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The head of the Securities and Exchange Commission said Thursday she erred in allowing a former agency official who benefited financially from Bernard Madoff’s Ponzi scheme to play a key role crafting policy on how Madoffs’ victims should be compensated.

SEC Chairman Mary Schapiro told a House hearing she should have gone beyond the agency’s ethics requirements in her handling of David Becker, the agency’s former general counsel. She said she now wishes Becker had stayed away from the policy. Earlier this week, she told lawmakers in a letter that she didn’t see a conflict in Becker having inherited a Madoff account from his mother.

In hindsight, it would have been “appropriate” for Becker to be excluded from any SEC work on the Madoff policy, Schapiro said in testimony to two panels of the House Oversight and Government Reform Committee.

Republican lawmakers said the incident erodes the public’s trust in an agency already battered from its failure to detect Madoff’s scheme.

The Becker affair “could be the greatest challenge to the SEC” since the Madoff scandal, said Rep. Darrell Issa, R-Calif., chairman of the full oversight committee. “We’re not willing to accept that this can ever happen again.”

The SEC inspector general is investigating the agency’s handling of Becker, who is being sued because a federal court-appointed trustee says he inherited money his mother made from Madoff’s scheme. Madoff pleaded guilty in 2009 after conducting a multibillion-dollar investment fraud scheme.

“From where I sit now … I wish that Mr. Becker had recused himself, absolutely,” Schapiro said

Republicans are questioning Schapiro’s judgment at a time when the SEC is seeking more money from Congress to implement new financial regulatory rules. Many GOP lawmakers voted against the sweeping financial overhaul law and now say the SEC has been rushing out the rules.

Schapiro said the agency needs the $1.4 billion for the budget year beginning Oct. 1 to hire new staff and to invest in new technology to police sprawling markets.

Schapiro said the agency is making a “top-to-bottom” review of its conflict-of-interest and other ethics policies.

“We will learn from this experience and we will take all actions necessary to earn the trust the public places in us,” she said.

Becker, who was appointed by Schapiro in February 2009, left the SEC last month. His tie to Madoff became public late last month, when the court-appointed trustee sued Becker and his brothers, saying they earned more than $1.5 million in profits from their deceased mother’s investments with Madoff.

Schapiro says she left it to Becker to get a judgment from the agency’s ethics officer on whether he had a potential conflict of interest.

Becker did that. The ethics officer told him that “a reasonable person with knowledge of all of these facts would not question (his) impartiality.”

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First-time claims for jobless benefits probably rose last week from an almost three-year low, a pause in the improvement in the U.S. labor market, economists said before a report today.

Initial applications for unemployment insurance climbed by 8,000 to 376,000 in the period ended March 5, according to the median forecast in a Bloomberg News survey. The gain would be the second in the past eight weeks. It would follow the previous week’s level of 368,000 claims, which were the fewest since May 2008. Separate figures may show a wider trade deficit in January on costlier imported oil.

The rebound in the world’s largest economy has limited firings, paving the way for employers such as Boeing Co. (BA) and Home Depot Inc. (HD) to add jobs and spur household spending. While American companies ship more goods abroad, stronger domestic demand and surging energy prices point to a bigger import bill, curbing the contribution to growth from trade.

Still, the labor market “has improved only slowly,” and it may take “several years” for the unemployment rate to reach a “more normal level,” he said guaranteed high risk personal loans.

While stocks have gained this year amid signs employment is picking up along with the economy, they’ve been restrained by surging oil prices. The Standard & Poor’s 500 Index is down 0.5 percent so far this month.

The tax compromise reached by President Barack Obama and congressional Republicans in December has resulted in bigger paychecks that are helping support demand even as fuel costs rise. Costlier oil, which this week reached a 29-month high in New York, also will lead to higher imports. At the same time, exports of American-made goods, aided by a weaker dollar and expansion in developing economies like China, may help limit growth in the trade deficit.

