But other White House officials — namely Kenneth Baer, spokesperson for the Office of Management and Budget — expressed dismay at the tentative data, calling it “premature and irresponsible.” The annual deficit figure is not due to come out until late summer. The new estimate sets a higher bar for the White House to clear, and is based on higher tax-withholding by employers in March and April (a positive sign, but a preliminary one) and lower spending on helping the financial sector (premature, particularly given the possibility of housing market troubles later in the year).

Still, using Office of Management and Budget data, I created a graph to show just how much lower the annualized projection might be, and presumed similar savings in the coming years. The blue line is official White House data, either confirmed or projected; the red shows the estimated savings.

Last week’s horrendous jobs report actually understates the nastiness of the recession. Along with the 533,000 jobs lost in November, the government nearly doubled previous job-loss estimates for September and October, bringing total losses thus far in 2008 close to the 2 million mark. In short, we are well into what is shaping up as the worst recession of the postwar era.

Depressingly, the downturn is accelerating despite more than a year of extremely aggressive remedial actions by the Federal Reserve and the Treasury, which together have pumped some $2.5 trillion of new liquidity into the financial system, with almost no visible result.

Why isn’t the reflation program more successful?

Illustration by: Matt Mahurin

For one thing, the government seems to be encouraging the banks to mask the extent of their problems. For instance, in a deal currently being finalized with Citigroup, the government would guarantee about 90% of a $306-billion portfolio of toxic assets in return for $7 billion in preferred stock. The purpose of the deal seems to be to minimize more Citigroup writedowns, even though its portfolio’s real value is almost certainly much less than the carrying amount. The Fed is similarly propping up ersatz valuations at dozens of other institutions by exchanging hundreds of billions of its Treasuries for a variety of shaky assets at something close to par.

No wonder banks are hoarding cash. They don’t trust even each others’ numbers. There are at least $1 trillion of unrealized losses and writedowns still sitting on banks’ books, and credit markets will not revive until they are cleaned out. Here’s one way to get things moving again:

Create a temporary bank-auditing control board. Coordinated audit teams from the Fed, the Securities Exchange Commission and the Comptroller of the Currency should conduct an urgent systematic review of all bank and brokerage portfolios, starting with the biggest, forcing realistic writedowns against consistent standards. Such an expert board, with both government and private-sector members, would set the standards and resolve disputes. The goal would be force honest accounting, no matter how big the losses.

Move all assets that are underwater into a “bad bank.” A bad bank is an entity that absorbs toxic assets at realistic values. The technique has been used successfully in many other countries, and also in the United States after the banking disasters of the 1980s. The bad bank manages the collection process and/or sells off assets to specialist vulture investors. Its equity is supplied by the banks that contribute assets or by the government. Its shares can be distributed to existing bank shareholders or held in a separate entity controlled by the contributing banks. The ‘good’ banks left after the disposition of their bad assets will finally have clean books and should be able to get back to the business of lending.

In the current crisis, it would far preferable to have a single über-bad bank controlled by all the banks contributing assets rather than by the government, as envisioned by Treasury Secretary Hank Paulson’s original Troubled Asset Relief Program, or TARP. Under Paulson’s plan, the government would have been negotiating prices of hard-to-value toxic assets, which is a set-up for financial rape. In a bank-controlled bad bank, board members would be vigilant against sweet deals for their rivals, so pricing would be realistic.

Make a sufficient one-shot equity infusion to recapitalize the banks. Probably $1 trillion of new equity would be required to cover the losses disclosed by the audits and to capitalize the bad bank. That would have to come from the government, and it should be in the form of common equity. Common equity is more highly weighted in bank-capital calculations, and it doesn’t impose the drain of interest or preferred dividend payments.. Pricing should be arm’s-length, ideally negotiated by another temporary board of pricing experts. The current process of huge, opaque, midnight deals hammered out by a small group of officials has a dangerous catch-as-catch-can air. Common equity infusions on the scale required would wipe out all or most current equity at many banks. But that’s the deal equity holders sign up for, and there’s no reason why they should be subsidized.

