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Sri Lanka’s central bank has room to cut interest rates should inflation remain “persistently low” as it seeks to support the island’s economic recovery after a 26-year civil war, Governor Nivard Cabraal said.

The economy may grow as much as 6 percent next year after expanding about 3.5 percent in 2009, Cabraal said yesterday in an interview in Istanbul, where he is attending the annual meetings of the World Bank and the International Monetary Fund.

The South Asian nation’s benchmark stock index, Asia’s best performer this year, closed at a record high yesterday on optimism that lower interest rates will boost earnings as the economy grows. Borrowing costs are already at a three-year low.

“If we see persistently low inflation, then we’ll see some reason to make some adjustments in the months ahead,” Cabraal said. “We don’t need to do any changes right now because we are on the right track. We don’t need to have a knee- jerk reaction.”

The central bank on Sept. 11 lowered the reverse repurchase rate to 10.5 percent from 11 percent, and cut the repurchase rate to 8 percent from 8.5 percent. Commercial banks are increasing lending at a “reasonable” rate as borrowing costs fall, Cabraal said.

Consumer prices will probably climb between 3 percent and 5 percent this year, and inflation may accelerate to between 5 percent and 6 percent in 2010, Cabraal said.

“Naturally, we are worried about a possible resurgence in inflation but at the same time our demand management has been so good that to some extent, it offsets the possible increases that may arise in the supply side,” he said. “We are confident we will be able to manage that.”

Civil War

Sri Lanka’s growth is expected to be driven by domestic demand including infrastructure development and construction activity as the end of the civil war spurs rebuilding in areas formerly controlled by the separatist Liberation Tigers of Tamil Eelam. Output in the fisheries and agricultural industries will also show “strong growth,” Cabraal said.

Sri Lanka may resettle 100,000 ethnic Tamil civilians stranded in transit camps in the country’s north by the end of this year, Deputy Finance Minister Sarath Amunugama said in Istanbul yesterday.

There is little risk of asset bubbles forming in the economy even as funds pour into the country’s stock market and investment increases, the governor said. The Colombo All-Share Index rose as much as 1.9 percent to 3,156.37 yesterday, the highest-ever for the measure of 238 companies on the Colombo Stock Exchange.

“We are not too worried about asset bubbles because what is being taken up is the slack that has been around for a long time,” Cabraal said. “It hasn’t reached that stage as yet.”

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Senate Banking Committee Chairman Christopher Dodd’s plan for a single bank regulator may set up a fight with House colleague Barney Frank and the Obama administration and might slow the overhaul of financial rules.

Dodd, leading efforts to rewrite regulations, will suggest combining the Federal Reserve, the Federal Deposit Insurance Corp., the Office of Thrift Supervision and the Office of the Comptroller of the Currency into one agency, the senator’s office said yesterday.

“Establishing a single regulator is a very bad idea,” Camden Fine, president of the Independent Community Bankers of America, a Washington-based trade group with 5,000 members, said yesterday in an e-mail. “When you have a cyclopic regulatory system, it only takes one stick in the eye to blind it.”

Dodd’s proposal goes further than recommendations by President Barack Obama that are backed by Frank, chairman of House Financial Services Committee that resumes hearings on the issue this week. Dodd’s plan embraces ideas of Democratic Senators Charles Schumer of New York and Mark Warner of Virginia and has elements from measures introduced by House Republicans. Any differences must be resolved before the rules become law.

Obama in June recommended combining OCC, regulator of national banks including New York-based Citigroup Inc., and OTS, which regulates savings and loans including Paramus, New Jersey- based Hudson City Bancorp Inc.. His proposal leaves intact oversight powers of the Fed and FDIC.

The multiple-agency system has produced “some real costs ranging from inefficiencies and redundancies to the lack of accountability and regulatory laxity,” Dodd said at an Aug. 4 Senate Banking Committee hearing to consider the issue. “We are now paying a very high price for those shortcomings.”

No Panacea

FDIC Chairman Sheila Bair and Comptroller of the Currency John Dugan support Obama’s proposal.