Bloomberg Survey ============================================================== Trade Initial Cont. Federal Balance Claims Claims Budget $ Blns ,000’s ,000’s $ Blns ============================================================== Date of Release 03/10 03/10 03/10 03/10 Observation Period Jan. 5-Mar 26-Feb Feb. ————————————————————– Median -41.5 376 3750 -225.2 Average -41.4 377 3759 -225.3 High Forecast -39.0 410 3820 -190.0 Low Forecast -46.0 355 3700 -243.6 Number of Participants 74 49 16 26 Previous -40.6 368 3774 -220.9 ————————————————————– 4CAST Ltd. -42.2 383 — -223.0 ABN Amro -41.5 355 — — Action Economics -41.0 390 3820 -223.0 Aletti Gestielle -42.0 380 — — Ameriprise Financial -41.0 370 3720 — Banesto -41.1 — — — Bank of Tokyo- Mitsubishi -41.7 381 — -225.0 Barclays Capital -42.0 380 — -225.0 BBVA -41.0 370 3740 -227.5 BMO Capital Markets -41.7 380 3765 -232.5 BNP Paribas -41.8 380 — -240.5 BofA Merrill Lynch -41.5 375 — -235.0 Briefing.com -41.5 370 3750 -223.0 Capital Economics -41.0 — — — CIBC World Markets -41.0 — — — Citi -41.5 375 3810 -220.0 ClearView Economics -42.0 — — — Commerzbank AG -42.0 360 — — Credit Agricole CIB -41.0 — — — Credit Suisse -41.0 400 — — Daiwa Securities America -42.0 — — -190.0 DekaBank -40.5 — — — Desjardins Group -41.9 385 — — Deutsche Bank Securities -41.0 — — — Deutsche Postbank AG -39.0 — — — First Trust Advisors -42.2 372 — — FTN Financial -42.0 — — — Goldman, Sachs & Co. -41.5 — — -235.0 Helaba -41.5 375 — — Horizon Investments -40.0 — — — HSBC Markets -40.7 370 — — Hugh Johnson Advisors -39.0 — — — Ibersecurities -41.8 — — — IDEAglobal -41.0 380 — -235.0 IHS Global Insight -40.1 — — — Informa Global Markets -41.5 375 3785 -223.0 ING Financial Markets -42.0 365 3700 -243.6 Insight Economics -42.0 395 3750 — J.P. Morgan Chase -42.0 375 — -226.0 Janney Montgomery Scott -41.9 — — — Jefferies & Co. -41.0 375 — -225.0 Landesbank Berlin -46.0 — — — Landesbank BW -41.4 378 — — Manulife Asset Management -41.5 372 3725 — Maria Fiorini Ramirez — 365 — — MF Global -41.5 380 — -230.0 Mizuho Securities -42.0 410 — — Moody’s Analytics -42.4 385 3780 — Morgan Keegan & Co. -41.3 — — — Morgan Stanley & Co. -42.5 370 — -220.0 National Bank Financial -40.5 — — — Natixis -42.2 — — — Nomura Securities Intl. -39.9 — — -192.0 Nord/LB -41.5 370 — — Parthenon Group -40.7 378 — — Pierpont Securities -42.0 373 — -220.0 PineBridge Investments -42.0 388 — — PNC Bank -42.0 — — — Raiffeisenbank International -40.8 — — — Raymond James -41.2 378 — — RBC Capital Markets -41.7 380 — — RBS Securities -40.6 380 — — Scotia Capital -42.0 390 3800 — Societe Generale -39.7 360 — — Standard Chartered -41.5 — — — State Street Global Markets -41.8 376 3756 -225.4 Stone & McCarthy Research -39.7 390 — -230.0 TD Securities -41.5 365 3750 — Thomson Reuters/IFR -41.0 370 3740 -229.0 UBS -42.0 370 — -225.0 University of Maryland -40.9 375 — -235.0 Wells Fargo & Co. -39.4 — — — WestLB AG -41.0 — — — Westpac Banking Co. -41.5 380 — — Wrightson ICAP -41.5 385 3750 — ==============================================================

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QUOTE OF THE WEEK

“So the battle going on in Wisconsin is part of a larger war. It is about Republicans across the country trying to use voter anger at the economy to institute out-of-the-mainstream, far-right policies by pretending they are related to jobs or deficits (like the insane argument that tax cuts for the wealthiest one percent of Americans will somehow translate to significant job growth) free credit report and score.”

