The Fed & Treasury Auctions: Is there any real money being paid?

Interesting exchange in the comment section of MarketWatch for this article on the Fed buying T-bills at Treasury auction.  Here's the exchange:

Q: Can anyone explain to me how they issuers of debt, can be the buyers of the same debt? This doesn't make sense on any kind of level.

A: (Gooby) Here's how they do it. 

The Fed loans (interest free money) to the TARP minions (JP Morgan, GS, and foreign central banks that Bernanke will not reveal) so that they can drive the market and gold back up in order to sucker the ordinary investors into jumping in with their hard-earned wealth. Then the minions will play their microtrades, skim off their profits, make the market dump, pay back the Fed and buy more TREASURIES...... 

Ordinary investors are funding TARP minions buying US Debt. ..........so we get screwed when we get the bill for the TARP bailouts and then we'll get screwed when we also get taxed to cover the interest on the TREASURIES.

A: (Wil-E-Coyote) US Treasury issues the bonds, Federal Reserve buys them (effectively retiring them). 

Magic money then credited to the US Treasury account, without the need for taxes.

(Repeat until currency is worthless).

A: (Freefall) Like Coyote said, US treasury sells the bonds, the Fed buys them with their printing press. However, these buybacks are not purchased directly from the Treasury per se as treasury floats debts through auction. The Fed purchases them through primary dealers effectively increasing liquidity(more cash available to lend). They used to control liquidity through 'temporary open market operation' or 'permanent open market operation.' However, after the crisis, the Fed only does buybacks and POMO which are effectively retiring those debt instruments off the market permanently.

A: (Woodsmoke52) A lot of people are consoling themselves that the coming inflation holocaust spawned by the Fed/Treasury collusion will push stock prices higher. Yes, inflation is likely to drive stock prices higher, but there's a catch. Stock prices rose in the 1970s, but they didn't keep pace with inflation and they won't do so this time. Stocks are not historically a good hedge against steep monetary inflation. Real estate does better, but even real estate falls short of CPI increases. And 18.8 million empty housing units say that today is not a good time to buy residential real estate. If you want to park wealth in real estate, I would suggest an old farm in the midwest. Someplace you can unload a shotgun or a 7mm mag without upsetting the neighbors.

With the big-spending 45-54 year old demographic shrinking and baby boomers beginning to retire and sell stocks out of their retirement plans, there is nothing to support stock prices for years to come. The government is increasing the money supply at a rate many times that of GDP growth. Ultimately, that can have only one outcome. It is consumer essentials that will go up the most, not paper assets.

CPI inflation is modest now (about 6%-7% according to shadowstats.com) but when the economy begins to show a real uptick in consumption, the velocity of money will pick up. As soon as that happens, inflation will run wild. Think about it: millions of unemployed people are no longer producing goods and services, but still consuming. If government keeps mailing out the food stamp cards, extending unemployment checks and granting 100% LTV mortgages through the GSE's, consumption will overwhelm actual production.

Do not sell gold when the price reaches $2000.

A Bursting Seam: Will Kurdistan Tear Iraq Apart?

An excellent article from CFR on both the recent history of, and challenges currently facing, the relationship of the Kurdish regional government and the Iraqi federal government. Given the immense oil reserves at stake in and around Kirkuk, it's no wonder that the referendum on the city's status has been delayed repeatedly, and that violence pervades the city today.

The Kurdish Issue Flares Up in Iraq
Author: Daniel Senor, Adjunct Senior Fellow for Middle Eastern Studies


July 21, 2009
Wall Street Journal

At their White House meeting today, President Barack Obama and Iraqi Prime Minister Nouri al-Maliki will discuss the escalating conflict between Iraq's Arabs and Kurds. Tensions have almost turned into warfare in recent months, especially following the Iraqi Army's deployment of its 12th Division in Kirkuk late last year. It is a critical time for the U.S. to play a constructive role, but this cannot happen if Mr. Obama throws away his most potent card: a clear signal that he is prepared to slow down planned U.S. troop withdrawals.

