not guaranteed forever.

It also warned in May that if the United States failed to reduce current debt levels once economic growth returned, the triple-A rating could come under pressure. 

How the bailout bashed the banks

NEW YORK (Fortune) -- Washington's most dramatic foray into the nation's financial sector since the Great Depression began on Oct. 13 with a misnamed acronym, an unwitting tribe of CEOs, and a confused staff of Treasury officials. It was a foreshadowing of the misadventure to come. "I don't even know who the 9 companies are. Do you?" Michele Davis, assistant secretary for public affairs, wrote in an e-mail sent at 7:15 a.m. on that history-making Monday. "No clue," Treasury chief of staff Jim Wilkinson responded. "Let me get the list."

The list held the names of nine companies that Hank Paulson and Tim Geithner, at the time the Treasury secretary and the New York Federal Reserve president, planned to draft as the leaders of a parade of banks to get capital injections as protection against the financial panic. Paulson had spent Sunday evening calling the CEOs of the firms with a next-day summons to Washington. But by Monday morning, top Treasury staff and the arriving executives remained in the dark about the 3 p.m. meeting Paulson had insisted they attend. In one e-mail out of a series obtained through the Freedom of Information Act by the conservative group Judicial Watch, Citigroup (C, Fortune 500) CEO Vikram Pandit's deputies suggested sending someone else in his place. "If this is a briefing of industry group, I don't think VP can go back to DC. If it is something else we need to know," wrote Citi vice chairman Lewis Kaden. But the Treasury wanted to maintain the element of surprise, saying in a midday news release only that the executives were there to "work out details" of the $700 billion bank rescue plan Congress had passed days earlier.

0:00/4:22Bailout culture clash

By then, everyone knew the rescue plan by the acronym TARP, for Troubled Asset Relief Program, and its passage through Congress had been a tormented affair, with the stock market collapsing after an initial thumbs-down by the House. When TARP finally passed, it was supposed to jump-start the lifeless credit markets by deploying taxpayer money to help banks shed toxic assets that were crushing their balance sheets.

The government, however, changed its mind. At this dramatic Monday meeting, TARP morphed into something altogether different -- a more direct program in which the Treasury would pump fresh capital into the system by buying preferred shares of individual banks. And in the months that followed, TARP would morph again and again, especially in terms of political perceptions that became a perplexing new hazard for the more than 500 banks, thrifts, and other financial institutions that had signed up for the deal.

Pandit, among the last to arrive, was joined that afternoon by eight other titans of the shaken world of American finance, including J.P. Morgan Chase (JPM, Fortune 500) CEO Jamie Dimon, Bank of America (BAC, Fortune 500) CEO Ken Lewis, Wells Fargo (WFC, Fortune 500) chairman Richard Kovacevich, and Morgan Stanley (MS, Fortune 500) CEO John Mack. As the men checked in at the Treasury entrance, department staff scrambled to figure out how to keep the media at bay, but by that point the whole financial world was watching. "There are cameras at the gate," headlined an e-mail that was quickly followed by a decision to corral the media into Lafayette Park across the street, from which they would snap pictures of the bankers emerging with $125 billion more than they had when they went in.

Inside Treasury, some of the bankers initially balked at Paulson's offer, but he wasn't taking "no thanks" for an answer. "We don't believe it is tenable to opt out because doing so would leave you vulnerable and exposed," he said, according to his talking points. At 4:01 p.m., just one hour after the meeting started, Wilkinson e-mailed an update to the White House: "We are there except for one. This deal will get done." Treasury staffers had set up individual offices for the bankers so that they could call their boards and other colleagues without leaving the building. By 6:25, all nine executives had scrawled their signatures on single white sheets of Treasury paper, inserting the amount, in tens of billions, that they had been told to accept. "We now have 9 out of 9," wrote Wilkinson. The next day the Treasury issued a press release declaring, "These healthy institutions have voluntarily agreed to participate."

Was the rescue program necessary? We can probably assume that those signatures helped stave off a far more damaging economic collapse. Some banks, notably Citigroup, wouldn't be alive in their current form without TARP funding. But for those that had a choice (or think they did), accepting taxpayer dollars was a decision that came with costs to their reputation as well as damage to their view of Washington politicians, most notably Congress.

Eight months into a program designed as a three-year capital infusion, the banks allowed to leave TARP are doing so. On June 17, 10 large U.S. banks, including five of the original nine, announced that they had repaid a total of $68 billion in bailout funds, following $2 billion in repayments by smaller banks. The rush to the exit door by relatively healthy banks means that TARP is on the way to becoming what Treasury has always insisted it wasn't: government welfare, a taxpayer-funded propping-up of failed institutions. While taxpayers can't be expected to be sympathetic to complaints from a sector that vaporized hundreds of billions of dollars, it's worth understanding their motivations as they bail out of the bailout or chafe within its strictures. This is a story exploring the point of view of the often vilified parties on the receiving end of a historic experiment in government intervention, one of many that will play out in the coming years. Banking executives say this is what they've learned:

A signed deal with Treasury is not a done deal. If taxpayer dollars are on the line, Congress will have something to say, and that something holds the force of law.Populism isn't good for business -- but it's the overriding sentiment in Congress today, fueled by a 24/7 news cycle that feeds on outrage. The House actually passed a 90% tax on bonuses, which died only when the headlines had moved on.Good intentions don't control the message. The Treasury website still insists the TARP capital-injection program is "not a bailout." But amid a backlash against Wall Street, TARP transformed from a seal of approval to what J.P. Morgan's Dimon called "a scarlet letter."The strings attached are not always obvious in the heat of crisis but emerge as major disadvantages in a normal competitive environment.What starts out as all-for-one breaks down as participants pursue their self-interest. Treasury boasted that the first nine banks moved "quickly and collectively." It didn't last.