Bair said merging the four agencies is “no panacea” for effective oversight, according to Banking committee testimony Aug. 4. “One of the advantages of multiple regulators is that it permits a diversity of viewpoints to be heard,” she said.

Fed officials including Chairman Ben S insurance quotes. Bernanke and Governor Daniel Tarullo, who is leading efforts to overhaul the Fed’s bank supervision, have testified that the central bank should retain its authority over U.S. banks.

The administration recognizes “many ideas” will be offered and will “work with the leadership” in the House and Senate committees “to get a bill done” this year, White House spokeswoman Jennifer Psaki said yesterday in a statement.

‘Big Mistake’

Frank, the Massachusetts Democrat leading his chamber’s efforts, supports Obama’s merger. Stripping the Fed and FDIC of their oversight powers would be “a big mistake,” Frank said.

Representative Spencer Bachus of Alabama, top Republican on the Financial Services panel, has proposed consolidation as a step to reduce duplication and avoid the separate Consumer Financial Protection Agency proposed by Obama.

“If structured like the House Republican plan, streamlining and consolidating the functions of the four bank regulatory agencies will address consumer protection without the need for a new and costly government bureaucracy,” Bachus said in a statement. “It will create smarter regulation, and will benefit both taxpayers and consumers.”

Schumer and Warner, along with Republicans on Frank’s committee, support a single regulator.

“It does not make sense for up to four different federal regulatory bodies to retain oversight over the safety and soundness of banks,” Schumer wrote in June to Treasury Secretary Timothy Geithner. This system “preserves the regulatory arbitrage that allows institutions to pick the oversight scheme that benefits them the most.”

Warner told Bloomberg News July 1 that the Fed and FDIC should cede their bank oversight role to an “end-to-end” supervisor.

Jonathan Graffeo, a spokesman for Senator Richard Shelby, top Republican on Dodd’s committee, in an e-mail yesterday said “we continue to review” Dodd’s proposal.

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The world’s top cellphone maker Nokia said on Monday it would start to make laptops, entering a fiercely competitive but fast-growing market with a netbook running Microsoft’s Windows operating system.

Nokia had earlier this year said it was considering entering the laptop industry, crossing the border between two converging industries in the opposite direction to Apple, which entered the phone industry in 2007 with the iPhone.

Nokia has seen its profit margins drop over the last quarters as handset demand has slumped, and analysts have worried that entering the PC industry, where margins are traditionally razor-thin, could hurt Nokia’s profits further.

“We are fully aware what has the margin level been in the PC world. We have gone into this with our eyes wide open,” Kai Oistamo, the head of Nokia’s phone unit, told Reuters.

“There’s really an opportunity to bring fresh perspective to the PC world,” he said, adding that Nokia would introduce extended battery life and continuous connectivity.

Nokia has produced PCs before, but divested the unit in 1991 when it started to focus on the mobile phone industry.

But Nokia’s first netbook, the Nokia Booklet 3G, will use Microsoft’s Windows software and Intel’s Atom processor to offer up to 12 hours of battery life while weighing 1.25 kilograms. Netbooks are low-cost laptops optimised for surfing the Internet and performing other basic functions. Pioneered by Asustek with the hit Eee PC in 2007, netbooks have since been rolled out by other brands such as HP and Dell.

“The question is: How will Nokia differentiate? This is already a crowded market. If they manage to differentiate it’s going to give them competitive advantage,” said Gartner analyst Carolina Milanesi.

CUT-THROAT SEGMENT

Research firm IDC expects netbook shipments this year to grow more than 127 percent from 2008 to over 26 million units, outperforming the overall PC market that is expected to remain flat and a phone market which is shrinking some 10 percent.

“Nokia will be hoping that its brand and knowledge of cellular channels will play to its strengths as it addresses this crowded, cut-throat segment,” said Ben Wood, director of research at CCS Insight.

“At present we see Nokia’s foray into the netbook market as a niche exercise in the context of its broader business.”