How did Iraq arrive at this new flashpoint? Between the end of the first Gulf War in 1991 and the fall of Baghdad in April 2003, Iraqi Kurds lived in a semi-autonomous region. The informal border-called the Green Line-stretched from just north of Diyala and Kirkuk, and cut through part of Ninewa. Ever since, the Kurds have had their own parliament and ministries, control over all the cultural institutions in the region, and their own militia called the peshmerga.

Providing the Kurds with a protected region made perfect moral and geopolitical sense. Saddam had repeatedly attempted genocidal campaigns against them: the Anfal depopulation campaign in 1987-88, in which the Baathist regime killed or expelled hundreds of thousands of Kurds; the expulsion of thousands of Fayli (Shiite) Kurds from northern Iraq into Iran; and the 1988 slaughter of 5,000 Kurds with chemical weapons in Halabja.

In April 2003, the peshmerga helped the U.S. fight Saddam-not just in the Kurdish area but also south of the Green Line. When it came to Kirkuk, however, the Kurds moved in during the war and never left. With Saddam gone, the Kurds quickly set up Kurdish Regional Government (KRG) offices in the city and began to establish facts on the ground.

From the Kurdish point of view, all this was natural and just. Before Saddam's brutal expulsions during his Arabization campaign, Kirkuk had a Kurdish majority.

Iraq's post-Saddam interim constitution-which we in the Coalition Provisional Authority helped the Iraqis draft-recognized Kurdish authority only over the territories that the Kurds controlled before the fall of the regime. The permanent Iraqi Constitution went a step further in requiring a referendum to determine the future status of Kirkuk. While both articles clearly left Kirkuk outside the jurisdiction of the KRG in the near term, the language also conceded that Kirkuk and other nearby areas were "disputed territories." In the eyes of the Kurds, this ambiguity left the door open.

At that time, resolving the Kurdish issue was subordinated to the urgent need to address the Sunni insurgency and the growing power of Moqtada al-Sadr's Mahdi militia. Today the threats from Iraqi al Qaeda and the Sadrists are significantly diminished.

Two factors will drive the Kurdish-Arab issue to a boiling point over the next six months unless the Obama administration heads them off. First, oil. There is still no federal Iraqi hydrocarbons law. The KRG and the Iraqi government rely on different interpretations of Article 111 of the Iraqi Constitution, which declares that "oil and gas are the property of all the Iraqi people in all the regions and governorates."

Kirkuk's oil is a big issue for the national government in Baghdad. When Mr. Maliki's government wrote its federal budget for 2009, oil prices were hovering around $150 per barrel. And while the Iraqi government had wisely forecast prices to fall to $80 per barrel-and made budget projections accordingly-oil prices were still 50% below their projections by mid-year. This has caused panic at Iraq's Oil and Finance Ministries.

From the Kurds' standpoint, oil is part of a broader KRG strategy to draw international pressure on Baghdad to grant further Kurdish autonomy. It is no coincidence that on the eve of Mr. Maliki's visit to Washington, the KRG's Ministry of National Resources released an embarrassing document contrasting its success in attracting foreign energy investors with the national government's approach, which has been stalled.

Second, politics. On Saturday, the Kurds vote on a new parliament and president. While polls show that President Massoud Barzani and the two largest Kurdish parliamentary parties will be re-elected, the dynamic of this election is making Kurdish leaders nervous. Historically, Kurdish elections turned on the KRG's power struggle with the national government. But in this election, the Iraqi Kurds seem to be more preoccupied with local governance issues such as KRG corruption. This may be prompting KRG officials to foment tension with Baghdad in the hope that the perception of external threats will strengthen their position at the polls.

As for Mr. Maliki, he must prepare for national elections in January. Tapping into Iraqi-Arab nationalism is to his political advantage. In short, the political schedule all but ensures that there will be no grand Baghdad-Erbil bargain soon.

Kurdish leaders are deeply concerned about the withdrawal of U.S. forces. Under the current timeline, most U.S. troops will be out of Iraq by the end of the summer 2010, with 35,000 to 50,000 remaining through the end of 2011, at which point all U.S. forces must be gone. Mr. Obama should consider slowing the withdrawal schedule. The willingness of the Kurds to negotiate will decrease if they believe U.S. forces will not be there to help enforce an agreement. In addition, the U.S. government must be sensitive to the possibility that al Qaeda may see an opportunity in the north to support an Arab cause.