SUNSET HILLS

Facebook has launched a new feature in Canada that allows mobile users to claim discounts through smartphones by

U.S. Treasury Secretary Timothy F. Geithner said China needs to strengthen the “substantially undervalued” yuan because it puts other countries at a competitive disadvantage.

“China’s exchange rate needs to strengthen in response to market forces,” Geithner said in a speech in Washington today. The country’s policies “have the effect of keeping the Chinese currency substantially undervalued.”

President Barack Obama is due to meet with Chinese President Hu Jintao in Washington on Jan. 19 as currency policy remains a point of contention between the two governments. Geithner has been urging China to continue to let the yuan appreciate, and lawmakers in Washington say an undervalued yuan is hurting U.S. manufacturers by making their exports less competitive.

In October, Geithner delayed a twice-yearly report on foreign-exchange policy in which the U.S. can say whether it is of the opinion that China is manipulating its currency. The yuan has climbed about 3 percent against the dollar since officials in June scrapped a peg which had been in place since the global financial crisis.

“This is a pace of about 6 percent a year in nominal terms, but significantly faster in real terms because inflation in China is much higher than in the United States,” Geithner said. Taking inflation into account, the yuan is rising at a rate of about 10 percent a year, “so if that appreciation was sustained over time, it would make a very substantial difference,” he said in response to a question after the speech.

‘Real Change’

“If China does not allow the currency to appreciate more rapidly, it will run the risk of seeing domestic inflation accelerate and face greater risk of a damaging rise in asset prices, both of which will threaten future growth,” Geithner said.

Inflation in China accelerated to 5.1 percent in November from a year earlier, the biggest jump in 28 months, driven by higher food costs. In the U.S., consumer prices rose 1.1 percent in November from a year earlier.

“China presents enormous economic opportunities for the United States and for the world, but its size, the speed of its ascent, and its policies are a growing source of concern in the United States and in many other countries,” he said.

European Crisis

Geithner also said he has “no doubt” that Europe “has the ability” to stop its sovereign-debt crisis from spreading, calling it one of the “most obvious remaining challenges” to the global economic recovery in response to a question after his speech. “They will do whatever is necessary to prevent this crisis from escalating beyond the countries that were initially the focus of so much pressure.”

China’s policies “impose substantial costs on other emerging markets that run more flexible exchange rates, and as a result have experienced a substantial loss of competitiveness against China,” Geithner said.

The Treasury Secretary said China “has been gradually moving to address some of our concerns” on issues including trade barriers and intellectual property. Geithner, 49, was speaking at Johns Hopkins University’s School of Advanced International Studies in Washington.

China will increase currency flexibility this year to cut the trade surplus and reduce inflationary pressure, central bank Deputy Governor Yi Gang wrote in a commentary published in the official China Forex magazine Jan. 10.

Kerry on China

U.S. Senate Foreign Relations Committee Chairman John Kerry said in December that lawmakers are losing patience with the artificially low value of China’s yuan and may take action in 2011.

“The United States Congress is getting increasingly impatient and in the next session may take matters into its own hands,” Kerry said. If the Group of 20 nations “can’t deal with this problem, then we ought to look at other multilateral tools, ones with teeth that can fix this.”

The U.S. said last month that China failed to implement “important commitments” under its obligations to the World Trade Organization.

China is using “excessive, trade-distorting government intervention” to the disadvantage of American companies, the U.S. Trade Representative’s office said Dec. 23 in its annual report on China’s compliance with WTO rules.

In September, the U.S. filed a WTO complaint against China concering curbs on payment-processing companies such as MasterCard Inc. and Visa Inc. that are at a disadvantage because China favors a monopoly provider, China UnionPay Data Co., according to the U.S. trade office.

