Back in February, the Obama Administration committed $75 billion to make mortgages more affordable to homeowners under financial pressure. Last week, however, the Congressional Oversight Panel for the financial bailout criticized the design of this mortgage modification program, and declared that "in the best case" it would prevent half as many foreclosures as the Administration predicted.

The Congressional Panel is right. The program does offer substantial financial incentives to banks and mortgage servicers to reduce homeowners' repayments to 31% of their monthly income. But it provides little incentive for these firms to reduce the principal outstanding on a mortgage. In other words, lower monthly payments are achieved by lowering the interest rate and extending the term of the mortgage; the principal outstanding on the mortgage remains the same.

Of course, this does help reduce cash flow strains on struggling homeowners. But the evidence suggests that for "underwater" mortgages, where the outstanding principal on the mortgage is higher than the fair market value of the home, this kind of mortgage modification does little to reduce the likelihood that the homeowner will default.

In July of 2009, for example, analyst Mark Hanson published data showing redefault rates of 34% to 59% for homeowners within 10 months of a mortgage modification. His explanation: "Loan mods are designed to keep the unpaid principal balances of the lender's loans intact while re-levering the borrower." In other words, the program does little to make it difficult for homeowners to walk away from any mortgage at the next sign of trouble. With no equity in their property, what do they have to lose?

On that basis it would make much more sense for the Obama Administration to spend its $75 billion on reducing the principal on underwater mortgages of qualifying homeowners. That would give homeowners some skin in the game.

Here's how such a program could work:

1. A federal agency would buy home mortgages at a price below the current principal from financial institutions. They should be willing to sell at 70% or 90% of the current principal in order to avoid much larger losses and legal costs on mortgage foreclosures.
2. The federal agency would then issue new mortgages to qualifying homeowners at 95% of the current fair market value of their homes. Since these homeowners would have equity in their homes, they would be unlikely to default on the new mortgages.
3. The mortgages would be repayable in 10 years with interest at 2% above the current rate on 10-year Treasury bonds — roughly 5.4% at today's rate on 10-year Treasuries. The 2% difference between the federal agency's funding costs and the interest rate on the mortgages would help finance the principal reduction program.

Would you support using the $75 billion for this kind a principal reduction program instead of the current mortgage modification program?

Bob Pozen is a senior lecturer at Harvard Business School and the author of the forthcoming Too Big to Save? How to Fix the US Financial System (November 2009)

According to Gary Pisano and Willy Shih, the U.S. has lost or is in the process of losing the ability to manufacture many cutting-edge products because of the outsourcing of development and manufacturing work abroad, which has caused a damaging deterioration in the collective capabilities that serve high-tech industries. This is a disturbing hypothesis backed up by anecdotal data about a variety of high-tech products that can no longer be manufactured in the U.S. As someone who has worried about the global competitiveness of U.S. high-tech industries for years, I find their analysis chilling — but not entirely convincing.

A look at some of the recent data on global market shares supports a more nuanced and optimistic assessment: The U.S. retains significant shares of global markets for high-tech products and services. And the reduction in costs and prices made possible by outsourcing upstream component production to low-cost foreign locations has helped U.S. companies maintain their competitiveness in high-value-added downstream products.

According to the O.E.C.D.'s latest Science and Technology Indicators, on a value-added revenue basis the U.S. continues to have the largest share of global markets in both knowledge-intensive services (business, communications, financial, education, and health services) and high-tech manufacturing industries (aerospace; computers and office machinery; communications equipment; pharmaceuticals; and scientific instruments).

Between 1995 and 2005, the U.S. maintained about a 40% global share in knowledge-intensive services and about a 35% global share in high-tech industries, keeping the lead in four of them. Indeed, despite the high value of the dollar and the rapid growth of emerging markets between 1995 and 2005, the U.S. increased its global share in all but the aerospace industry. The U.S. share in communications equipment increased by more than 20 percentage points as Japan's share plummeted, and the U.S. doubled its share in computers and office equipment, although it was overtaken by China in 2003. These are the two sectors that encompass most of the products and companies that are the focus of the Pisano and Shih analysis.

The increase in China's share in computers and office machinery — from 2% in 1995 to 46% in 2005 — was remarkable, but it is not a sign that China has gained on the U.S. in innovative capacity in this sector or others. China's exports of high-tech products turn out to be not very high tech and not very Chinese: 80%-90% of China's high-tech exports come from firms that are partially or wholly foreign-owned — in many cases by American or Japanese companies — and 95% are processing exports, the high-tech components of which are produced elsewhere and imported into China. China accounts for about 35% of the value added in its exports — and considerably less in many of its high-tech exports sold under the brand names of U.S. high-tech companies like Apple, Microsoft, and HP.

Pisano and Shih also argue that the national identity of high-tech companies is meaningless — that U.S. multinational companies are no more important to the innovative capacity of the U.S. than foreign MNCs. Again the data suggest otherwise.

According to a study by Matthew J. Slaughter of Dartmouth's Tuck School of Business, in 2007 U.S.-based MNCs accounted for 19% of private-sector employment, 25% of private-sector output, 31% of private sector investment, 48% of exports, 37% of imports, and an amazing 74% of U.S. corporate R&D spending in the U.S.