There is pressure building within the Pentagon to cut forces in Iraq even faster than planned to send more troops to Afghanistan. That pressure should be resisted. We must not do in Iraq what Mr. Obama, when campaigning last year for the job of commander in chief, said we did in Afghanistan: lose a key fight by focusing too intently on another theater.

Mr. Senor is an adjunct senior fellow at the Council on Foreign Relations. He served as a senior adviser to the coalition in Iraq and was based in Baghdad in 2003 and 2004.

To read about the history of Kurdistan, see an essay here from my archive.

Seeing the Forest, Not just the Trees

An excellent article that, read in conjunction with Taibbi's "Counterfeit Ecomony," captures the essence of the millions of mindless securities insurance transactions that form the backbone of today's investment economy. The little guy can't even play in this game, let alone win at it.

Wall Street on the lam

By Eugene Robinson
Friday, October 23, 2009
Originally posted @ http://www.washingtonpost.com/wp-dyn/content/article/2009/10/22/AR2009102203866.html?

Slashing executive salaries, bonuses and perks at the seven bailed-out companies that gorged most gluttonously at the public trough is emotionally satisfying, but it shouldn't be. It's like arresting jaywalkers while ignoring the bank robbery that's happening in broad daylight down the block.

Don't get me wrong. The Obama administration's "pay czar," Kenneth Feinberg, is right to put a lid on compensation at the Not-So-Magnificent Seven: Citigroup, Bank of America, General Motors, Chrysler, GMAC, Chrysler Financial and the unforgettable AIG. Twenty-five of the biggest earners at each of those firms will have their overall compensation cut roughly in half, and most of that will come as restricted company stock, not cash. This means that what they ultimately reap, when they are eventually allowed to sell the stock, will depend on how well the company performs -- which will depend on how well the executives do their jobs.

Tying pay to performance: What a concept.

Feinberg even muscled outgoing Bank of America chief executive Kenneth Lewis into accepting no pay or bonus for this year. But Lewis will still have an estimated $70 million retirement package to keep him warm at night, so hold your tears.

It's nice to know that there must be some pooh-bah at B of A, Citigroup or AIG who will have to live without the new $90,000 Porsche Panamera he was planning to buy. But Feinberg's writ of imperial decree doesn't extend beyond those seven companies, and the rest of Wall Street gives no indication of remotely understanding what the big deal is about compensation. Goldman Sachs, for example, has a bonus pool this year of at least $16 billion and perhaps as much as $23 billion.

But all this is just a sideshow. The main event is the limited, far-too-modest attempt by the Obama administration and Congress to curb the irresponsible Wall Street practices that led to the financial meltdown -- and, if unaddressed, will lead inexorably to the next crisis.

Deregulation allowed the financial marketplace to devolve from an institution that served the overall economy -- by allocating capital most efficiently to the companies that could put it to best use -- into an institution whose primary mission was to serve itself.

The vast over-the-counter trade in instruments known as derivatives, nominally worth a staggering $600 trillion worldwide, is largely an exercise in make-believe. Firms make highly leveraged investments in exotic securities whose true value is opaque. Then they hedge these investments by buying insurance against potential losses, although the insurer doesn't have a fraction of the money it would need to make good on all its promises.

All this investing and hedging generate huge transaction fees and big profits, which can be skimmed off the top each year. Everything's fine, until there's some disruption in the real economy -- a downturn in the housing market, say. If the disruption is severe enough, the web of make-believe deals starts to unravel. At which point the government steps in and bails everybody out.

The White House and Treasury Department have proposed reforms that would ameliorate, but not eliminate, this ridiculous cycle. What the administration won't do is outlaw some kinds of derivative products or transactions; officials say that if they went down that road, they would always be one step behind Wall Street's inventiveness and greed. I think it would be worth a try.

The administration did propose that derivatives transactions go through clearinghouses and be conducted on transparent, regulated exchanges. But as reform legislation begins to work its way through Congress, Wall Street firms -- including companies that received bailout funds -- have boosted their spending on lobbying and political donations.