Nokia’s choice of Windows software surprised some analysts who had expected the company to use Linux in its first laptop.

Analyst Neil Mawston from Strategy Analytics said the technology choices were a good win for the U.S. companies.

“We believe ARM and Symbian are among the main losers from the Nokia Booklet announcement,” he said. 

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Intel Corp. said Tuesday that its second-quarter sales fell compared to the same quarter a year ago, but that business is picking up fast.

Even as revenue declined from last year, sales figures were better than what analysts had expected. The company reported profits of 18 cents a share, excluding a one-time fine from the European Commission.

Sales fell $1.4 billion to $8.02 billion from $9.47 billion in the second quarter of 2008. Analysts were looking for revenue of $7.28 billion, according to a consensus estimate of analysts polled by Thomson Reuters.

Sales pick up: From the first quarter of 2009, sales surged $879 million as personal computer sales picked up. "Intel’s second-quarter results reflect improving conditions in the PC market segment with our strongest first- to second-quarter growth since 1988 and a clear expectation for a seasonally stronger second half," said Paul Otellini, Intel president and CEO in a written statement.

In particular, sales from Intel’s Atom chip, which are the units that go into smaller netbooks, spiked 65% from the first quarter.

Shares rose 34 cents to close at $16.83 during regular session trade on Tuesday, but surged as much as 8% in after-hours trading.

Intel expects that sales will continue to improve. For the third quarter, the microprocessing giant expects sales of $8.5 billion, plus or minus $400 million, according to the statement. However, the company also says that the overall economic climate could impair its ability to meet its guidance.

The company’s sales will be driven more by consumer demand, like back-to-school shopping, than businesses replacing their computers, according to Otellini. He predicts that businesses will begin to evaluate their technologies toward the end of the summer, but won’t begin their purchases this year.

Intel’s dependence on the consumer concerned one analyst. "Over the past 5 months, oil prices have doubled and if oil prices continue to be where they are today, I think Intel may miss the guidance because the consumer is going to hit the breaks on buying new PCs," said Trip Chowdhry, senior analyst with Global Equities Research.

Antitrust charge hurts profits: In May, European regulators charged Intel with a record fine of $1.45 billion for violating antitrust laws by unfairly paying computer makers to delay or even cancel products that contained chips made by AMD, Intel’s primary rival. Intel disagrees with the ruling., Advanced Micro Devices (AMD, Fortune 500) will report its second quarter results in one week.

Taking into account the one-time charge, the Santa Clara, Calif.-based company’s net income was $1 billion, or 18 cents per share, for the three months ended June 30, compared with net income of $1.6 billion, or 28 cents per share, for the same quarter one year ago online health insurance.

Intel easily beat analyst forecasts. A consensus estimate of analysts polled by Thomson Reuters, which typically excludes one-time charges, had forecast a profit of 8 cents per share.

Without adjusting for the one-time charge from European regulators, Intel posted a loss of $398 million, or 7 cents per share.

A good sign for tech: Intel (INTC, Fortune 500) is something of a bellwether for the tech sector. Investors watch its results as an indicator of spending on personal computers and servers. Intel makes the chips that power PC, and when manufacturers anticipate more consumer demand, they increase their purchasing with Intel.

"While the global economic environment is still recovering, our customers signaled increased confidence for a seasonal second half with their ordering patterns," said Otellini in the conference call after the report was released.

Consumers and businesses have been looking to get the extra mile out of their computers — and put off buying a new one — as they try to save money in the recession.

Demand in Asia was the quickest to recover. "Globally, we saw strength in Asia-Pacific, particularly China, where their stimulus programs continue to generate meaningful growth in their PC market," said Otellini on the conference call. "The U.S. also had a strong quarter while Europe’s recovery lags that of the U.S. and China."

One of the contributing factors to a recovery in demand was the decline in inventories, which fell $240 million in the second quarter. "The supply chain began refilling inventory positions that had been depleted over previous quarters," said Stacy Smith, CFO, on the conference call.