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South Korea’s industrial production increased for the 17th straight month and the current account may post a $29 billion surplus this year, supporting the case for the central bank to increase borrowing costs again.

Factory output rose 10.4 percent in November from a year earlier, Statistics Korea said in Gwacheon today. The current- account surplus is expected to widen “a lot” in December after narrowing to a seven-month low of $1.93 billion last month on rising imports, the Bank of Korea said separately.

The data signal exports are weathering a 35 percent appreciation in the nation’s currency against the dollar since March last year, the biggest in Asia. Moves to pare the gain by reviving taxes on overseas investment in government debt and discouraging foreign-currency speculation contributed to the won’s steepest decline in six months in November.

“The won’s recent weakness due to capital controls is apparently helping exports hold up,” said Kong Dong Rak, a fixed-income analyst at Taurus Investment & Securities Co. in Seoul. “Given solid economic growth and growing inflation pressures, the central bank will likely discuss a rate increase next month and act in February.”

The won rose 0.6 percent to 1,139.75 as of 12:03 p.m. in Seoul, according to data compiled by Bloomberg. The currency fell 2.9 percent in November, the steepest drop since May. The benchmark Kospi stock index was little changed.

‘Robust’ Exports

The current-account surplus “is expected to widen a lot next month as exports remain robust,” Lee Young Bog, an official at the Bank of Korea, said in Seoul today. “This year’s total surplus won’t be much different from the $29 billion forecast earlier this month.”

The central bank left the nation’s benchmark interest rate at 2.5 percent on Dec. 9 after raising borrowing costs by 0.25 percentage point in each of July and November from a record-low 2 percent no fax payday loans. The benchmark lags behind last month’s 3.3 percent pace of inflation.

Officials from Brazil to Taiwan and Thailand are trying to curb currency gains driven by capital inflows. They have faulted the U.S. Federal Reserve’s plan to inject $600 billion into the world’s biggest economy for threatening to depress the dollar and intensifying capital flight to their higher-yielding markets.

South Korea said earlier this month that it aims to apply a levy on banks’ foreign-exchange borrowings, will strengthen punishment for inappropriate reporting of currency trades and may tighten rules on derivatives in a bid to control incoming foreign funds and prevent sudden capital flight.

Imports Climb

November’s current-account surplus compared with a revised $4.89 billion in October, the Bank of Korea said in a statement in Seoul today. The current account is the broadest measure of international trade, tracking goods, services and investment income.

Total exports on a customs-cleared basis, which excludes ships, rose 23.6 percent last month from a year earlier, while imports climbed 32.7 percent, according to the statement.

The increase in industrial production followed a 13.5 percent rise in October, Statistics Korea said. Output advanced 1.4 percent in November from October.

Exports account for about half of South Korea’s economy and have boosted earnings this year at companies including Samsung Electronics Co., Asia’s biggest maker of semiconductors, flat screens and mobile phones.

Gross domestic product increased 4.4 percent in the third quarter from a year earlier. It is set to rise 4.5 percent in 2011, while consumer prices may increase 3.5 percent next year, from 2.9 percent in 2010, according to the central bank.

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Living your dream often isn

There is an old joke that economists only make predictions so that the weather guys have someone to laugh at. In much the same spirit, once a year this column also makes some predictions — but only so the economists have something to giggle over.

With that caveat in mind, here are 10 things that might (or as likely not) happen in 2011:

No. 1. The bull market returns. Actually we’ve already been in a bull market for more than a year. Just take a look at the figures. But in the early stages of a rising equity cycle, no one says it’s a bull market. First they call it a dead-cat bounce. Then they call it a bear-market rally. By the end of 2011, the penny will have dropped. We’ll be officially back in bull territory. By the close of the year, everyone will have started piling back into equities again.

