Wall Street ready for pause in Fed rate cuts

By Adam Shell, USA TODAY
NEW YORK — A pause in interest rate cuts by the nation's central bank could prove to be refreshing for the stock market.
Investors who once clamored for rate cuts to stabilize a slowing economy and financial system on the verge of a meltdown now are calling for a halt to the Federal Reserve's easing cycle. Wall Street is now of the mind that further cuts would do more harm than good.

The 3.25 percentage-point reduction in the fed funds rate to 2% since September has restored a sense of calm to markets.

But the cheap money has also eroded the value of the U.S. dollar and contributed to an alarming rise in the price of gasoline and food, putting pressure on cash-strapped consumers.

In a statement last week, the Fed hinted that its campaign to lower borrowing costs may be near an end, saying the "uncertainty about the inflation outlook remains high." But it's not just the hope that the Fed can control inflation that has Wall Street wanting an end to the rate-cutting program.

There is a financial motive, as well: Stocks have historically performed very well during "pause periods," when the Fed has stopped lowering interest rates, an analysis by Bespoke Investment Group found.

In the past 50 years, the benchmark Standard & Poor's 500-stock index has rallied 12.3%, on average, in the period from the last rate cut in an easing cycle to the first rate increase. (The S&P is up 2% since the Fed cut on Wednesday, and a total rise of 12.3% would put it just shy of a new high.) The average duration of the Fed's pause in those 12 interest rate cycles in that period was 329 days, or almost 11 months.

Stocks rise when the Fed starts to wean the market off cheap money, because the pause:

•Signals the outlook is brightening. If the Fed no longer sees the need to provide monetary stimulus, it suggests that it is confident the economy is on the comeback trail, says Paul Hickey, Bespoke's chief investment guru.

•Shows lag effect is kicking in. It usually takes six months to a year for the benefits of rate cuts to cycle their way through the economy. Hickey says that when the Fed pauses, it often coincides with signs that the cuts are working.

While those explanations have proved true in the past, circumstances surrounding the Fed's hoped-for pause now may suggest a different outcome for stocks, says Christopher Orndorff, managing principal at money management firm Payden & Rygel.

"Historically, stocks go up because the market assumes the Fed has done their job," says Orndorff. This time, a pause is expected, "not because things are rosy again in the economy, but because inflation is higher than they would like."

Orndorff says the Fed would be in a tough spot if the economy weakens more, because if it is forced to cut again, it could fan inflation. The Fed meets again on interest rates at the end of June.

Retailers bait shoppers with rebate specials

NEW YORK (AP) — Retailers from Safeway to RadioShack Corp. are offering special discounts to lure consumers in and persuade them to spend some or all of their economic stimulus checks, the first wave of which were deposited into bank accounts this past week.
"It's going to be a real war in the stores starting this weekend" as retailers fight to get a piece of the checks, said Burt P. Flickinger III, managing director of Strategic Research Group, a consumer industry consulting firm.

The retailers are all hoping to persuade Americans, worn out by high gas and food prices and the weak housing market, to spend the money rather than save it or pay down debt. Polls have indicated that most recipients plan to use the rebates mainly to buy gas, food and other essentials that have become far more expensive in the past year if they spend the money at all.

That makes convincing shoppers to buy a new dress, flat-screen TV or living room sofa a much harder sell.

"I think the retailer recognizes that they've got to strike while the check is hot," said Marshal Cohen, chief retail analyst at research firm NPD Group. "I think if you're a retailer and you're not trying to entice the consumer, you might as well go back to bed."

The checks and payments are part of a $168 billion tax rebate plan passed by Congress to help spur the lagging economy. Under the plan, individuals who have filed their tax returns for the year can receive up to $600 and families can get up to $1,200, plus $300 per child. The rebates are expected to reach 130 million households. The direct deposit payments began on Monday and paper checks go out May 9.

With sales declining, some clothing and specialty retailers have been cutting prices for months. But this week, a few big names stepped up their efforts to try to turn the stimulus cash into extra sales. Wal-Mart Stores Inc., for example, announced price cuts on everything from cereal to shampoo on Tuesday to coincide with the first round of payments.

"The traffic is certainly busier these days in our stores," said Wal-Mart spokeswoman Melissa O'Brien, although she couldn't be certain the most recent price cuts were the source of the traffic increase. She declined to say whether sales had grown since Monday or whether the marked-down items saw significant gains in the past week.

Other retailers are waiting until the weekend to offer their best deals, since more shoppers will be out on their days off.

CVS Caremark Corp., for example, is offering its loyalty card customers $5 off on a $30 purchase. At Restoration Hardware, shoppers will get $100 off orders of $750 or more through Sunday. Circuit City Stores Inc. is offering an extra 15% off through Saturday.