Reaching outside the PC market: Sluggish PC sales have stung Intel, and investors are waiting to see whether a rebound in PC sales will be enough to revive Intel.

Intel and Advanced Micro Devices have the market cornered for the chips that go into standard personal computers, while Samsung and Texas Instruments (TXN, Fortune 500) have most of the market share for mobile-phone processors. At the end of June, however, Intel started working its way into the cell phone business by announcing a deal with the number-one cell phone maker, Nokia (NOK).

At the time of the announcement, Nokia and Intel would not provide any product details other than saying that they would collaborate to developer a new line of "mobile computing devices."

Intel is the first of three major technology companies to report its second-quarter financial performance this week: Google (GOOG, Fortune 500) and IBM (IBM, Fortune 500) are both set to report on Thursday after the bell.  

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A self-styled bridge between Wall Street and Main Street is showing some cracks. Now the question is whether Washington might try to shore it up.

CIT Group (CIT, Fortune 500), the New York-based lender to small and midsize companies that got $2.3 billion in taxpayer funds in December, has been reportedly in discussions to get additional government assistance. As of late Tuesday, those discussions were still ongoing.

Though CIT’s shares gained nearly 20% Tuesday, they have plunged some 60% since the beginning of June, to just $1.60 each. And the cost of insuring against a default on its bonds has skyrocketed. The company has also reportedly hired lawyers to explore a possible bankruptcy filing.

The problems at CIT mark the administration’s first brush with financial crisis since the spring’s stock market rally.

While CIT is much smaller than Lehman Brothers, which failed last September with disastrous consequences, the debate in Washington hasn’t changed: Policymakers must weigh the health of the financial system against holding the private sector accountable.

"It’s a balancing act. Everyone has been worrying about bailouts creating moral hazard," said Douglas Elliott, a former investment banker who is now a fellow at the Brookings Institution. "At the same time, they’re still trying to rebuild confidence in the economy."

Speaking in London Monday, Treasury Secretary Tim Geithner said of CIT, "I’m actually pretty confident in that context we have the authority and the ability to make sensible choices."

Cash crunch

The immediate problems at CIT, which says it has been the top Small Business Administration lender nine years running, center on the company’s lack of access to funding.

Like many finance companies, CIT funded its operations by borrowing in the debt markets. But the collapse of Lehman all but closed those markets to finance companies — prompting CIT and bigger players, ranging from Goldman Sachs (GS, Fortune 500) and American Express (AXP, Fortune 500), to hurriedly convert themselves to banks.

But unlike those firms, CIT has not gotten access to a program that allows financial firms to issue debt backed by the Federal Deposit Insurance Corp cash advance. CIT applied in January to join that Temporary Liquidity Guarantee Program, under which banks and finance companies have issued some $285 billion of guaranteed debt since November.

But CIT’s application is still pending. And an analyst at Fox-Pitt Kelton said last month approval now appears unlikely, given the long lag since the application was filed and the agency’s desire to wind the program down. The program is scheduled to expire in October.

An FDIC spokesman said the agency has been having evaluating the exposure it would take on were it to allow CIT to issue FDIC-backed debt. The Fed said it couldn’t offer any guidance on the CIT situation.

At the same time, CIT’s finances have been weakening. It lost $438 million in the first quarter, as revenue dropped 35%. Moreover, it has $1 billion in maturing debt to pay off next month, as well as $10 billion through the end of 2010.

As a result, all the major ratings agencies have downgraded the company’s bonds over the past week. On Monday both Moody’s and S&P cut CIT’s ratings, with Moody’s citing the firm’s "inadequate progress" in boosting liquidity.

The CIT crisis comes just seven months after the firm sold stock, swapped some new debt for old bonds and submitted to regulation by the Federal Reserve in hopes of regaining its access to funding markets. Executives claimed the moves would be an "inflection point" for CIT, but events haven’t played out as they might have hoped.