The experience has reminded business leaders why the government is considered a rescuer of last resort. As they repay TARP money, executives at stable institutions are vowing they will never again be tethered to a fickle Washington and a vindictive Congress. In normal times, that would merely be a sign of the free market's healthy skepticism toward government. But these aren't normal times -- the Obama administration needs the private sector to pitch in: healthy banks to lend more than they might otherwise; prospective investors to buy the illiquid assets weighing down lenders. And what happens if "there's another crisis and the private sector doesn't trust the government. What will we do?" asks a former top bank regulator. The bad blood runs deep.

Four months after signing Paulson's term sheets, CEOs from the same nine banks were hauled before a House committee to be derided by one lawmaker as "captains of the universe" and told by another that "no one trusts you anymore." Within days financial institutions that were encouraged to accept taxpayer money under one set of rules issued by the Treasury would be subjected to a new set of rules issued by Congress. They were shamed into canceling corporate events -- "employee recognition" outings in their minds but "lavish junkets" in the language of posturing politicians. (Who got hurt the most? Probably workers in the travel and hotel industries.) Customers called their bankers, angry that the institutions had been "bailed out" and demanding their own bailout from burdensome mortgages and credit cards. "There was this belief that this was free money," says Wells Fargo CEO John Stumpf. "But it was not a bailout, and we never asked for it."

Executives now refer to the "reputational risk" of participating in government-funded programs, while Treasury Secretary Geithner worries that the "stigma" associated with TARP funds is preventing needed capital from getting into the lending pipeline. According to a study by the investment bank Piper Jaffray, shares of those banks that accepted TARP funds suffered compared with those that did not. "Public, investor, and government perception toward recipients has turned negative," the study concluded. Among stable banks there is a "recognition that participating in a government program with a subsidy is not necessarily a good choice," says former Sen. John Sununu, a member of the congressional panel overseeing TARP.

In the TARP saga, executives list a range of complaints: Dimon, whose J.P. Morgan Chase has a global workforce of nearly 225,000, has called the restrictions on hiring foreigners "a complete and utter disgrace." Every executive interviewed complained that Congress's pay limits were driving away top talent. But mostly they complain about the unpredictability that Congress injected into their operations. "Whoever gets TARP will be punished after the fact," Kovacevich told Fortune. "Is this good policy? Does any of this make any sense?" Further down the size spectrum, CEO Tom Geisel of New Jersey-based Sun Bancorp (SNBC) (assets: $3.6 billion) says he wasn't prepared for the changing terms of the deal. "When we signed the contract, the biggest risk was the fact that we didn't know what we didn't know," says Geisel, whose bank stayed out of the subprime business. "The government was a partner that could do whatever it wanted. That's not a partnership. I've never signed a document like that before in my life, and I'll never sign one again."

The Treasury, which is legally authorized to change TARP terms at will, was not the primary source of the problem: It was Congress. From issuing new rules on compensation to high-level talk of nationalizing the banks, the turmoil in Washington stirred an uncertainty in the financial sector that can't have helped recovery efforts. Says former Treasury chief of staff Wilkinson: "Institutions need to know the rules, and the rules keep changing."

TARP began as a three-page document that Hank Paulson rushed to Congress in September, during the worst week of the financial crisis. The next month, after critics urged that the toxic-asset plan should be replaced with a capital-injection campaign similar to Britain's approach, Paulson came around to the new idea. Once embraced, Treasury was determined to make it happen. "We would rather have erred on the side of getting too much capital into the system than too little," Neel Kashkari, the Treasury official who ran the program until May, told Fortune. From the outset, it was billed as an effort to shore up the financial system, not individual banks. Recalls Stumpf: "There was a sense that we were in this together." However, the results of this spring's stress tests suggest that at least some of those big banks did need the government's cash after all. Wells Fargo and Bank of America were among 10 banks told to raise more private capital, as was Citigroup, which is turning over a one-third ownership stake to the government, making it a virtual ward of the state.

While the original nine were told they had no choice but to accept, others did have a choice -- yet soon lined up at the door, having faced mounting losses and worries about financing. Nonbanks American Express (AXP, Fortune 500) and CIT Group (CIT, Fortune 500) converted into depository institutions to qualify for TARP. Community banks mounted a lobbying campaign to be included. "I guess my invitation got lost in the mail," Camden Fine, CEO of the Independent Community Bankers Association, joked to a Treasury official on learning of the Oct. 13 meeting. By January hundreds of banks, thrifts, and other financial institutions were in the system, encouraged by Treasury, which sent out the message that only healthy banks need apply. Treasury was approving applications at a rapid clip, despite a cost to the banks of the 5% annual preferred stock dividend, which would rise to 9% if not paid in five years.

Even though taxpayers stood to profit under those terms, lawmakers from both parties were nursing their own frustrations -- over constituents unable to get loans, over Paulson's sudden shift in direction, over the torrent of federal rescue money Treasury was unleashing with minimal congressional input before the fact. "It was like a fire hose," recalls Rep. Scott Garrett (R-N.J.). "They were being totally dismissive" of alternatives.