As a result, legislation approved Wednesday by the House Agriculture Committee -- which has jurisdiction over the futures markets -- would exempt up to 30 percent of derivatives transactions from new regulations. A bill approved Thursday by the House Financial Services Committee that would create a Consumer Financial Protection Agency, strongly opposed by most luminaries on Wall Street, was amended in the committee to exclude mortgage insurers, title insurers, accountants, lawyers and others.

Banks, meanwhile, are jacking up overdraft charges and instituting new kinds of credit card fees before any new limits kick in. Hey, get it while you can.

Capping salaries and bonuses is fine. But we need to pay attention to the guys in ski masks with bulging bags of money slung over their shoulders. They're about to jump into the getaway car.

A Mighty Wind: How Centralized Government Has Taken the Lead in Alternative Energy Generation and Component Manufactuing

Blown away: China is set to become world's biggest wind power
By: Alex Salkever
Published here

Holland has the windmill. Will China's new cultural icon be the 21st-century version -- the wind turbine? Moves taken by the Middle Kingdom could ultimately position the country to dwarf the United States in terms of total wind power installed and would make China far and away the globe's premier wind power, according to alternative energy expert Ryan Wiser, a scientist at Lawrence Berkeley Laboratories.

Before 2009 draws to a close, China will already match or surpass the U.S. in terms of total amount of wind-power generation capacity installed, says Wiser, one of the top authorities on alternative energy development and planning. By 2011, it will definitely have surged ahead, he adds. And China's ambitions are growing. This year, the Chinese government will likely significantly expand its targets for wind-generation energy, with a goal of generating up to 150 gigawatts of wind-generated power by 2020.

I've posted before on how China is assuming leadership in the rush to green the world. China showed it was serious earlier this week when it announced plans for a pilot carbon exchange, or what is basically a platform that allows parties to trade permits to pollute. But for a better view on what is happening in China in the alternative energy space, I hung out with Wiser at this week's REFF West Conference in San Francisco.

As a point of comparison, total wind power installed in the U.S. at the end of the second quarter of 2009 was 2.9 gigawatts. Today, the U.S. is roughly on par with China. China's goals mean the country is aiming for a 50-fold increase in wind power over a mere 10 years.

And China is prepared to pay for it. In August 2009, the Chinese central government set up a national feed-in tariff for wind power. That means anyone building a wind farm can count on selling the power that the farm generates back to utilities at a set price, which is likely to be higher than the market price for power.

This made it much easier to build wind-power farms by setting a power price that can be used to calculate whether or a not a project will be profitable. To date, the U.S. has not established a national feed-in tariff for wind.

Wiser said China has done a number of things right. "China's recent leadership in wind has been driven by a number of things," said Wiser. The country has an ability and willingness to aggressively pursue manufacturing-cost advantages to drive down the cost of wind equipment. This results from a targeted industrial policy that encourages wind turbine manufacturing in China. By law, 70 percent of the materials used in China's wind farms must be manufactured in country.

This has resulted in complaints of protectionism by foreign suppliers. But China has fostered the growth of its own wind-technology sector sufficiently to allow homegrown companies not only a chance to compete with foreign suppliers, but even to break into the export market for wind gear.

The government has also been willing to require the electric transmission needed to bring wind to market. Due to its command economy, China's ability to develop sufficient electric transmission is an area where it has an inherent advantage. It has also invested in that transmission on an accelerated time scale.

By comparison, building high-capacity power transmission lines in the U.S. is a nightmare that requires huge environmental impact studies, approvals of right-of-ways by private owners, buy-in by states and regional power organizations, and sundry other approvals. The net result, says Wiser, is that it can take 10 years or more for a transmission line to be built in this country.

China faces no regulatory approval logjams. It is in the process of building out a new power grid that would make a utility engineer in the U.S. green with envy. Over the longer term, a much better grid will prove to be a powerful economic-growth driver, as the growth in an economy is closely related to power generation and electricity demand.