No. 2. The alternative-investment industry crashes. The main driver of hedge funds and private-equity funds was the search for yield. With stock markets in the doldrums, interest rates cut to almost nothing, and bond yields at record lows, investors were desperate for any kind of meaningful return on their money. They were willing to listen to slick hedge-fund managers who promised to make 30 percent a year on high velocity yak-hide arbitrage. Next year, interest rates will be rising, and so will bond yield and equity returns. Why bother paying a fortune to hedge- and private-equity fund managers, few of whom deliver on their promises, when you can get pretty decent returns from mainstream investments?

No. 3. Venture capital returns. The start-up industry took a terrible beating from the dot-com crash. But as a rough rule, a decade is long enough for the financial markets to forget everything. There are fantastic opportunities out there. Smartphone apps. Social networking. Alternative energy. Africa. The markets always have space for some blue-sky optimists — and 2011 will be the year that venture capitalists fill that slot again.

No. 4. France gets smoked out in the euro crisis. Somehow France has managed to get itself grouped along with Germany as one of the strong euro nations. But it runs a bigger budget deficit than Italy. It has chronic unemployment and little growth. Crucially, it has the greatest resistance to reform. The merest suggestion of extending working hours, or retirement ages, or reforming public services, prompts massive demonstrations. It can’t last. Next year will be when France wallows with Ireland, Greece, Portugal and Spain.

No. 5. The Apple Inc. backlash starts. We used to think International Business Machines Corp. was sort of sinister. Then it was Microsoft Corp. But which business today has far too much power, is run by control freaks and puts profits before principles? That’s right. The world’s third-biggest company, measured by market value, is about to discover that the line between cool upstart and ugly monopolist is a very thin one.

No. 6. The German model is back in fashion. The words German and fashion go together about as well as Greece and solvent paydayloans. But in a world trying to figure out how you get out of a debt crisis, the Rhineland model of capitalism is suddenly going to seem very appealing. Lots of mid-size companies, with huge technical expertise, low debt and skilled workforces exporting niche products to the whole world — that sounds like a pretty good formula for success in the 2010s. By the end of 2011, expect every chief executive on the planet to start talking earnestly about how they are looking to a German management model as their guide.

No. 7. Lloyds Banking Group Plc gets broken up. The hastily assembled merger between two of Britain’s largest banks, Lloyds and HBOS Plc, increasingly looks like one of the more catastrophic decisions made during the height of the credit crunch. It is too powerful. This will be the year it gets split apart.

No. 8. Iceland teaches the world a lesson. Two years ago, every government in the world bought into the idea that you had to bail out your banks. If they collapsed, you would go straight back to the Stone Age. One country defied the consensus. Iceland couldn’t afford to keep its banks going. What happened? There’s been pain, sure, but from next year on the economy should be growing again, inflation is under control and interest rates are coming down. If Iceland keeps recovering, only one conclusion is possible: You don’t need to bail out banks after all.

No. 9. Russia puts the R back in BRIC. We’ve heard a lot about the rising economic power of Brazil, India and China. A lot less has been heard about the R in the BRICs - - Russia. It tends to get dismissed as a raw materials supplier with an authoritarian government. But it’s trying to recreate itself as a technology powerhouse — look at the plans to create a new Silicon Valley in the Moscow suburb of Skolkovo. Crazy? Remember, this was the first country to put a man into space. Russia has always been scientifically advanced. If it can bring its brains and businessmen together, it could yet outshine the B, I and C in the acronym.

No. 10. A backlash against Christmas e-cards. Do I really need festive greetings from a small bank in Latvia I’ve never spoken to? Is that Austrian management consulting firm sincere in wishing me the best for the holiday season? I doubt it. Listen up guys. It’s not thoughtful. It’s not touching. It’s spam. Frankly, I’d rather get another e-mail from that friendly Ukrainian company that supplies Viagra without a prescription. By Christmas 2011, sending out e-cards will be socially unacceptable — and not too soon.

(Matthew Lynn is a Bloomberg News columnist and the author of “Bust,” a book on the Greek debt crisis. The opinions expressed are his own.)

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The world’s economic policy makers have talked up a zero-tolerance attitude toward sovereign-debt defaults. For every troubled national borrower, there seem to be a dozen central bankers ready to hand out cash, always to avoid Armageddon.