The event that set off the populist tsunami -- and forever changed the public view of TARP banks -- came days after the inauguration of a new President, one who had campaigned against the "greed" of Wall Street. On Jan. 29, New York state comptroller Thomas DiNapoli issued his annual report on Wall Street compensation, which concluded that bonuses in 2008 had fallen 44% over the previous year. But what caught everyone's attention is that they still totaled $18.4 billion, even at a time when the companies were collapsing from their bad bets. New President Obama condemned the bonuses as "shameful" and "irresponsible." Lawmakers picked up on the theme, generating headlines and passing an amendment to the 2009 stimulus bill to impose new compensation rules on executives whose banks had signed on to TARP.

Lawmakers mined it for good theater. CEOs from each of the nine banks that had signed the initial deal were summoned Feb. 11 before the House Financial Services Committee, where lawmakers demanded an accounting of the taxpayer money they had accepted. Arrayed across the dais as cameras rolled, the nine men were lashed with scolding and sarcastic gibes like the one by Rep. Michael Capuano (D-Mass.): "Basically you come to us today on your bicycles after buying Girl Scout cookies and helping out Mother Teresa, telling us, 'We're sorry, we didn't mean it, we won't do it again, trust us.' " Of course, some bankers haven't done themselves any favors by continuing to enjoy perks like the use of company jets for personal trips while accepting TARP money, as the Wall Street Journal reported.

Participation in TARP by healthy banks began to decline as banks began to witness the political costs. That dropoff accelerated a few weeks later, after it was disclosed that bailed-out AIG (AIG, Fortune 500) was planning to give its executives $165 million in retention payments and the House responded with its confiscatory 90% tax on bonuses. "The media goaded Congress," recalled Rep. Melissa Bean (D-Ill.), an influential member of the House Financial Services Committee and one of six Democrats who resisted the goading. "That created fears."

Eighty banks withdrew their TARP applications or declined the funds after being approved. Others, like Geisel's Sun Bancorp, began returning their money in March and April. "What began as a positive partnership between business and government to get the economy back on track quickly became politicized," he says. In Geisel's case, he was initially encouraged by regulators to acquire weaker banks, but Congress, steeped in a big-is-bad sentiment, was threatening to amend the program again to add a series of hurdles to acquisitions.

By then the collective spirit was unraveling, and the big banks wanted out too. When top bankers met in March with Obama in the White House, J.P. Morgan's Dimon reportedly presented Geithner with a fake check for $25 billion, the amount of his bank's TARP investment. Geithner didn't accept the souvenir, and Obama didn't accept their protests either. "Be careful how you make those statements, gentlemen. The public isn't buying that," Politico reported Obama saying. "The anger, gentlemen, is real."

No wonder the White House was concerned. The stigma attached to TARP was beginning to affect other relief efforts the administration was trying to get off the ground. Analysts blame the initial lackluster performance of the Term Asset-Backed Securities Loan Facility -- designed to bolster student, auto, and credit card loans -- in part on political fears. Another program still hasn't gotten off the ground, one that was the original intent of the TARP bill: The Public-Private Investment Program to lift toxic assets (now redubbed "legacy" loans and securities) from the banks' balance sheets has had trouble attracting investors. Pricing assets is one obstacle, but investors are also reticent about making money off a government program. "Who wants their employees subjected to death threats and their homes picketed?" asked a hedge fund executive in a pointed reference to the AIG bonus debacle.

The lesson for Wall Street is hard to miss: Profiting off a government-subsidized program is a recipe for a political nightmare. Prospective investors "correctly believe that if they were to make a profit, Congress would come along and claw them back," says Peter Wallison, co-director of financial policy studies at the conservative American Enterprise Institute.

So has TARP done its job? "It was one of the largest government appropriations in history," says Thomas Chen, CEO of the investment bank Piper Jaffray. "And a mere seven months later we're letting capital be returned on the basis that the problem is fixed. So you have to ask: (1) Has it all been fixed?, or (2) Was it necessary in the first place?" Chen believes the program had a short-term calming effect on the economy -- more than a financial effect. Says Thomas Nides, Morgan Stanley's chief administrative officer: "The original concept was to accomplish one thing: to stop us from going off the cliff, to send a clear message that the government was not going to let the system collapse. For that I give them an A+."

Paulson's team has acknowledged that Treasury officials should have communicated better with Congress as the program expanded, bringing lawmakers onboard with the message that was communicated to the nine CEOs on that Monday afternoon: We're all in this together. "We were trying to get the political will to prevent the financial system from collapsing," says Kashkari. "But our political system is better at cleaning up after a mess than reaching consensus to prevent one."

Our political system is also fraught with turmoil and unpredictability. Capitalism, however, thrives on contractual certainty. The Obama White House has drawn many lessons from the Great Depression -- insisting, for example, that the crisis demonstrated the need for early, bold, and large-scale government intervention. But that era also holds lessons about the costly unpredictability of government rules. In her 2007 history of the Great Depression, The Forgotten Man , which became a hot book this spring among conservatives, author Amity Shlaes argues that the economy took longer than it should have to recover in the 1930s and contends that F.D.R.'s stated strategy of "bold, persistent experimentation" spawned fear of commitment in the markets.

That is the theme that TARP veterans return to time and again -- sanctity of contracts, the importance of certainty in market rules. This is American business culture, one that is at odds with the vicissitudes of American political culture. Right now Congress thinks it knows better. But too much bold, persistent experimentation just might undercut the recovery lawmakers say they want.

--Reporter associates: Alyssa Abkowitz, Marilyn Adamo, and Adam Lashinsky  

Job Growth

NEW YORK (CNNMoney.com) -- Job losses slowed dramatically in May, according to the latest government reading on the battered labor market, even as the unemployment rate rose to a 26-year high. But some experts cautioned that the job market remains weak.