What's more, its pricing and regulatory system encourages the country's major, state-owned enterprises to aggressively pursue wind-energy development opportunities. Included in this system are the feed-in tariffs, tax breaks and subsidies designed to encourage utilities to build wind farms.

China has been particularly aggressive in rolling these things out, to the point of underwriting 50 percent or more of project costs and making it nearly impossible to lose money by building an alternative-energy power generation facility. The feed-in tariffs, too, make a huge difference because it makes it possible to build an economic model for a power-plant project, something that is difficult to do with fluctuating wholesale energy costs.

These steps that China has taken all go against some powerful political or business element in the more chaotic environment of the U.S. Manufacturing subsidies, while given out in many industries, are generally fought by potential competitors and are taboo in the minds of conservative politicians.

Big transmission projects inevitably draw huge fire from environmentalists, homeowners, counties and states. Feed-in tariffs are unpopular with powerful utilities, who prefer not to pay extra for power. And subsidies for construction of power plants inevitably meet resistance from competing energy lobbies for coal, natural gas, and oil.

In that light, it's no surprise China is rushing ahead and will soon blow by the U.S. in wind energy.

The Economic Implosion from 30,000 Feet

What follows is a remarkably pithy yet insightful explanation of both the underpinnings of, and casual damage to, the increasingly fragile American body economic. Moreover, the snarky, tough guy tone of the author serves as an excellent mechanism for the distribution of this analysis. Enjoy-- and then go fix the world.

Source: http://master-of-none.tumblr.com/post/207991990/reprogram-the-reaganites

Reprogram the Reaganites

In BusinessWeek, a Harvard Business School (HBS) alumnus blames the MBA farms for the current crisis. I think he’s right to blame the schools, in part, but wrong about why.

The author says we went astray by orienting business education away from relationships (good managers, customer service) and towards processes (efficiency, business channel segmentation). And this supposedly leads companies to make bad decisions. I don’t buy it.

He is correct, however, when he says that ethics don’t enter into the debate: “Subordinating everything to shareholder value is, literally, anti-ethical.”

Anti-ethical, and yet this is what we require from our CEOs and management teams. By law, the CEO is required to do everything legally possible to achieve gains for his shareholders.

If we are getting bad outcomes from this arrangement, we need to make more bad stuff illegal.

And the reason we haven’t made more bad stuff illegal is because of two ideas popularized in the 1980’s:
Free markets are good (courtesy of Milton Friedman, University of Chicago)
Markets are efficient (courtesy of Eugene Fama, University of Chicago)

For the record, I do believe that free markets are usually a good thing (i.e. self-interest is a strong natural motivator), and I agree that large well-trafficked markets are usually efficient. The dangers to society (and the bad outcomes) happen when these theories are taken to the extreme, like religious fanaticism.

Some academics, many management teams, almost every bank CEO, countless right-wing think tanks, and the mainstream media (especially CNBC), will absolutely demonize any deviation from these two principles (or for that matter any deviation from the belief that stocks outperform in the long-run, which happens to be grossly inaccurate).

But, in any case, society is harmed by both of the extreme versions of these theories.

Do you like really free markets? How about we bring back slavery, then? And I suppose people don’t really need to be licensed to practice medicine? Where do we draw the line? How dangerous is too dangerous for an outsourced petrochemical plant? Profit-seeking managers will likely generate worse outcomes than than a robust legislative system, when it comes to this type of debate.

Efficient markets don’t get a free pass, either. The article’s use of the mortgage industry as an example is a good one: “It was completely redesigned since the 1980s along good HBS guidelines—to maximize efficiency, lower costs, and increase liquidity. Collateral damage: no relationships, skewed incentives, incompetent regulation, and greed run amok.”

What really happened was that “easy” short-term profit-seeking activities (how hard is it to swindle from the poor uneducated masses, really?) undermined the long-term viability of corporate institutions (and therefore the entire financial system). If markets are efficient, they will allocate capital to viable long-term enterprises with net positive returns. That didn’t happen. Not by a long shot.

So, we need to re-educate the Reagan generation:
Fair markets, with strong rules that don’t let corporations hurt societies, are good
Some markets are efficient, others aren’t, and irrationality exists

There. Now go fix the world.