"As the bridge between Wall Street and Main Street, CIT remains one of the few significant sources of liquidity for small and mid-sized businesses who are struggling to survive in today’s challenging environment," CEO Jeffrey Peek said in a statement last November, when CIT applied with the Fed to become a bank holding company.

Now, it seems, CIT is struggling to survive as well. 

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Aluminum producer Alcoa Inc. reported its third quarterly loss in a row Wednesday, as the global recession has crippled demand for the lightweight metal.

The stock surged in after-hours trade, adding as much as 9%. In regular session trade, shares of Alcoa added 5 cents to close at $9.46.

Alcoa has cut costs aggressively in the face of sharply slower demand, but with inventory levels low and the global economy showing signs of recovery in the longer term, executives said they were seeing signs of stabilization.

In the three months ended June 30, Alcoa (AA, Fortune 500) lost $454 million, or 47 cents per share, compared with a profit of $546 million, or 66 cents per share, in the same period a year ago.

Excluding one-time restructuring charges and losses from discontinued operations, the company posted a loss of 26 cents per share, which was better than the forecast for a loss of 38 cents a share from analysts polled by Thomson Reuters. Analysts typically exclude one-time charges from their estimates.

Sales fell 41% to $4.24 billion from $7.62 billion last year, beating analyst expectations of $3.93 billion.

The company blamed the loss and drop in sales on a slowdown in the industries for which it provides raw materials — including automotive, commercial transportation, building, construction and aerospace — as well as a 49% drop in metal costs.

The company boasted that its cost-cutting initiatives — such as previously announced headcount announcements and production cut-backs — were boosting its balance sheet.

"Our cash generation initiatives, productivity improvements, and portfolio changes are working," said Klaus Kleinfeld, Alcoa President and Chief Executive Officer, in a written statement. "Now Alcoa has the staying power and reduced cost base to withstand the most serious downturn in the history of the aluminum industry."

Alcoa has been especially aggressive in reducing its head count. In the last year, the company has identified 21,650 jobs that it plans to cut, and so far, the company has already eliminated 18,375 of those planned cuts, said Chuck McLane, Executive Vice President and Chief Financial Officer, in a conference call after the release of the financials were released new car loans.

The company had to slash headcounts to navigate the downturn, but going forward, the company plans to operate at tighter standards.

"More important is how many of these reductions are permanent and how many would be added back once markets recover," said McLane. "Although it’s not an exact science, we estimate that 75% of the positions are permanent reductions."

Demand for aluminum will continue to be weak in the near term. Global demand for aluminum consumption will be 7% lower in 2009 compared to 2008, according to Klaus on the conference call, but he also say signs of a recovery in demand in the longer term.

For example, demand has been so low for big ticket items that manufacturers have been forced to scale back production. But with inventories low, manufacturers will have to ramp up production when demand does recover.

Stimulus programs will also begin to produce demand. For example, Klaus cited the "Cash for Clunkers" stimulus program that President Obama recently signed, which should bring some demand to the auto industry starting at the tail end of 2009.

Furthermore, Klaus is optimistic about the longer-term demand to come out of the growing Chinese economy. Klaus said that the stimulus bill that China passed was having a positive effect on that economy.

"We are actually seeing some signs of stabilization," said Klaus.

Alcoa is the first Dow component to release its second-quarter numbers. Investors look to the aluminum producer as a barometer of how corporations are faring during the recession. 

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KV Pharmaceutical Co. notified state regulators it was laying off nine employees in Largo and five employees in Plantation.

The layoffs took place on March 6, according to a notice posted Thursday by the Agency for Workforce Innovation.

The St. Louis-based pharmaceutical company is reducing its work force by about 1,700 employees nationwide.

KV (NYSE: KVa/KVb) last month entered a consent decree with the U.S. Food and Drug Administration regarding its drug manufacturing and distribution. As part of that decree, KV agreed not to market products it manufactures, until it has satisfied requirements designed to demonstrate compliance with the FDA’s good manufacturing practices regulations, a release from the company said.