Earth would be a better place if these bankers were forced to take a remedial course in Christian theology. Then they would stop obsessing over Armageddon, at least until a Messiah appears.

Debtors have failed to make good on their obligations throughout history, and we’re still here. Defaults by financial institutions are, of course, too numerous to count, but governments crash as well. We have a long record to see just how they play out.

According to “This Time Is Different: Eight Centuries of Financial Folly,” the 2009 book by Carmen M. Reinhart and Kenneth Rogoff, there were 238 external debt defaults or reschedulings from 1800 to 2008. Spain tops the list with 13 occurrences in its history, though none since the 19th century.

Today we are supposed to believe that if one small country such as Ireland goes down, the rest of us will too. Yes, the world is more interconnected now than 200 years ago. That doesn’t make every cough a sure sign of pneumonia.

At the risk of understatement, throwing money at a country teetering at the brink of default isn’t how things used to be done.

Gunboat Economics

In 1902, European nations responded to a Venezuelan government debt default with military force. German, Italian and British gunboats blockaded ports, seized customs houses and bombarded a Venezuelan fort. Venezuela caved, agreeing to restructure and pay its debts.

These days, when European leaders see Greece and Ireland on the brink of default, they don’t send gunboats — they send money. The word “restructure” is taboo. Somewhere along the line it became unacceptable to take 80 cents on the dollar from a debtor nation, but acceptable to give that same nation 20 cents to keep its payments on schedule.

The problem is, once you do that, everyone wants 20 cents.

The theory of bailouts is intricately related to the fear of Armageddon. If investors see Greece go down, the story goes, they might panic and stop lending to other nations, even ones that should be considered healthy. In this view, default spreads like influenza in 1918.

The theory doesn’t stop with national governments. If California defaults on its debts, then the credit crisis might sweep up all the other states. If Bear Stearns Cos. fails, then so will everyone else.

Averting Disaster

We seem to have become a world in which we assume a panic is around every corner. When markets are irrational, it’s impossible to say what might set them off, and fear of disaster becomes a powerful excuse for policy makers to do whatever they choose.

Economist Vincent Reinhart reviews the legacy of the 2008 Bear Stearns bailout in an article to be published in the Journal of Economic Perspectives. As he points out, the U.S. government, in its wisdom, wiped out equity holders but saved bondholders, and investors began to expect this policy.

Reinhart writes, “This expectation made it profitable to identify the next financial firm to be resolved and then to sell its stock short and use the proceeds to purchase its unsecured debt. If the candidate firm was identified correctly, the debt would appreciate in value and its stock collapse.”

Delayed Reckoning

The Bear Stearns bailout, then, only delayed the inevitable realization of losses from the collapse of the real estate market. It abetted the fiction that government can save us. Only when Lehman Brothers Holdings Inc. was allowed to go down did markets realize that the losses were just too big. The process would have been more orderly if the restructuring began at once.

It’s just as bad for countries. Central bank interventions become an excuse to avoid tough choices.

While no one would recommend that we return to the gunboat days, the old-fashioned hard-nosed approach had a big effect on contagion.

Economists Kris Michener and Marc Weidenmier studied what they call supersanctions — the use of military or political pressure to force repayment of sovereign debts, a commonly used enforcement mechanism from 1870 to 1913.

They found that following supersanctions, “on average, ex ante default probabilities on new debt issues fell by more than 60 percent, yield spreads declined approximately 800 basis points, and defaulting countries experienced almost a 100 percent reduction of time spent in default.” In other words, a Tony Soprano approach toward a defaulting nation can inspire some major improvements.

The world economy has survived sovereign debt defaults in the past, not by bailing out the miscreants, but by paying close attention to their own balance sheets. If you don’t want a Greek default to lead to a crisis in your country, balance your own budget ahead of time.

And stop whining about Armageddon.

(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He was an adviser to Republican Senator John McCain in the 2008 presidential election. The opinions expressed are his own.)

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