Flickinger said merchants are already offering weekly promotions or sales timed to events like Mother's Day, but the weekend's sales are meant as an additional incentive to "get consumers who are getting the money to spend it right away in their stores."

He said competition may be most heated at grocery stores where food prices have skyrocketed in recent months due to higher commodity costs. Milk, for example, has jumped to over $4 a gallon.

Grocers including Supervalu Inc. and Kroger Co. are offering a 10% bonus when shoppers use their rebates to buy gift cards. For example, if a customer turns a $600 economic stimulus check into a gift card, the cards would be worth $660.

Safeway Inc. has announced its own plan to give a 10% discount on groceries to Club Card customers who cash their paper checks at the store. That program begins May 14.

Sears Holdings Corp. also is offering a 10% bonus to anyone who converts their check into a Sears or Kmart gift card. That deal also starts May 14.

Other retailers are mailing special discounts to their most loyal customers. Lowe's Cos. mailed an offer Wednesday to its most active shoppers offering $10 off their next $50 purchase or $25 off their next $200 purchase when they turn their checks into its "project starter" cards.

Whether this weekend's sales can convince spend-wary consumers to come back to stores is far from certain.

Bryan Kennedy, a 30-year-old resident of St. Paul, received his payment in his bank account Wednesday and plans to spend part of it on a new set of wheels for his bike. But, he said, the bulk of his check will go toward paying down credit card debt: "I'm going to try to use it responsibly."

Gas prices keep climbing as average hits $3.39 a gallon

By James R. Healey, USA TODAY
Oil set a record on Monday — and gasoline tried to.
The nationwide average for a gallon of regular was $3.389, the federal Energy Information Administration reported. That's the highest actual price the EIA has recorded, but still short of the $3.413 that would match the record after adjusting for inflation. That is $1.417 in March 1981.


GOING PREMIUM: More cars are using pricier premium gas

Oil, already at all-time highs, closed Nymex trading Monday at a record $111.76 a barrel, up $1.62 from the Friday close.

"At this point, there's not much reason for prices to come back down," says Peter Beutel, president of energy consultant Cameron Hanover. "Everything's saying it's going to go higher."

Oil rose on a weak dollar and short-term supply worries caused by sabotage in Nigeria and problems on a Midwest pipeline. It ignored short-term forecasts of less U.S. demand and long-term news of what may be the world's third-biggest oil deposit, in deep water hundreds of miles off Brazil. That would take years to develop.

Diesel — the fuel of the semis, locomotives and local delivery trucks that tote goods to keep the U.S. economy going — averaged $4.059. That was up 10.4 cents in a week and $1.182 more than a year ago. It's the first EIA report showing diesel averaging $4 or more. The previous record was $3.989 March 24.

Diesel, like gasoline, skyrocketed in 1981, but even adjusted for inflation, today's price is at least $1 higher.

The EIA's Monday survey showed that the gasoline average jumped 5.7 cents in the past week. If that pace continues, the average would pierce the inflation-adjusted high by the weekend. Monday's price was up 51.7 cents from a year ago.

The government's most recent short-term energy forecast, published last week, foresees a monthly average as high as $3.60 this spring, and cautions: "It is possible that prices at some point will cross the $4-per-gallon threshold."

Some West Coast stations are above $4 for regular, but the only local U.S. average that high is Wailuku, Hawaii, at $4.072, according to a daily price report by the Oil Price Information Service and AAA.

Senate bill to help builders and homeowners

WASHINGTON — Under pressure to address the housing market meltdown, the Senate on Thursday passed a bipartisan aid package for builders and distressed homeowners, but the bill faces opposition from the House as being too generous to business.
The 84-12 Senate vote comes as congressional committees work on broader Democratic measures to provide hundreds of billions of dollars to help homeowners refinance into more affordable mortgages. The Senate action comes as home prices plunge, and economists say more than 2 million families are in danger of foreclosure.

Underscoring the increasing urgency of the issue, Republican presidential candidate Sen. John McCain of Arizona, who had resisted the idea of federal aid to homeowners, released a plan to help borrowers with high-cost adjustable-rate mortgages move into fixed-rate, 30-year loans. McCain's plan would apply to certain mortgages taken after 2005. Democrats called the McCain plan too limited, and promised more.

After passage of the Senate bill, Banking Chairman Christopher Dodd, D-Conn., said, "We're not done."

Said Dodd: "This bill is called the Foreclosure Prevention Act. Quite candidly, what we've done here doesn't quite live up to the title." Sen. Richard Shelby of Alabama, the top Republican on the banking panel, called the measure a good step, while expressing concern that Congress might move well beyond, to a taxpayer-funded bailout of people who "freely" used risky loans.