KV does not have manufacturing facilities in Florida, but laid off workers across the country as a result of the consent decree, said Michael Anderson, a spokesman for the firm car insurance quotes. He declined further comment. The workers are sales employees whose primary duties involve work outside of KV Pharmaceutical’s regular employment sites, the company said in a letter to the state agency.

KV is a specialty pharmaceutical company that develops, manufactures, markets and acquires branded and generic prescription products. It markets its branded products through its Ther-Rx Corp. subsidiary and its generic products through its ETHEX Corp. subsidiary.

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Fannie Mae and Freddie Mac could tap the government for up to $51 billion in coming weeks, exceeding some Wall Street estimates, so they can continue to operate as the largest providers of funding for U.S. residential mortgages.

The storm of rising delinquencies and falling securities values that led to the government’s seizure of the companies in September accelerated in the last quarter, requiring Fannie Mae and Freddie Mac to seek more of the stop-gap measures organized by the U.S. Treasury and their regulator. Analysts predicted more capital needs from Treasury through 2009.

Fresh losses in the most recent quarter will probably be the harshest on Freddie Mac (), which holds a larger portfolio of risky mortgage securities, including subprime bonds. The McLean, Virginia-based company said on Friday it may have to seek $30 billion to $35 billion in capital from the Treasury in the form of senior preferred stock.

Washington-based Fannie Mae () said late on Monday that the Federal Housing Finance Agency, the regulator, may request $11 billion to $16 billion, based on estimates for fourth-quarter results.

Signs of larger losses underscore the importance of the Obama administration’s measures to halt foreclosures that are feeding a downward spiral in the housing market, already in its worst downturn since the Great Depression. Until the declines in house prices are broken, the cycle will continue and the economic recession could get worse, economists said.

QUESTIONS ABOUT LOSSES AND RESERVES

Fannie Mae could see greater losses through 2009 than Freddie Mac from guarantees on mortgage-backed securities, according to analysts, including Rajiv Setia of Barclays Capital in New York.

The companies have provisioned for just a third of cumulative losses on guarantees of $45 billion and $80 billion, respectively, he said payday loans.

“The questions are the source of the losses and how much is set aside in reserves for future losses,” said Jim Vogel, a strategist at FTN Financial in Memphis, Tennessee, in a note to clients. “Both will determine, along with further housing performance, the size of the draw at the conclusion of the first quarter.”

Fannie Mae and Freddie Mac guarantee or own nearly half of all U.S. mortgages.

After taking about $14 billion from the Treasury last year, Freddie Mac would be using about half of its $100 billion Treasury lifeline. Other funding sources have shriveled in the credit crunch, enhancing the importance of liquidity from Freddie Mac, Fannie Mae and the 12 Federal Home Loan Banks, some of which are facing capital shortfalls of their own.

Expected capital needs for the fourth quarter exceed Barclays’ initial estimates of about $26 billion and $10 billion for Freddie Mac and Fannie Mae, respectively. Credit Suisse and FTN predicted about $10 billion and $15 billion in fourth-quarter capital needs, respectively, for Fannie Mae.

DANGER IN DERIVATIVES HEADWIND

Fannie Mae and Freddie Mac are also fighting a headwind of unrealized losses on interest-rate derivatives they use to hedge their mortgage portfolio, Moshe Orenbuch, a strategist at Credit Suisse, said in a research note on Monday.

What’s more, proposed legislation that would make it easier for a bankruptcy judge to tear up mortgage contracts has hurt the value of securities, he said. That could add $20 billion to the Treasury’s costs of buoying the companies, he added. 

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As President-elect Barack Obama prepares to take office, the incoming administration and Congress continue to shape a massive stimulus package to help the struggling economy.

The proposed $825 billion plan mixes government spending with tax breaks in the hopes of raising gross domestic product by 3.7% and saving or creating 3.3 to 4.1 million jobs by the end of 2010.

While the final breakdown of the package remains to be seen, much of the debate centers on the effectiveness of government spending versus tax cuts as means of reviving the economy. Currently, the plan includes roughly $550 billion in spending and $275 billion in tax cuts.