Employers cut 345,000 jobs from their payrolls in the month, down from the revised decline of 504,000 jobs in April.

This was the fewest jobs lost in a month since last September, when the bankruptcy of Lehman Brothers caused a crisis in U.S. financial markets and choked off credit for many businesses. Economists surveyed by Briefing.com had forecast a loss of 520,000 jobs in May.

There were still widespread job losses, as most sectors of the economy, including manufacturing, construction, retail, and business and professional services posted declines in jobs.

But there were also some signs of growth, notably in education and health services, as well as the leisure and hospitality sector. Nearly one third of industries added jobs during the month, the highest level of gains since last October.

Still, the unemployment rate rose to 9.4% from 8.9% in April. Economists expected unemployment would increase to 9.2%.

Strangely enough, economists said the rise in unemployment is partly a sign of an improved jobs outlook. That's because people who had stopped looking for work started looking once again, and thus were classified as unemployed rather than "not in the labor force" - which is how the Labor Department counts most discouraged workers.

"As conditions improve more people flock to the labor market," said Robert Brusca of FAO Economics. He believes the economy is poised to start adding jobs before the end of this year.

"Jobs are doing what they do at the end of recessions and in early recoveries," he said. "No one can be optimistic enough to catch the turn when it comes."

But other economists cautioned that even though it was a better-than-expected jobs report, there are still signs of weakness.

Kurt Karl, chief economist at Swiss Re, said he doesn't expect a monthly gain in jobs until at least the middle of 2010. With employers still cutting jobs and hours, he said consumers won't have enough money to spur an economic recovery in the near term.

"I think things are turning for the better. But it's a disappointingly slow turn," he said. "Consumers can't consume more with this kind of picture."

Karl pointed out that the loss of 345,000 jobs in a month was worse than any one-month drop in the previous three recessions. There have now been 6 million jobs lost since the start of 2008, with nearly half of them occurring in the first five months of this year.

"That 345,000, while an improvement, is still a lot of jobs," he said. "We're not out of the woods yet."

0:00/00:48Targeting your next job

The unemployment rate was the highest since August of 1983. And the official unemployment rate only captures part of the pain being felt by job seekers.

More than a quarter of unemployed people have been out of work for six months or more, and the number of long-term unemployed reached nearly 4 million, the highest reading on records that go back to 1980.

There were also 9.1 million people who were working part-time jobs because they could not find full-time work or they had their hours cut back. This was also a record high.

When counting people who wanted full-time work who are working part-time, as well as some of the people who are not counted as unemployed because they had stopped looking for work, the so-called underemployment reading rose to a record level of 16.4%.

What's more, the average work week slipped again to a record low 33.1 hours. That pushed average weekly wages down as well during the month.

Tig Gilliam, chief executive of Adecco Group North America, a unit of the world's largest employment staffing firm, said the average hours worked will have to increase before the economy will be ready to start adding jobs again, as employers will be cautious about restarting their hiring.

Gilliam is also concerned that the number of temporary employees fell for the 17th straight month, another sign of employer wariness.

"That's doesn't suggest a dramatic improvement in hiring soon," he said. "We're still in a difficult labor market and it's going to take us time the rest of this year to work through to where companies are adding back jobs." 

Retail Sales

NEW YORK (CNNMoney.com) -- Retail sales rose in May, breaking two straight months of declines, but the gains were fueled primarily by auto purchases and higher gas prices that pumped up gasoline station sales.

"This report on a high level looks better, but it's not very reassuring when you look beneath the surface," said Michael Niemira, chief economist with the International Council of Shopping Centers (ICSC).

The Commerce Department said total retail sales rose 0.5% last month, compared with April's revised decline of 0.2%. Sales in April were originally reported to have declined 0.4%.

Economists surveyed by Briefing.com had been expecting May sales to increase 0.5%.

0:00/02:58Consumers still greedy

Sales excluding autos and auto parts also rose a better-than-forecast 0.5%, compared to a revised decline of 0.2% in April. But the increase in the measure was driven mostly by higher gas prices that resulted in a 3.6% jump in gasoline station sales.

Economists had forecast May sales, excluding auto purchases, to rise 0.2% from the previous month.

Most economists typically look at core retail sales -- excluding gasoline station purchases and auto sales -- for a more accurate assessment of the health of the consumer.

Consumer spending is vital to the economy since it accounts for two-thirds of all economic activity. So far this year, the nation's gross domestic product has declined at a 5.7% annual rate in the first quarter, the third straight quarter of decline.

Much of this softness stems from a continued pullback in consumer spending as more budget-conscious Americans shop only for necessities.

Stripping out both gasoline station and auto sales, core retail sales showed a marginal gain of 0.1% last month.

The report showed that sales in most discretionary categories fell in May. Electronics sellers logged a 0.5% sales decline, furniture sales fell 0.4% and department stores sales declined 0.7%.

Sporting goods and hobby stores registered a 0.8% decline.

But clothing sellers and stores selling building and garden materials bucked the downtrend, with clothing up 0.4% and building gaining 1.3%.

"Weather was a factor last month and likely favored gardening stores," said Niemira. "So this could just be a temporary blip."

"If we look for a broader evidence of the return of the consumer, I don't think it's there yet, Niemira said. "Consumer spending is still pretty sluggish." 

Madoff meets with SEC - sources

NEW YORK (CNN) -- Admitted fraudster Bernard Madoff, the mastermind of history's biggest Ponzi scheme, had a three-hour meeting with the Securities and Exchange Commission's top watchdog this week, several sources with knowledge of the situation told CNN.