The Senate-passed bill includes $4 billion in grants to help localities buy and restore foreclosed homes, and a $7,000 income tax credit for buying foreclosed property. The bill beefs up consumer counseling efforts, provides more than $10 billion in mortgage revenue bonds to help refinance mortgages and expands the Federal Housing Administration.

One controversial provision, estimated to cost $25 billion through 2010, would allow home builders and other firms now posting losses to retroactively claim refunds against previous years' taxes.

Harvard economist Lawrence Summers said the business tax break would do little to stimulate activity and could harm the market. "Providing tax credits conditioned on initiation of the foreclosure process is likely to have perverse effects. … Foreclosures may be encouraged," Summers told a Senate hearing.

Dodd and House Financial Services Committee Chairman Barney Frank, D-Mass., want to let the FHA help refinance troubled borrowers into viable mortgages. In exchange for writing off part of the mortgage principal, a lender would receive a payment from the proceeds of a new FHA loan.

Import prices rise 2.8% in March on a tide of oil

WASHINGTON (Reuters) — U.S. import prices rose a more-than-expected 2.8% in March as petroleum prices jumped 9.1%, a Labor Department report showed Friday.
U.S. export prices rose 1.5% during the month, also more than expected and the largest monthly gain on record, as prices for farm and food products continued to rise.

Analysts polled by Reuters had forecast a 2% rise in import prices in March and a 0.5% rise in export prices.

The larger-than-expected rise in import prices boosted the dollar in early trading after the report. Stronger inflation could limit the Federal Reserve's ability to cut interest rates during the current economic slowdown.

Import prices have risen 14.8% over the last 12 months, the largest year-to-year gain since the Labor Department began publishing the data.

FIND MORE STORIES IN: Federal Reserve | Labor Department | Reuters
A large factor was petroleum prices, which have risen 60% over the past year, although prices for food, feed and beverages have increased 14%.

Export prices have risen 7.9% over the last 12 months, also the largest increase on record.

Prices for agricultural exports and food, feed and beverage exports have both risen more than 33% over the past year.

Fed transcript: '02 deflation fears helped drive down rates

By Martin Crutsinger, AP Economics Writer
WASHINGTON — Just-released transcripts show the Federal Reserve was worried about the threat of deflation when it decided to cut a key interest rate by a half point in November 2002.
The transcripts, which were released Friday, showed that then-Federal Reserve Chairman Alan Greenspan and his colleagues were concerned about a sluggish recovery from the 2001 recession and the possibility that the country could tumble into a period of deflation, or falling prices.

Greenspan, in the transcripts, said that deflation was a "pretty scary prospect, and one that we certainly want to avoid."

"We are dealing with what basically is a latent deflationary type of economy, and we are all acutely aware of the implications of that economy," Greenspan said.

While the Fed releases edited minutes of meetings of its interest-rate setting Federal Open Market Committee with a three week lag, it does not publish full transcripts until five years later.

The Fed cut interest rates at the November 2002 meeting to 1.25%, as the economy struggled to find its footing after the Sept. 11, 2001 terror attacks and corporate accounting scandals. It was the central bank's only rate move of the year, after it had lowered rates from 6.5% to 1.75% in 11 steps through 2001.

The Fed eventually took rates down to 1% in June 2003 over worries that falling prices could mire the U.S. economy in a similar rut as Japan.

Some critics have argued that there was never a serious threat that the United States would experience a bout of deflation and that the extremely low interest rates engineered by the Fed created a housing boom in this country that drove prices and sales up to record levels only to burst in 2006, sending shockwaves through the economy.

'Really bad': April consumer confidence lowest since '82

NEW YORK (Reuters) — Consumer confidence fell to its lowest in more than 25 years in early April, diving deeper into recessionary territory on heightened worries over inflation and jobs, a survey showed Friday.
The Reuters/University of Michigan Surveys of Consumers said its preliminary index of confidence fell to 63.2 in April from 69.5 in March, well below economists' median expectation of a slight fall to 69.0, according to a Reuters poll.

The April result is the lowest since March 1982's level of 62.0, when the "stagflationary" period of low growth and high inflation was still fresh in the memory of many Americans.

Near-term inflation expectations measured by the survey jumped to the highest since the turmoil after Iraq's invasion of Kuwait in late 1990, which caused oil prices to rise sharply.

"It's really bad," Carl Lantz, interest rate strategist at Credit Suisse in New York, said about the report.

of Michigan Surveys of Consumers
"It confirms what we already know now that we are in a consumer-led recession, and it's going to be a pretty protracted one."

The report's reading of one-year inflation expectations jumped to 4.8% — the highest since a similar reading in October 1990 — from 4.3% in March.