(A cynic would argue that right now the short-term profit seekers are getting in the way of making more bad stuff illegal. Call it regulatory capture. Or state-capture. But as Alton Brown would say, that’s another show.)

Elizabeth Warren: An Ode to the Middle Class

Elizabeth Warren is a professor @ Harvard Law School and, in the words of Cornell "Not Related To Kayne" West, a "decent sister." Belwo is an excerpt from an interview she did with the Washington Post. Full text of interview here.



WARREN:we're in trouble on so many fronts.

I will start with credit. We clean up the credit mess. This is like sewing up a hole in the bottom of someone's pocket. This is literally tens of billions of dollars that are just falling out of the pockets of middleclass families and making their way over to a handful of very large financial institutions. We can change some laws, and we can fix that one.

I have to say on health care, I do studies on families filing for bankruptcy in the aftermath of serious medical problems. Whatever else is going on in the debate is the reminder that even with people with health insurance are paying enormous sums for medical care, whether it's about copays, things that are denied and higher prices that they're paying for their health insurance. So whatever we can do to bring those costs under control for middle class families will help enormously.

Sending the kids to college, the costs are just out of control. And we are putting debt loads on children unlike those we have ever imagined.

The housing crisis. The way in which most American families build wealth is not through the stock market. It's by buying a home and paying it off. That is, for most Americans, their retirement account. They'll get that house paid off, live on Social Security. That'll be the in heritance for the children if they don't have to spend it down for medical care.

The chaos in the housing market is destroying wealth for middle-class families. To the extent we're popping a bubble, I get it. That's what it's going to have to be. But I worry now about overshooting in the other direction. You know, that just like a bubble pushes up too high, the collapse pushes down too low.

We're watching more and more families go underwater on their mortgages and not by 5 percent, going underwater by 25 and 30 percent. And this is going to intersect with unemployment. As unemployment keeps going up, more and more people are going to lose their houses. That means it depresses the value of the houses next door because it's all downward pressure on prices.

And, of course, the last one I would mention is the income front. As the pie grew throughout the 20th century, the portion that went to workers, went to the median earning family in the United States, it stayed the same percentage wise, but that meant a bigger and bigger pie was a bigger and bigger slice of pizza.

That began to shift in the '70s, and, ultimately, what happened is that the pie kept getting bigger. It's measured through productivity. It's measured through GDP. But the proportion that middleclass families got in income began to shrink.

As we talk about things, like what we produce in the United States, do we really have any manufacturing base, if not hard manufacturing, do we have other intellectual products where we think we have a comparative advantage, those kinds of issues about how workers get back in the role of participating in the growth in our economy, that's whether or not we're going to have a strong and vital middle class.

And, you know, at the end of the day, it's about these economic factors, but we have to remember we have fundamentally changed as a country.

In the 1950s and the 1960s, coming out of World War II, we said as a government, as a people, what can we do to support the middle class. You know that's what FHA was to help people get into homes, right? VA, GI loans on education, we looked at policies, like whether or not they strengthen and support the middle class.

Somewhere, that began to change in the late 1970s, early 1980s, and the middle class instead became like a resource to be pulled from, and you know, they became the turkey at the Thanksgiving dinner. Who could who could carve off a piece? Who can get this little piece? Who could make a profit from this piece and that piece or squeeze down on the wages? And the middle class has gotten shakier and shakier, hollowed out.

The consequences of that are far more than economic. The middle class is what makes us who we are. It's affects the poor. A strong and vital middle class is a middle class that can offer a helping hand to the poor. A strong and vital middle class is a middle class that has room, is creating new jobs to ¿ basically to suck the poor up out of poverty and into middleclass positions. The middle class is what gives us political stability. It's what gives us an America that's all bought into the whole process that what we do is not just about a handful of folks at the top who profit from it. We all profit from it, and that's why we work, and that's why we vote, and that's why we accept that the outcome of elections. And that's why we're safe to walk our streets, because we have a middle class for which this ultimately works, this country.

And every time we hollow that out, every time we take away a little piece of that, we run the risk that some of what we understood at America, some of what we know as America begins to die. That's what scares me.