U.S. MNCs are especially important in manufacturing, accounting for 61% of manufacturing value-added and 49% of manufacturing employment in the U.S. And within manufacturing they are particularly important in high tech, accounting for 85% of value-added in computers and electronics, 76% in transportation equipment, 73% in chemicals/pharmaceuticals, and 49% in electrical equipment, appliances and components And despite outsourcing, most of the activity of U.S. MNCs remains at home: they purchase 89% of their intermediate inputs from other companies in the U.S. and their U.S. operations account for 70% of their worldwide employment, 72% of their worldwide output, 75% of their worldwide investment, and 87% of their worldwide R&D.

Nor have these shares declined meaningfully in the last decade. Moreover, the evidence suggests that the offshoring of activity by U.S. MNCs — either to reduce the costs of their supply chain or to serve foreign customers — increases rather than decreases their U.S. activities. According to a recent study by Mihir A. Desai and C. Fritz Foley of Harvard Business School and James R. Hines Jr. of the University of Michigan at Ann Arbor Law School , both the domestic and foreign investment and the domestic and foreign employment of U.S. MNCs move together.

Overall, the data do not indicate that the U.S. has lost its innovative capacity or that the outsourcing of production to low-cost locations has undermined the global competitiveness of U.S. high-tech companies — at least not yet.

Laura D'Andrea Tyson
SK and Angela Chan Professor of Global Management
Haas School of Business
University of California, Berkeley

Leading any business is a delicate balance, but leading a turnaround is especially tricky. On one hand, you see so much potential: if a business was once successful, it could be so again — it just takes someone who believes in it to bring it back to life. On the other, you face incredible pressure. All eyes are on you. The employees, the investors, and even the market are waiting for your direction. When you unveil the new direction, it has to inspire them; if it doesn't, there's no plan B.

I was only 25 when I found myself leading a turnaround at my husband's family business, Focus. For over 30 years it had been a thriving offshore manufacturer of premiums (consumer giveaways that come with products or are handed out at events). But the world had recently changed: Chinese manufacturing had become the standard for premiums. Clients grew accustomed to manufacturers' delivering goods at prices that were kept artificially low because there were no quality control standards or social responsibility safeguards. Because we refused to compromise on ethics or product safety in favor of cost, we inevitably started losing business to lower-priced competitors. By 2007, the year before I came on board, the company was down to one client.

Guiding the business through a 180 as the youngest manager on the team was a daunting prospect, but it was not my first experience with a turnaround. I had worked on two turnarounds at P&G, and I knew that there was one powerful tool that would help me succeed: buy-in.

I first learned about buy-in while leading the marketing side of a turnaround on the Folgers brand in Canada. The team had been in place long before I joined them and were adamant about staying on the path they had mapped out. As a fresh pair of eyes, I saw things differently. We couldn't keep trying to sell the same story over and over again to our customers. At first, getting agreement on each of my recommendations for change was a walking-uphill-in-the-mud kind of battle; my team members fought me on everything. But one day, I had an epiphany: they had no idea what I was trying to accomplish long-term, because I had never really told them. Sure, we had objectives and goals for the year, but we had never sat down and discussed our vision of where we wanted the brand to be in five or 10 years. I was giving my team bits and pieces one at a time — one analysis, one recommendation, one brush stroke of an entire painting. If we didn't create a vision together that we could share as a team, they could never really get excited; they could never buy in.

So when I got to Focus, I knew what I needed to do. If we were going to change our offering, we'd have to do it together &#8212 or risk a failure we couldn't afford to have.

Step 1: Open Honest Lines of Communication
I started by getting to know the team members individually. They regaled me with stories about the glory days, and we commiserated about the current drought. We talked about what they'd heard from clients, and what they thought we should do. I began to notice a trend: we had been adding value in ways other than price for years but had never talked about it as a point of differentiation. Our account managers would handle the entire premium project from start to finish, working internally within our client's company to connect different functions, making recommendations on co-packing with products or drop-ship logistics...we were doing total project management without even realizing it!

Step 2: Get in Touch with Your Target
I realized that with a few more custom services, we could deliver a breakthrough offering to the market, and add enough value for our clients to balance out the incremental costs of paying proper wages and maintaining a high standard of quality control.

Armed with my hypothesis, I started collecting data to confirm or deny it, interviewing brand managers and corporate purchasing managers. Once I had an outline of how I thought we should evolve, I called Focus's first weekly priorities meeting with only one priority on the agenda: our vision.

Step 3: Create a Mosaic Vision
The meeting lasted for over two hours. I made sure everyone had the opportunity to voice his or her ideas, concerns, and opinions. Before we closed the meeting, we had a mosaic vision, made up of a little bit of each of us. We felt renewed pride, and a distinctly electric feeling was running through the office. We had created a new story for our company, and each day was a new page.

Over the next six months, we brought that story to life. We kept going with the weekly priorities meetings, and we found ourselves gathering around the speakerphone in my office whenever a sales manager called in after a great client meeting. We started brainstorming client recommendations as an entire company and came up with comprehensive plans we could be proud of. We've since brought in a wave of new blue chip clients and have gotten a lot of feedback about how unique our offering is, not to mention a reputation in Canada for our excellence in total project management on ethically made, high-quality premiums.

Still, in my mind, Focus will always be the place where I saw the power of buy-in take a company from the brink right back to number one.

Monica Tate-Maile is a managing partner at Focus Creative Concepts, a manufacturing and strategic consulting firm for consumer premiums. In her previous life, she worked for P&G Canada as a brand manager on some of North America's largest brands.