Five-year inflation expectations rose to 3.1% — the highest since December 2007 — from 2.9% in March.

The index of expectations for personal finances fell to 97, the lowest since April 1980 when it was 94, from 112 in March.

The index of current personal finances fell to 87, its lowest since November 1982, when it was 85, from 93 in March.

"The April loss was due to rising inflation and shrinking income gains," the Reuters/University of Michigan Surveys of Consumers said in a statement.

"There have only been a dozen other surveys that have recorded a lower level of consumer sentiment in the more than 50-year history of the survey."

World finance officials gather in Washington

WASHINGTON — The world's top financial officials, shaken by a credit crisis that has roiled markets around the world, planned to devote much of their discussions Friday to recommendations they hope will restore confidence.
The plan, with 65 recommendations, seeks to boost transparency, strengthen the role of credit rating agencies and bolster cooperation between regulatory authorities in major countries.

Those proposals will be explored when finance ministers and central bank presidents from the world's seven richest industrial countries meet in Washington for discussions to be led by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke.

The discussions, which will include the top finance officials of Japan, Germany, Britain, France, Italy and Canada, are taking place in advance of the weekend meetings of the 185-nation International Monetary Fund and its sister lending institution, the World Bank.

Even before the Group of Seven meeting, Paulson held a series of one-on-one sessions with finance officials from individual countries, including Japanese Finance Minister Fukushiro Nukaga. Nukaga told reporters that he believes each country should undertake suitable measures to deal with the global crisis.

The G-7 finance officials planned a dinner Friday night that will include executives of some of the world's biggest financial companies to get their ideas on what more should be done. Top executives of Citigroup, Deutsche Bank, Barclays, Credit Suisse, Lehman Bros. and Morgan Stanley were among those invited.

The financial officials are gathering after a credit crisis, which began in the United States with rising defaults on subprime mortgages, has spread around the globe. It has caused major financial institutions to declare billions of dollars in losses and brought Bear Stearns, the fifth largest investment bank in the United States, to the brink of bankruptcy.

The IMF said in reports this week that worldwide losses could approach $1 trillion over the next two years and that the turmoil has already pushed the United States, the world's largest economy, into a recession and raised the risks of a global downturn to one in four.

Faced with that gloomy assessment, global financial leaders are certain to do everything they can during the next three days of meetings to demonstrate that they are on top of the situation.

Paulson told an audience of bankers on Thursday that while "the risks continue to be to the downside" he believes the U.S. economy would receive a significant boost when 130 million households begin spending rebate checks the government will start mailing out next month. He said the extra consumer spending generated should be enough to create 500,000 to 600,000 extra jobs this year.

The plan the G-7 officials are working on was developed by the Financial Stability Forum, a group that includes central bankers and major financial regulators from around the world. The panel is headed by Mario Draghi, head of Italy's central bank, who will present his group's findings to the other G-7 officials during their Friday afternoon closed-door talks at the Treasury Department.

Those recommendations include proposals to make financial markets less secretive and improve supervision. One suggestion is to have banks, securities firms and other financial institutions disclose their holdings of securities backed by subprime mortgages, the risky debt instruments which were at the heart of the crisis in the United States.

Housing woes won't end soon, poll suggests

WASHINGTON — A growing majority say they won't buy a home anytime soon, the latest sign of increasing pessimism about the nation's housing crisis, a poll showed Monday.
The Associated Press-AOL Money & Finance poll found that more than a quarter of homeowners worry their home will lose value over the next two years. One in seven mortgage holders fear they won't be able to make their monthly payments on time over the next six months.


POLL RESULTS: See the numbers

"This is a great time to buy, but not necessarily to sell," said Robert Jackson, who lives in a two-bedroom house in Ferguson, Mo., with his wife and four young children. He said he would love to purchase a larger home, but can't because even if he found a buyer, he would probably lose thousands on his house, which he bought less than two years ago.

"We're just going to have to slap a Band-Aid on it and stay here until the market gets a little bit better," Jackson, 30, said.

Jackson is not alone. Sixty percent said they definitely won't buy a home in the next two years, up from 53% who said so in an AP-AOL poll in September 2006. At the same time, just 11% are certain or very likely to buy soon, down from 15% in 2006.

The growing reluctance to dip into the housing market seems to stem partly from worry that housing prices will continue falling — good if you're buying a house but bad if you have to sell one.

The number who expect falling prices in their area has grown to about 25% from 18% in September 2006, while nearly 40% think prices will rise, compared with 49%. Expectations for rising prices are highest in the South, with Westerners likeliest to predict they will drop.