The session took place Wednesday at New York's Metropolitan Correctional Center, where Madoff is awaiting sentencing on federal fraud charges, the sources said. He met with SEC Inspector-General David Kotz, who is investigating what federal securities regulators knew about Madoff's $50 billion enterprise before it collapsed in December.

Asked about the reported meeting, Kotz said only, "We've been making substantial progress in the investigation and plan to issue a comprehensive report very shortly." He told a congressional committee earlier this week that his main report should be complete by the end of August.

Madoff, 70, pleaded guilty in March to 11 criminal counts, including fraud, money laundering and perjury. The onetime chairman of the NASDAQ stock exchange faces a potential 150-year prison term at his June 29 sentencing.

His attorney, Ira Sorkin, had no comment on the report Thursday.

Madoff's operation reached far and wide, touching major financial institutions overseas, including Spain's Banco Santander and Britain's HSBC (HBC), tony communities such as Palm Beach, Florida, and members of Hollywood's elite, such as film director Steven Spielberg and actor Kevin Bacon.

Kotz is looking into whether the SEC missed or ignored warning signs before Madoff's enterprise collapsed. His office so far has interviewed more than 100 witnesses and has reviewed millions of e-mails and other documents, he told Rep. Paul Kanjorski, the chairman of a House subcommittee that oversees the securities industry, in a June 15 letter.

Chris Cox, the SEC chairman at the time the scandal broke, resigned under fire in January after disclosing the agency had ignored warnings about Madoff dating back to 1999. And Harry Markopolos, a Boston accountant, told Kanjorski's subcommittee in February that he repeatedly tried to raise questions about Madoff with the SEC.

"I gift-wrapped and delivered the largest Ponzi scheme in history to them and somehow they couldn't be bothered to conduct a thorough and proper investigation," Markopolos said. 

Inflation (CPI)

NEW YORK (CNNMoney.com) -- A key index of prices paid by consumers showed the largest year-over-year decline since April 1950, primarily due to sinking energy prices, the government said Wednesday.

The Consumer Price Index, the Labor Department's key measure of inflation, has fallen 1.3% over the past year.

That's the largest decline in nearly 60 years, and is due mainly to a 27.3% decline in the energy index.

On a monthly basis, CPI rose 0.1% in May, after remaining flat the previous month. Economists surveyed by Briefing.com expected a 0.3% increase.

Core CPI: The even more closely watched core CPI, which excludes volatile food and energy prices, increased 1.8% on an annual basis.

Core CPI rose 0.1% in May compared with April, matching forecasts. It was restrained by rent costs, which rose only 0.1% -- the smallest increase since November 2004, according to Ian Shepherdson, economist at High Frequency Economics.

"Overall, core is subdued," Shepherdson wrote in a research note. "Expect further slowing ahead."

A related Tuesday report showed wholesale prices jumped slightly in May, but the the 5% annual rate of decline was the sharpest since 1949. Both reports seemed to allay fears of inflation and deflation in the short-term.

Energy: The energy index slipped 27.3% on an annual basis. It climbed 0.2% in May after declining the previous two months.

The gasoline index rose just 3.1% in May - "much less than we expected," Shepherdson wrote.

The mild rise in the gasoline index "merely delays the inevitable," Shepherdson warned, adding that he expects a double-digit increase in June.

Prices at the pump have increased for 50 straight days, rising 30.8% during that period, according to a separate survey for motorist group AAA.

0:00/4:36T.Boone Pickens: $300 oil

Index-by-index: The indexes for shelter, new and used motor vehicles, and medical care also posted increases in May.

Many other indices slipped. The food index decreased for the fourth consecutive month with a decline of 0.2%.

The tobacco and smoking products index fell 0.3% in May after rising sharply in the two months prior. The increase in March and April was due to an increase in the federal tax.

The indexes of public transportation and apparel also fell. 

Rising gas prices hit drivers nationwide

NEW YORK (CNNMoney.com) -- Gas prices have risen for 50 days in a row and the pain at the pump is taking a toll on household budgets across the nation.

Nationwide, gas prices now average $2.679, motorist group AAA said Wednesday. Prices have risen every day since April 29, when the national average stood at $2.05 a gallon.

Drivers in every U.S. state, with the exception of South Carolina, now pay an average of at least $2.50 a gallon. In the Palmetto State, gas averages $2.49 a gallon.

The runup in gas prices comes at a time when drivers are already struggling with record high unemployment and an abysmal housing market.

"The rise is gas prices is putting a large dent into our household budget at a time when we are already feeling some pain," said Michael Clark, a technologies business analyst in Phoenix.

Clark, who said prices at his local station have gone up more than 90 cents since May, was recently asked by his employer to accept a 15% pay cut.

"I do not understand how the stock market can be up and the price of oil rising when everybody I know is hurting so badly," he said.

Many economists worry that consumers like Clark will be forced to cut back on spending on other items to make up for higher pump prices.

That could pose a serious threat to the already battered economy, since consumer spending makes up the bulk of U.S. economic activity.

The spike in gas prices comes on the back of a surge in the price of crude oil, which is the main ingredient in retail gasoline.

The price of oil has more than doubled since late December, climbing from a low of $33.87 a barrel to more than $70 recently. Meanwhile, gas prices have followed a similar trajectory, jumping more than $1 a gallon over the same time period.

Oil prices have been driven higher as investors bet the world's once-robust demand for energy is poised for a rebound. However, many analysts say the recent runup is overdone, and that oil prices at current levels are not justified based on sound economic fundamentals.