Create a fiduciary structure for holding government-owned stock. Neither the executive branch nor Congress should have any control over government-owned bank stock stemming from the restructuring. A simple solution would be to donate the stock to the Social Security Trust Funds under the control of a fiduciary board, like those at mutual funds, to manage, or sell off, the shares in the interest of Social Security beneficiaries.

This, or some process like it, would take at least a year to complete, but it would be far preferable to the current semi-random process of throwing trillions of dollars at the credit problem with little effect. And while cleaning up the banks would be a necessary condition to ending the credit crisis, it would not be sufficient. Other things must be done.

President-elect Barack Obama’s just-announced infrastructure spending program is a good start toward creating jobs and restarting economic growth. But it will take time. It also depends on the rest of the world’s willingness to keep absorbing U.S. debt.

The new administration might also explore privatized infrastructure construction, with lenders reimbursed from tolls and user fees. Those may be attractive investments for dollar-heavy sovereign wealth funds and would help repatriate the huge international overhang of dollars.

Because new stimulus programs will not have immediate effects, they should be paired with much-improved income relief for the large numbers of lower-income workers who are losing their jobs. The United States consciously accepts a higher level of economic instability than other industrialized countries but puts a disproportionate amount of the adjustment burdens on the backs of lower-income families.

The new administration should not try to reverse the rapid decline in consumer spending that started this fall. The grossly overleveraged consumer sector created by Wall Street’s lending binge is the main reason we’re in crisis. Trying to gin up high levels of consumer borrowing again is simply crazy. Households understand that they have to pare down debt and boost their savings. They are behaving far more sensibly than the Fed or the Treasury.

The sad reality is that we’re deep in the grip of a truly nasty recession that will probably run at least through 2009. Tiding over poor families is of crucial importance. Jollying along the banking sector, and assisting in the cover-up of their true losses, will ensure only years of stagnation.

Charles R. Morris, a lawyer and former banker, is the author of “The Trillion Dollar Meltdown: Easy Money, High Rollers and the Great Credit Crash.” His other books include “The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould and J.P. Morgan Invented the American Supereconomy” and “Money, Greed, and Risk: Why Financial Crises and Crashes Happen.”

But green business owners know that they face obstacles. This week, E&ETV looked at some of them in an interview with Natural Resources and Defense Council energy analyst Jim Presswood.

E&ETV’s Monica Trauzzi asked how the financial crisis will affect solar and wind industries. Although some businesses could feel the credit pinch as banks continue to struggle, Presswood said he thinks the rapidly growing solar and wind industries could help pull the economy out of its doldrums, especially as Americans look for alternatives to fossil fuels. The extension of the tax credits means that private investment will still be attracted to clean energy, Pressman added.

Trauzzi also asked how a Democratic-controlled Congress could battle over tax credits for solar and wind power for almost two years yet move quickly to lift a 30-year-old ban on offshore oil drilling.

I expected Presswood to say that the Democrats are a bunch of weanies. Instead, he talked about some of the legislative politics at play — with fights between the Senate and House, Democrats and Republicans and members trying to please commercial interests, including oil and gas companies.

Ultimately, the political game-playing resulted in the lifting of the ban on offshore drilling becoming “must-pass legislation” and the renewable-energy tax credits becoming “a vigorous game of ping pong.”

Presswood believes that alternative energy will receive even more attention in 2009 under a new president, and with that knowledge, green companies can more comfortably focus on growing.

But the credits may not be dead. Senate leaders decided to attach the renewable energy bill that prolongs the credits onto the $700-billion financial bailout package that lawmakers hope to vote on tonight.

This actually makes sense, and not just because it’s the government’s last chance this year to save a booming sector of the economy from an uncertain future. (I’ll have more on just how uncertain that future is in a forthcoming piece.)

It also makes sense because the credits will help save Main Street jobs.  With the financial system ailing, unemployment on the rise and energy prices bouncing up and down, Congress can’t afford to end tax credits that have rapidly stimulated the green economy, according to solar and wind industry experts.

For now, folks in the renewable energy industry will have to keep doing what they’ve been doing all year long — nervously biting their nails as they wait to see what lawmakers do.