Underscoring the public's unsettled feelings, the number saying local housing prices are about right has fallen to 35% from 45%. Almost half say homes are overpriced — especially in the Northeast — unchanged from 2006. Those saying housing is underpriced have doubled to about one in 10, particularly Midwesterners.

Some pockets buck regional trends. Laurie Jensen, a single mother of three, struggles to make payments on her home in Whitehall, Mont., by working as a seasonal road construction flagger and at times collecting unemployment. She said she'd like to move outside of town, but the area is popular and prices have surged.

"Things are pretty crazy," she said. "Places I don't consider that great are really expensive."

One in 10 have adjustable rate mortgages, half of the number who said so two years ago. These mortgages generally start at a low interest rate and are later adjusted to market conditions — which has often meant steep, unaffordable boosts that have forced many to refinance or even lose their homes.

Daniel Gallego, a warehouse worker in Stockton, Calif., said he may have to sell his home at a big loss. He said rising gasoline and other costs have made his adjustable rate mortgage unaffordable. Because he doesn't expect his home's value to recover soon, he said he may be better off moving now, before his rates rise.

"We may have to move in with my wife's parents or my parents," said Gallego, 30, who has two young children. "I could pay off some debt, then we could rent, and maybe buy another house in a few years."

The public anxiety is in reaction to an economy that is veering toward recession and losing jobs even as the housing market sputters badly. Foreclosures have soared to record highs, mortgage rates have increased, sales of existing and new homes have fallen and home values have dropped.

Gus Faucher, director of macroeconomics for Moody's Economy.com, a consulting firm, estimated that 9 million homeowners owe more on their home than it's worth. He said his company believes home sales are at or near bottom and home values will continue to fall until early next year.

Even so, he said, many people bought their homes before the run-up in values that started around 2001 and remain in good shape.

"So the value of your house goes down temporarily," he said. Unless the homeowner must sell now or can't afford the payments, "that doesn't have that much of an impact."

The poll also found:

•The biggest worriers are those expecting to buy soon. Of that group 43% frets that their home's value will drop in the next two years, compared with 25% of those not expecting to buy shortly.

•Fifty-nine percent think now is a good time to buy.

•Half think this is a very tough time for first-time buyers, an increase from two years ago. Nearly two-thirds think it's harder for first-home buyers than it was five years ago.

The AP-AOL Money & Finance poll was conducted from March 24-April 3 by Abt SRBI. It involved telephone interviews with 1,002 adults nationwide, for whom the margin of sampling error is plus or minus 3.1 percentage points.

Included were interviews with 769 homeowners, for whom the sampling margin of error is plus or minus 3.5 points. The margin of sampling error for other subgroups was larger.

Rising oil pushes up wholesale prices

The price of oil shot to a record Tuesday, pushed up by supply worries — and a gusher of new money into the commodities markets.
Texas light, sweet crude for May delivery closed at $113.79, up $2.03 from Monday's record settlement at $111.76. Oil has soared 79% the past 12 months. The record followed a government report that said prices at the wholesale level soared nearly 7% in the 12 months ended in March and that half the increase came from energy. Moving the prices:

•Oil production jitters. Middle East producers are pumping at full capacity. "Any supply disruption has an outsized impact," says Alec Young, equity market strategist for Standard & Poor's. Traders have been fretting about problems in Nigeria and Russia.

•Huge demand. "Even though the U.S. is in recession, analysts have underestimated the voracious demand for oil from emerging markets," Young says. Just seven in 1,000 Indians own a car, for example, despite India's booming economy. As emerging economies grow, so will the demand for oil and energy.

•The weak dollar. Oil is priced in dollars, and the value of the dollar has tumbled 8% this year vs. the euro. Producers raise prices to compensate for the lower value of the dollar.

All of these forces have been in place for some time. But huge demand for commodity investments — particularly in energy — have sent oil prices skyrocketing, says Tom Kloza, chief oil analyst for the Oil Price Information Service. "People are pouring money into commodities as the can't-miss asset class of the second half of the decade," Kloza says.

The number of energy futures contracts traded at the New York Mercantile Exchange in the first three months of 2008 soared 18% vs. the same period in 2007. Investors have poured a net $928 million into four of the largest commodity exchange-traded funds this year, Lipper says.

Commodity markets are smaller than the stock or bond markets, and even modest increases in volume can push up oil prices sharply. "People who say it has nothing to do with speculation are the same people who said there wasn't a housing bubble a few years ago," Kloza says.

Soaring oil prices drove wholesale prices up 1.1% in March from February, the second-largest increase in 33 years, the Labor Department said Tuesday.