Most economists support the emphasis on spending, saying government expenditure does more to boost gross domestic product, a key indicator of fiscal health.

In other words, spending delivers more bang for the buck because each dollar paid to a worker building a wind turbine, for example, is then re-spent on groceries or clothing, causing a fiscal ripple-effect. Conversely, a worker might save a third of the money he is given in a tax cut, with some of the spending going toward imports, which would also reduce the stimulus to GDP.

According to a Jan. 6 study by Mark Zandi, chief economist at Moody’s Economy.com, GDP grows by $1.59 for every dollar spent on infrastructure, while the increase from a corporate tax cut is only $0.30.

"The mix between spending increases and tax cuts is roughly right," Zandi says. "Spending packs a bigger economic punch, but tax cuts are helpful because even though they’re not as economically efficacious, they do work more quickly."

Based on Zandi’s study, some of the most efficient ways to spend government money are temporarily increasing food stamps (a $1.73 GDP increase per dollar), extending unemployment benefits ($1.63), increasing infrastructure spending ($1.59) and upping direct aid to financially strapped states ($1.38).

The draft bill reflects that emphasis on spending. The approximately $550 billion in government spending includes: $159 billion to education; $154.5 billion for health care; $92 billion to infrastructure; $58 billion to investments in energy; $71.5 billion in aid to the poor and unemployed; and billions more to science, technology and housing.

Still, tax cuts can work quickly get bipartisan support among lawmakers, and the current bill contains $275 billion in breaks for business and individuals. For companies, cuts include savings on capital investment and past profits; individuals will likely get $500 of relief ($1,000 for families), a $2,500 college tuition tax credit, and home-buyers will owe less bad credit payday advance.

Some research shows the positive effect of tax cuts on GDP gets short shrift. Christina Romer, who studied the subject while a professor at the University of California, Berkeley - and who Obama chose as Chairwoman of his Council of Economic Advisers - says don’t underestimate them as an effective means of stimulating the economy.

Many conservatives want to adjust the tax section of the package, although most acknowledge that government spending is necessary. Norman Ornstein, a resident scholar at the American Enterprise Institute, agrees with the two-to-one spilt between spending and tax cuts, but he believes the mix of tax breaks currently proposed will not have the "major simulative effect" that’s intended.

"It’s difficult to get money out there and moving into the pipeline as quickly as you would like," he says on the spending programs. "What you want to do at this point is to get money into the hands of people who need to money to spend on their daily existences."

James Galbraith, an economist at the University of Texas, says payroll tax cuts are better than rebates, but won’t do a lot for the GDP immediately because most people will use the money to pay off credit card debt or mortgages. "A fair amount of this money," he says, "will just go into shoring up the balance sheets of households."

Other observers want far less spending. "Any increase in government spending is a bad idea," says Daniel Mitchell, a senior fellow at the Cato Institute, noting that the best stimulus is to downsize government and implement a flat tax. The most wasteful part of the Obama plan, he says, is to aid states and local municipalities: "It’s like giving an alcoholic the key to a liquor cabinet."

Regardless of the final balance between spending and tax cuts, the two-year stimulus package’s goals are ambitious: lowering unemployment by nearly two percentage points, doubling U.S. production of alternative energy in three years, modernizing 75 percent of federal buildings, and making two million homes more energy-efficient.

But those big goals and big spending come with a hefty price tag. The government projects the federal deficit will reach $1.2 trillion this year for a total national debt of $11.5 trillion - and that’s not including the proposed stimulus package. 

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Federal Reserve Chairman Ben Bernanke says he would be reluctant to use the central bank’s emergency lending program to help struggling U.S. auto companies.

In a letter to Senate Banking Committee Chairman Christopher Dodd, D-Conn., Bernanke wrote that any decision about whether to provide financial aid to Detroit is best left to Congress.

Congress and the White House are pushing to clear the final obstacles to a $15 billion bailout of the auto industry, seeking agreement by the end of the day followed by swift passage classic car insurance. 

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