Has the rebound in gas prices caused you financial hardship? Are you spending less on other items to help with the cost of driving? Have you postponed summer driving plans? We want to hear your experiences. E-mail your story to realstories@cnnmoney.com and you could be part of an upcoming article. For the CNNMoney.com Comment Policy, click here.  

Report card: Obama's plan to fix financial rules

NEW YORK (Fortune) -- Now that President Obama has presented his plan to fix the way the U.S. regulates finance, it's time to assess if the plan will work. The 85-page "white paper" his Treasury Department released lays out the specifics. Now Congress will begin its ugly process of turning the proposals into law. There are some good ideas here. There's also a whole lot that may make Wall Street howl in protest.

Here, then, are some preliminary grades on a preliminary plan. The final exam is a long way off.

0:00/4:31Geithner:'Too unstable, fragile'

Give government power to wind down systemically important players. This is a good idea, if the manner in which this purportedly rare power is to be exercised is clearly spelled out to the affected companies. Last year there was considerable debate about whether the federal government had the authority to seize Lehman, an investment bank not regulated by the FDIC, instead of allowing it to collapse. These powers should be written down to avoid the embarrassing position the Bush and Obama administrations have found themselves in in the last year, exercising power that may or may not exist. (Grade: B+)

Empower the Fed to oversee the biggest financial players, including imposing leverage restrictions (and liquidity and capital requirements) on the largest financial companies. This arguably is the only proposal that means anything at all. Limiting the use of leverage at institutions like Citigroup (C, Fortune 500) or AIG (AIG, Fortune 500) would have made all the difference in 2008. Then again, the same action would have eroded years of profits at Goldman Sachs (GS, Fortune 500). A leverage restriction for banks and nonbanks alike would go a long way to preventing another crisis. Exactly how the requirements are written, including if they are transparent to investors, will mean everything. (Grade: Incomplete. Too soon to know.)

Create a super-regulator for consumer-oriented financial products, including mortgages and credit cards. It sounds good, but adding another regulator rather than eliminating them is a troubling development. (Grade: C)

Eliminate the Office of Thrift Supervision. Oh, actually, Obama does plan to do away with one ineffectual agency. What's not to like about eliminating the regulator that oversaw AIG, Countrywide and WaMu? The total number of regulators will stay the same. There should be more, not less, of this, but Beltway types say the White House doesn't want to risk political fights with Congressional committee chairmen whose turf includes agencies that should go away. This isn't change we can believe in, suffice it to say. (Grade: A on the specific action; D on the larger message.)

Urge harmonization between the SEC and CFTC. It's an open secret that the securities regulator and futures regulator step on each other's toes. A March 2008 blueprint by former Treasury Secretary Hank Paulson suggested the agencies should be merged. That plan went nowhere. "Harmonization" is Washingtonspeak for "nothing will happen." It's sort of like forming a blue-ribbon commission. (Grade: F)

Require hedge funds to register; regulate derivatives. Registration of hedge funds is harmless, and bringing the unregulated products they trade into the tent is a good idea. But this regulation should be constructive, not punitive. Plenty of laws against manipulation and abuse already exist. What we shouldn't be doing is going after "speculators," also known as investors. It's a slippery slope. (Grade: C-)

Reduce reliance on ratings agencies and require the originator, sponsor or broker of securitized mortgages to retain a financial interest in loans. Whoa. This is a bombshell. Diminishing the roll of the agencies will be a fun one to watch. Requiring mortgaging originators to hold a portion of their loans will annoy the banks. This will be a bloody debate. (Grade: B-)

Create a council of regulators to monitor systemic risk. This sounds like a Washington problem waiting to happen. A council could be helpful because its members will be powerful and motivated to spot problems. But it will be a political body in a political town. You'd have to see it in action to know if it works. (Grade: Incomplete.)

Treasury Secretary Tim Geithner and Larry Summers, the president's chief economist, concluded an opinion piece in The Washington Post earlier in the week by writing: "Now is the time to act." Actually, March 2008, when Paulson suggested his blueprint, would have been a really good time to act. Now would be good too. 

House GOP outlines health care bill

WASHINGTON (CNN) -- House Republicans on Wednesday presented what they called a "sorely needed" alternative to Democrats' proposals to overhaul health care.

Republicans want to make sure all Americans have access to affordable coverage, Rep. Eric Cantor, the House minority whip, said Wednesday.

"We do so by making sure we keep down costs and incorporate the ability for folks to pool together to access lower costs, to bring private sector into the game and keep government out," Cantor said.

Neither Democrats nor Republicans have detailed how they would pay for their proposals. Rep. Roy Blunt, R-Miss., said his party's plan will cost "far less" than that of the Democrats and "provide better results for the American people."

0:00/4:22Geithner: Health care's critical

Rep. Dave Camp, R-Mich., who co-authored the GOP plan, said it's important to make sure the bill is one with a "common-sense approach."

"We are not going to have a bill that is larger than the GDP [gross domestic product] of most countries, which is what we are beginning to see roll out," said Camp, the ranking Republican on the House Ways and Means Committee.

"Clearly, if we move forward and this bill is on the floor, we are going to have to have a bill that is paid for and that's going to depend on what the scores come back."

A score is a preliminary estimate of the cost of proposed legislation. A preliminary review by the Congressional Budget Office of a plan being drawn up in the Senate found it would cost about $1 trillion over 10 years to extend health insurance to 16 million people who otherwise would not be covered, about a third of the roughly 45 million now uninsured.

Camp said that the House Republican proposal calls for refundable tax credits for lower-income Americans.