Producers' prices in March were up 6.9% from a year earlier, and about half the increase came from higher energy costs. Energy prices on a monthly basis leaped 2.9% in March, led by a 13.1% rise in heating oil and a 15.3% gain in diesel fuel. Core producer prices, which are stripped of the volatile food and energy components, grew 0.2%.

Dems try to load up 'money train' war funding bill

WASHINGTON — Democrats in Congress are seeking to attach tens of billions of dollars in domestic spending to President Bush's latest $108 billion war funding request, setting up a political battle that could put U.S. troops and their families in the middle.
Plans to add money for such things as transportation, unemployment insurance, aid to states, food stamps, public housing and veterans' benefits has prompted veto threats from the White House.

Bush's budget director, Jim Nussle, said Tuesday that only a month remains before the Pentagon would threaten to furlough thousands of civilian employees. The Pentagon made a similar threat in December before Congress appropriated $70 billion for the wars.

"They're trying to figure out how to put everything onto this," Nussle said in an interview. In testimony prepared for the Senate Appropriations Committee today, he calls the war funding measure "the last big money train out of town before the election." That could be the case if Congress doesn't pass any of its regular appropriations bills on time.

House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid have not decided which items to seek as part of the war funding request and are hoping to reach agreement with the White House on some of it. Reid spokesman Jim Manley said the items being reviewed would be "quick ways to stimulate the economy."

Spurring the Democrats' effort is a struggling economy. Pelosi, who negotiated with the Bush administration to win quick passage of a two-year, $168 billion economic stimulus package, called on the president last week to support a second measure "to get our economy back on track, create jobs and speed assistance to families struggling to make ends meet."

The first package included more than $100 billion in rebates to taxpayers, which will only begin to be mailed or deposited directly into bank accounts next month. A family of four with an annual household income under $150,000 will get up to $1,800. Even low-income Americans who paid no taxes last year are in line for smaller rebates.

Bush has said he wants to wait for those rebates to reach households — and perhaps get spent — before deciding on a second stimulus package. But pent-up demand in Congress has pushed items left out of the first package to the forefront. The House Ways and Means Committee is set to approve an extension of unemployment benefits today. A similar measure that fell out of the first package would have cost nearly $15 billion over two years.

Nussle said adding that type of spending to the war funding bill would jeopardize projections for a balanced budget in 2012. Halfway through the 2008 fiscal year, the deficit already has reached $310 billion, according to the Congressional Budget Office. The White House has projected the deficit for the full year would be $410 billion.

"This is a matter of just continued deficit spending without an eye toward how it's going to be paid for," Nussle said.

The war funding bill is slated to reach the House later this month or in early May. Possible additions:

•Providing 13 more weeks of jobless benefits to workers who reach the 26-week maximum, which is backed by House Ways and Means Committee Chairman Charles Rangel, D-N.Y., and Senate Finance Committee Chairman Max Baucus, D-Mont.

•Spending on highway, rail and airport projects that are ready to go but fall short of state funds. House Transportation and Infrastructure Committee Chairman James Oberstar, D-Minn.,lists 3,000 such projects.

•Expanding college tuition benefits for military veterans of Iraq and Afghanistan, proposed by Virginia Democratic Sen. Jim Webb.

Some Democrats and advocates want to pay for at least part of it. "There's many a good thing that you could do, and you should pay for it," said Chad Stone, chief economist for the liberal Center on Budget and Policy Priorities, which has been involved in the negotiations.

Consumer prices up 0.3% in March; housing starts plunge

WASHINGTON (Reuters) — Consumer prices rose a less-than-expected 0.3% in March, leaving the Federal Reserve some room to lower interest rates to ward off a housing-led slowdown, and the construction of new homes plunged in March to the lowest level in 17 years, according to reports Wednesday.
While the slide in the housing sector continued, industrial production unexpectedly rebounded as utilities raised output due to colder weather, according to the Fed, making up for weak manufacturing growth.

And a fourth report showed that higher prices and rising unemployment resulted in falling wages in March. After adjusting for inflation, average weekly earnings for non-supervisory employees dropped 1% last month, compared to the same period a year ago. It was the sixth month that inflation-adjusted wages were down.

The rise in March's consumer price index was less than the 0.4% gain that economists had forecast. Prices were flat in February. So-called core consumer prices, which exclude food and energy, were up 0.2% — in line with expectations — after also being unchanged in February, the Labor Department said.

Energy prices gained 1.9% in March after declining 0.5% in February. Costlier energy has been a major factor in rising concern about potential inflation, but it did not show through strongly in the March data.

Over the past 12 months, inflation is up 4%, reflecting relentless gains in energy costs, which are up 17% over that period, and food prices, which are up 4.4%.

For individual food items, the gains are even more stark, with the price of bread up 14.7% over the past year and milk prices up 13.3% over the same period.