Tax credits, subsidies and pernicious threats: Business still does not understand that to get along, it must go along

As noted in the article below, the State of Michigan simply can't win in its dealings with big business. The story is equally applicable in all forty-nine other states, where the incentives required to lure a few hundred jobs from another state often costs the "winner" more than would have been lost in refusing to extend unwarranted subsidies to unappreciative business vermin-- the same cabal that will relentlessly continue to socialize the risk of economic failure while privatizing the benefit of profit. If this trend continues (and there's no evidence of it is waning), then the economy of the States, and the nation as a whole, will continue to deteriorate as the Electrolux's of the world exploit cheap foreign labor while demanding access to the American market and the protection of its laws.  


In Michigan, A Yellow Light For Green Jobs:
Some Question Focus of Ailing State's Governor

By Dana Hedgpeth
Washington Post Staff Writer
Tuesday, October 6, 2009


LANSING, Mich. -- If the future of American manufacturing lies in green industries, the Michigan governor's pursuit of jobs offers a cautionary tale.

Four years ago, Jennifer M. Granholm set out to remake her state, which took an exceptional walloping with the decline of the auto industry, as a pioneer in creating environmentally friendly jobs. Today, however, jobs are still disappearing much faster than she can create them, raising questions about how long it will take Michigan and other hard-hit states to find new industries to employ their workers.

Since taking office in 2003, Granholm has created 163,300 positions, her office says. She expects that a recent infusion of more than $1 billion from the Obama administration aimed at nurturing car battery and electric-vehicle projects will generate 40,000 more positions by 2020.

In the past decade, however, as the auto industry has grown smaller, Michigan has lost 870,000 jobs -- about 632,000 of them during Granholm's tenure. The number is expected to reach 1 million by late next year, the end of her term.

In her effort to attract employers, the governor has taken up the latest arms in the economic arsenal -- tax credits, loans, Super Bowl tickets and a willingness to travel as far as Japan for a weekend to try to persuade an auto parts company to bring more jobs to Michigan. She has won solar and wind energy, electric car batteries, and movie production jobs. About 10,800 of the new positions came from overseas companies, according to her office, the fruits of visits to seven countries.

"We have great bones as a state," she says. "We know how to build stuff. We will build on that strength and diversify this economy. We will lead the nation in creating jobs in renewable energy. We're not going to be viewed as Luddites."

In a state hit so hard by the recession, though, securing every new job has required enormous effort: mobilizing the state bureaucracy, negotiating tax deals with a politically divided legislature, dispelling impressions that Michigan is a pro-union state and inhospitable to business.

Supporters and detractors alike call the 5-foot-7-inch blonde "Jenny the cheerleader" because of her relentless optimism. She prefers zealot. Those qualities were severely tested three years ago when appliance maker Electrolux closed its century-old refrigerator plant in Greenville, 160 miles northwest of Detroit, and moved to Mexico, taking 3,000 jobs from the town of 8,000.

As Granholm told the story in her office, overlooking the state Capitol, tears welled up in her eyes. She had spent months calling, e-mailing and meeting with city and state officials trying to sway the company to take a package worth about $70 million in tax breaks to stay in Michigan. Electrolux left anyway.

Granholm visited with workers at an orchard near the plant within days of the last refrigerators coming off the assembly line, and the employees ate a "last supper" of boxed lunches while a band played. Her staff had scheduled 45 minutes. She stayed three hours, listening to workers' stories.

"I went to say, 'I'm sorry,' " Granholm said. "We couldn't save it. I can't even say it now. I stayed until the last guy left."

A 48-year-old man with tattoos and a ponytail, who had worked at the plant since high school, described how his grandfather and father had worked there, too.

"He told me, 'I don't know anything else. Who is going to hire me?' " the governor recalled.

Granholm remembered coming home and telling her husband, "I just don't know what to do for people."

A $37 million tax package helped persuade Michigan-based United Solar Ovonic -- she wooed the chairman with a trip to the 2006 Super Bowl in Detroit -- to build a solar panel production plant on the Electrolux property instead of pursuing a South Carolina offer. To retrain workers, she secured money from the legislature and later developed "No Worker Left Behind." With new skills and a new plant, the people of Greenville would have new opportunities.