0:00/4:21Curing public health care

But Camp and Republicans have not determined key details for their proposal, including the amount of those tax credits or who precisely could be eligible.

House Republicans on Wednesday planned to release a two-page summary of Camp's proposal, which CNN Radio obtained.

Some highlights include:

·~"Pools" of insurance. It would let states, small businesses and others group together to offer lower-cost, health care plans. Such pools would have to offer, at a minimum, any coverage that is provided in a majority of states.

·~Medicaid transfer. It would allow Medicaid users to take the value of their Medicaid benefits and transfer/apply those to a private health care plan instead.

·~Boosting of health care savings accounts. It would increase incentives for people, especially those in lower income brackets or over 55, to build up HSAs.

·~Automatic insurance. It would encourage employers to sign up their workers for health insurance automatically, so that employees would have to "opt out" of coverage if they didn't want it.

This Republican alternative bill also contains several ideas that are increasingly championed by both parties.

·~Longer coverage for youths. It would allow dependent children to stay on their parents' policies until they are 25.

·~Promotion of wellness at the workplace. It would encourage employers to reward employees for improved health.

·~Expansion of community health centers.

·~Mobile health care. It would allow Americans to maintain their specific health insurance policies when they lose or leave jobs.

·~In-home care. It would provide financial help and encourage more in-home care over institutions.

·~Limitations on malpractice lawsuits. There is general agreement over limiting such lawsuits, but a deep divide exists over exactly how much.

This House Republican plan comes a day after fellow Republican Rep. Mark Kirk of Illinois and other moderates in the so-called Tuesday Group released their proposal, which spelled out many of the same ideas as the Camp bill.

Kirk contends his plan is less partisan but said he supports Camp's effort.

-- CNN's Lisa Desjardins contributed to this report.  

The fear factor in health care costs

NEW YORK (CNNMoney.com) -- Every time a doctor orders an extra test for you, it pushes up your medical costs and -- some experts say -- contributes to the waste in the nation's $2.2 trillion in health care spending.

While there's much debate about the actual dollar impact of this controversial practice called "defensive medicine," experts agree it's an obstacle to reining in the medical care expenses.

Defensive medicine occurs when a doctor orders tests or procedures not based on need but concern over liability, explained Dr. Alan Woodward, former president of the Massachusetts Medical Society (MMS) and vice chairman of its committee on professional liability.

"If you're serious about (health care) reform, you have to be serious about this issue," Woodward said. He estimates that more than 80% of doctors across the country are engaged in defensive medicine.

President Obama, who has so far made information technology a key to his plan to reform health care, addressed this issue Monday in his speech to the American Medical Association (AMA).

0:00/4:22Geithner: Health care's critical

"Some doctors may feel the need to order more tests and treatments to avoid being legally vulnerable. That's a real issue," he said. "While I'm not advocating caps on malpractice awards, I do think we need to explore a range of ideas about how to put patient safety first, let doctors focus on practicing medicine, and encourage broader use of evidence-based guidelines."

"That's how we can scale back the excessive defensive medicine reinforcing our current system of more treatment rather than better care," he said.

A 2008 study from PricewaterhouseCoopers found that wasteful spending in the health system accounts for more than half of all of health care spending. The firm identified defensive medicine as the biggest area of excess.

Pricing fear: Still, the effects of defensive medicine aren't easy to quantify. Estimates vary vastly.

"Each doctor has a very different risk profile," said Dr. David Chin, managing partner of consulting firm PricewaterhouseCoopers' Global Healthcare Research Institute. "If one doctor asks for an additional test, it's not always because they are practicing defensive medicine."

The Congressional Budget Office, the federal agency that will calculate how much money health reform will cost or save, has estimated that medical malpractice costs -- which include defensive medicine -- amount to less than 2% of overall health care spending.

Chin said his guess is in line with the CBO's number.

Michael Morrisey, a professor of health economics and health insurance at the University of Alabama's Lister Hill Center for Health Policy, is also skeptical about defensive medicine's impact on health care costs. He said states that have capped malpractice claims haven't seen any significant decreases in health care costs or heath insurance premiums.

"To me, the three biggest challenges for health care reform are tax treatment of employer-sponsored insurance, retooling health care payment systems and technological advancement in health care," said Morrisey.

Woodward disagreed. He ranks defensive medicine as the second-biggest burden on health care costs after the fee-for-service model in which doctors are paid for the quantity, rather than the quality, of services provided.

Woodward estimates that defensive medicine accounts for about 10% of health care costs. Some industry studies have translated that to more than $100 billion in health care costs annually.

"We are driving the standard of care more and more in the defensive direction," he said. "Physicians are practicing maximalist medicine rather than optimalist care.

Woodward defines optimalist care as everyone getting high-quality care, when they need it, in a cost-effective way.

He said the uninsured are getting "minimalist" care while insured Americans are getting maximalist care, or more than what they need from doctors due to fear of liability, the fee-for-service payment model and direct-to-consumer advertising.

Consumer impact: Redundant tests can pump up premiums for the insured. "Consumers' premiums could be 10% lower if doctors stopped this practice," Woodward said.

From a medical standpoint, excessive tests can also be harmful to patients if errors or complications occur, said Dr. Manish Sethi, a member of the MMS' board of trustees and co-author of a 2008 study that investigates and quantifies defensive practices in Massachusetts.

The MMS surveyed more than 830 physicians across eight specialty areas in the state and found 83% reported practicing defensive medicine at an estimated cost of $1.4 billion per year.