While financial markets initially greeted the consumer price data as providing greater scope for the Fed to lower interest rates, not everyone agreed.

"In spite of a benign core reading, the overall increase will persuade the Fed to be less aggressive in easing rates," said Richard DeKaser, chief economist at National City in Cleveland.

The department said that in the first quarter this year, overall consumer prices rose at a seasonally adjusted annual rate of 3.1%, down from the 4.1% rise posted for all of 2007. Core prices in the first quarter gained at a 2% rate, under the 2.4% rise for all of 2007.

Prices for apparel dropped for a second month, down 1.3% after falling 0.3% in February. The department said the March decline was the largest since September 1998, possibly a sign that retailers are being forced to cut prices to lure hard-pressed consumers into stores.

Car prices slipped 0.1%.

But a range of other costs moved higher. The Labor Department's housing-cost gauge moved up 0.4%, reflecting a sharp gain in utility costs. A measure of owner-occupied housing costs not affected by energy rose 0.2%.

Housing starts set an annual pace of 947,000 units in March, lower than the 1.02 million expected by economists. The February starts figure was revised upward to 1.075 million from the 1.065 million originally reported.

"These housing starts suggest that the pace of decline is intensifying, which is the last thing the U.S. economy needs right now," said Stephen Malyon, senior currency strategist at Scotia Capital in Toronto.

Building permits fell 5.8% to an annual rate of 927,000, the slowest pace since a 916,000 rate set in April 1991. Economists polled by Reuters had forecast March permits at 970,000 after the 984,000 rate of February.

Industrial production increased 0.3% last month following a sharp 0.7% decline in February, the Fed said. That was better than the small decline of 0.1% that economists had expected.

The strength last month came from a large 1.9% increase in output at the nation's utilities and a 0.9% increase in mining, a sector that also includes oil drilling. Manufacturing posted a more modest 0.1% rise after a decline of 0.5% in February.

"Factory output was held down by a large decline in the output of motor vehicles and parts. A shortage of motor vehicle parts that resulted from a strike at a parts manufacturer idled a number of motor vehicle assembly plants," the Fed said in the report, referring to the seven-week-old walkout at American Axle & Manufacturing Holdings.

Senate agrees on compromise to help homeowners

By Sue Kirchhoff and Kevin McCoy, USA TODAY
WASHINGTON — Senate leaders on Wednesday night announced a multibillion-dollar bipartisan compromise measure to aid families facing foreclosure amid the sharp housing downturn.
The proposal, which could be debated as early as Thursday, contains funding to provide foreclosure counseling to beleaguered households, help local governments buy and refurbish foreclosed properties and increase the limit on loans backed by the Federal Housing Administration.

But negotiators for both parties could not reach agreement on a provision that would give foreclosed homeowners more lenient treatment in bankruptcy proceedings.

Lawmakers were also forced to shelve a more ambitious FHA mortgage rescue plan but promised to continue working on the issue.

"This is not a complete package. Obviously, there is a lot more work that needs to be done," said Banking Committee Chairman Chris Dodd, D-Conn.

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"This will be the first reaction. It will not be the last," said Alabama Sen. Richard Shelby, the Banking Committee's top-ranking Republican.

The compromise includes:

•Foreclosure aid. A $4 billion package to aid communities hard hit by foreclosures and mortgage delinquencies. Local governments could use the funds to buy and rehabilitate foreclosed homes at a discount.

•Government-backed mortgages. Increased loan limits for FHA-guaranteed mortgages.

•Financial counseling. About $100 million in new funding for housing counseling to help up to 250,000 families.

•Tax credit. A $7,000 tax credit, over two years, for buyers of foreclosed homes or properties on which foreclosure action has been filed.

•Business tax relief. Authority for home builders and other firms that are losing money to reclaim taxes paid up to four years ago vs. two years now.

The package was negotiated against a backdrop of increasingly bleak housing market news.

During February, new foreclosure filings — including default notices, bank repossessions and auction sale notices — were reported on 223,651 properties nationwide, according to RealtyTrac, an online marketplace for foreclosure properties. That's up 60% from a year earlier.

Many business groups applauded the compromise. The Mortgage Bankers Association said the plan would "keep at-risk borrowers in their homes."

But a coalition of consumer, housing and civil rights groups criticized the failure to reach agreement on bankruptcy changes they say would help 600,000 families avoid foreclosure.

The omission represents "a win for the financial services industry that brought us this mess," the coalition said.

Surge in jobless claims stokes fears about recession

By Edward Iwata, USA TODAY
In another scary sign for the sluggish U.S. economy, the Labor Department said Thursday that initial jobless claims last week rose 38,000 to 407,000 — the highest in three years.
The surging number of first-time unemployment benefit claims is a clear signal that the U.S. economy has sunk into a recession and more workers have lost jobs, economists say.