Except, she discovered from a workforce training agency, only about 20 percent of the 400 jobs at the new plant, which opened in 2007, went to former Electrolux workers. Many simply didn't have the skills; some were fearful about their ability to learn.

"You had people who were testing in at sixth-grade math," she said, "when they'd gotten awards as line workers."

Granholm had a community college and a state workforce training agency set up a separate program so they wouldn't feel humiliated beside more skilled students.

"It was taking one step forward and then one step back, and then two steps forward," she said. "We still didn't get the numbers we wanted to get."

Residents remember the time and effort invested in seeking to preserve the Electrolux jobs.

"She put everything she had into trying to save that little town," said Dick Long, a former national political director for the United Auto Workers union. "I've never seen somebody work so hard and get so frustrated in trying to save them. She just didn't give up. But in the end, we lost them."

Although Granholm's critics admire her determination and concede that creating jobs and transforming the economy are long-term goals, they say that she has not done enough to streamline state government and regulations and that she is too enamored of alternative-energy jobs, which they say represent a relatively small number of positions.

Genesee County Treasurer Daniel T. Kildee, like Granholm a Democrat, said she is "too concerned about finding consensus with the legislature and interest groups."

He worries that the focus on green-energy jobs detracts from fixing problems such as those facing schools and municipal governments. "The green economy is not going to replace jobs of an industrial era," he said. "It is an important part of the new economy. But it is not the next GM."

Granholm says she is trying to diversify the economy, going after defense-related firms, robotics and life sciences along with green jobs.

State Senate Majority Leader Michael Bishop (R) says Granholm has been remiss in not reshaping Michigan's business tax.

The state, he said, needs to change its image and "create an environment where taxes are low, labor costs are low, and not send so many negative vibes."

Granholm's office said that she has offered business tax proposals but that she has met opposition from the legislature and some business leaders.

Michigan felt the recession first and hardest. The state ranks fifth in foreclosures and last in attracting new residents. Nearly 20 percent of its citizens are on Medicaid. As the auto industry has shrunk, so has tax revenue. The state government technically shut down for nearly two hours early Thursday over a budget crisis, and the legislature and governor are still tussling over how to resolve a projected $2.8 billion deficit. Underlying all of the grim statistics is the loss of jobs. Michigan has had the nation's highest unemployment rate -- now 15.2 percent -- for most of the past three years.

"This is not a time for wimps," Granholm says to her two dozen cabinet members one recent morning. "The message is to continue to play offense -- go get jobs."

Granholm's résumé is well known in her state: Michigan's first female attorney general and governor; mentioned as U.S. Supreme Court candidate; graduated summa cum laude from the University of California at Berkeley, Harvard Law School, beauty queen, mother of three. The 50-year-old is a native of Canada who settled in Detroit in the mid-1980s after marrying a Michigan man; she was a federal prosecutor there for four years.

Her quick focus pleases businessmen such as David Hardee, top executive of California-based Clairvoyant Energy, who encountered Granholm at a meeting after spending three months negotiating with her economic development officials over a green-energy development.

"We were on the third slide and she politely interrupted and said, 'I get it. What do you need? I'm here,' " Hardee said.

With a tax incentive package worth more than $100 million, Michigan beat out Arkansas, Missouri and Oklahoma, as well as Spain, in getting Hardee's company and two other alternative-energy firms -- one from Texas and one from Switzerland -- to take a factory that once made the Lincoln Continental and Ford Thunderbird about 40 miles northwest of Detroit in Wixom and turn it into a solar panel and battery storage pack manufacturer employing 4,000 workers.

In the spring of 2008, Granholm returned to Greenville to tour the United Solar plant that replaced the Electrolux factory.

"They had product orders all the way out until June 2009 back then," said Greenville Mayor Ken Snow. "But the global economy shifted. That left them with more product than orders that need to be filled."

Since March, United Solar has been feeling the downturn, and so have the workers in those hard-won positions. Some have been furloughed for six days each month.

There are no easy victories in the fight for jobs.

"You can't give up," Granholm says. "You gotta keep moving."