"The bottom line is doctors across the country are ordering more tests because of liability concerns," said Sethi. "I am not advocating liability reform but we could look at other options."

The American Medical Association, the group representing doctors, last month mentioned "health courts" as one option.

"Let's have special courts for patients just like bankruptcy court or patents courts and judges have medical training," said Woodward. "In the current system, medical cases are heard by judges who may not be trained in health care. Jurors have no background in health care and jury awards are huge."

Sethi offered other ideas such as a national standard of care, enforced by the Department of Health and Human Services, mandating specific clinical practice guidelines for doctors.

Sethi feels this would mitigate some of the liability concerns and encourage more doctors to accept high-risk patients, countering another aspect of defensive medicine.

In Massachusetts, lawmakers are also considering a bill allowing doctors to apologize to patients and their families for a medical error. However, that apology wouldn't be admissible in court during any future lawsuit brought by the patient.

"What a patient wants when errors happen is full disclosure, an apology and assurance that it won't happen again and compensation," said Woodward, adding that this process can help prevent complaints ultimately going to court.

"We have to move from a reactive to a proactive health care system. I think Obama gets it, but I don't know how aggressive he will be about it," he added. 

California won't grow until 2010

SAN FRANCISCO (Reuters) -- California's economy faces more hard times this year and will not grow until late next year, weighed down by the ongoing housing slump and the state government's need to slash spending, a UCLA Anderson Forecast report released Tuesday said.

California, the country's most populous state with roughly 38 million people, also faces a double-digit unemployment rate persisting until 2011, the report said.

"California is in for a continued rough ride for the balance of 2009 and is not going to see economic growth return until the end of the year, shortly after the U.S. economy begins to grow," the report said.

A $24.3 billion budget gap faced by the state is sure to force deep spending cuts, which will limit the contribution of public spending to the state's economic recovery, the report said.

"California's state government, saddled with anachronistic revenue and spending processes, has no choice but to contract at the worst time," the report said.

California's current recession may be its worst since World War Two, and headwinds impeding a recovery include weak international trading partners.

The home of Silicon Valley and Hollywood, and often seen as a cultural trendsetter, California will be a follower not a leader in recovery from the country's current downturn, the report said.

Housing woes near end

Some relief in housing, however, is taking shape. "If there is any good news in the picture, it is that the correction in the housing market is complete and the overshooting which normally occurs after a correction has appeared," the report said.

"Our employment forecast suggests that it will be late in 2009 before prices are tempting enough and supply is low enough for the market to stabilize. When it does, the contraction in residential construction will, finally, after more than three years, cease to be a drag on the California economy," the report added.

But then the drag from state worker layoffs will emerge, and it will be "decidedly negative and will retard economic growth in 2010."

California's unemployment rate now stands at a near-record 11 percent, largely from slashed payrolls in home building and finance amid the mortgage crisis and foreclosure surge.

California's economy will begin to grow at more normal levels by the beginning of 2011, but not enough jobs will be created to push the unemployment rate below double digits until the end of 2011, the report predicted.

Potential risks to recovery include renewed turmoil in financial markets and a "longer term collapse in consumption," the report added.

It also listed political risks from state officials failing to craft a state budget in a timely manner and protectionism in international trade.

"While we don't anticipate any of these to occur, there is enough momentum in this recession and discussion in the policy sphere to make them possible," the report said. 

Industrial production sinks 1.1% in May

WASHINGTON (Reuters) -- U.S. industrial production slid a steeper-than-expected 1.1% in May from the prior month with output off sharply at factories, utilities and mines, a Federal Reserve report showed Tuesday.

Economists polled by Reuters were expecting a 0.9% decline after a revised 0.7% drop in April, initially reported as a 0.5% decrease.

The data suggest that any slowdown in the pace of the recession that many economists have pointed to in recent weeks may be uneven.

The capacity utilization rate for total industry, a measure of slack in the economy, fell to 68.3%, the lowest level on records dating back to 1967. 

Wholesale price report shows inflation in check

NEW YORK (CNNMoney.com) -- Wholesale prices jumped slightly in May, the government said Tuesday, but the increase was less than expected and the 5% annual rate of decline was the sharpest since 1949.

The Producer Price Index, which tracks the changes in selling prices for domestic producers, rose by 0.2% last month. The report is widely watched to monitor inflation.

A consensus estimate of economists surveyed by Briefing.com had forecast a 0.6% increase.

The jump in wholesale prices follows a 0.3% increase in the index in April. January's 0.8% increase snapped a five-month streak of falling prices.

"There's no story on inflation here, and deflation doesn't seem to be a concern," said Anika Khan, economist at Wachovia.

Inflation and deflation: Year-over-year, wholesale prices fell 5%, the largest decline in 60 years.

"That continues to show that even further back in the pipeline we don't have inflation risk," Khan said.

Inflationary concerns rise in tandem with large increases in the so-called "core PPI," which excludes volatile energy and food costs, Khan said. In May, the core PPI edged up by only 0.1%, matching forecasts.

Conversely, deflation is characterized by "broad-based, continued declines in subsectors, which we haven't seen," Khan said.

A 2.9% increase in energy goods prices offset a 1.6% decline in consumer foods, the report said. That's due in large part to gasoline prices, which rose 13.9% following a 2.6% increase in April.

Prices at the pump have increased for 49 straight days, according to a separate survey for motorist group AAA.

Outlook: In the short term, neither inflation nor deflation should occur, Khan said.

"But eventually, we should be taking a watchful eye to the core numbers," she said. "With all of the stimulus spending, inflation should be a problem in the long term."