In its monthly employment report Friday, the Labor Department is expected to announce more U.S. job losses in March for the third month in a row.

"Our view is that the economy has slipped into a recession, and we're going to see very sluggish growth for the first half of this year," says Michelle Meyer, a Lehman Bros. economist who noted that the 407,000 claims were the most since September 2005, just after Hurricane Katrina.

Economist Ian Shepherdson at High Frequency Economics called the jobless claims "a grim surprise" in a note to clients. He wrote that claims higher than 400,000 "clearly signal recession, though one week is not a trend."

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The news — coupled with Federal Reserve Chairman Ben Bernanke's congressional testimony earlier this week that the U.S. economy might stall — spooked Wall Street and sent stock indexes falling in early trading. By the end of the day, though, the Standard & Poor's 500, the Dow Jones industrial average and Nasdaq all had risen slightly.


BERNANKE: Recession is possible

Meyer and Andrew Gledhill, an economist at Moody's Economy.com, believe that the March unemployment rate will rise to 5%, up from 4.8% in February. "Businesses are scaling back hiring plans, and layoffs are rising," Gledhill says.

The unemployment rate should peak at about 6% by the end of the year, as the U.S. economy starts to bounce back from the downturn, Meyer predicts.

In recessions from the 1970s energy crisis through the 2001 dot-com bust, unemployment rates have ranged from 6% to 11%.

Many economists believe that the Fed's recent rate cuts are warding off a worse recession. Meyer predicts that the Fed will continue to trim rates through early 2009.

In a separate economic indicator out Thursday, the Institute for Supply Management's Non-Manufacturing index rose in March by 0.3 points to 49.6%. A reading below 50% means the value of services in the USA contracted slightly during the month. The number reflects turmoil in the financial markets and construction that have rippled through the economy, Steven Wood of Insight Economics wrote in a note to clients.

Late payments on consumer loans at 16-year high

NEW YORK — More Americans have fallen behind on consumer loans than at any time in nearly 16 years, as credit problems once concentrated in mortgages spread into other forms of debt.
In a quarterly study, the American Bankers Association said the percentage of loans at least 30 days past due rose to 2.65% in the fourth quarter from 2.44% in the third quarter, and from 2.23% a year earlier.

The rate of delinquencies was the highest since a 2.75% rate in the first quarter of 1992. It provides a fresh sign the nation's economy is slowing, and may be in recession.

"There's no question that the economy is weakening beyond housing, resulting in the loss of household purchasing power," said John Lonski, chief economist at Moody's Investors Service.

"Deterioration of household credit should continue through 2008, though the rate may moderate," he added. "If it intensifies, then the current recession may prove more severe than anticipated."

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ABA Chief Economist James Chessen attributed the jump in the delinquency rate largely to auto loans.

Late payments on "indirect" auto loans, which are made through dealerships, totaled 3.13%, the highest on record. Delinquencies on direct auto loans rose to 1.90%, a 2-1/2-year high.

Credit and debit card delinquencies rose to 4.38% from the third quarter's 4.18%, following four straight quarterly declines.

Housing wasn't spared. Delinquencies on home equity loans rose to a 2-1/2-year high of 2.39%, and on home equity lines of credit rose to 0.96%, matching a level last seen in the fourth quarter of 1997.

The ABA study covers more than 300 banks that extend a majority of outstanding consumer loans. Its study covers direct auto, indirect auto, home equity, home improvement, marine, mobile home, personal and recreational vehicle loans.

Losses tied to mortgages, credit cards and other consumer loans are expected to hurt quarterly results at large lenders such as Citigroup (C), Bank of America (BAC) and Wachovia (WB), and at more specialized lenders such as GMAC, the auto finance and mortgage company.

Financial companies worldwide have written off more than $200 billion related to subprime mortgages and other debt, and analysts expect tens of billions of dollars of additional write-downs for the just-completed quarter.

Labor market woes won't help. Economists surveyed by Reuters expect the government on Friday to report the economy shed 60,000 jobs in March, boosting the unemployment rate to 5% from February's 4.8%.

"Debt repayment abilities of consumers should continue to erode until the labor market firms," Lonski said. "It will be difficult to have a firming of the labor market if household purchasing power continues to suffer from faster growth in food and energy prices, relative to income."

Economy sheds 80,000 jobs in March

WASHINGTON (Reuters) — Employers cut payrolls for a third month in a row in March and the unemployment rate jumped to a 2-1/2 year high, more evidence that a housing downturn and credit crisis may have pushed the economy into a recession.
The Labor Department on Friday reported that March non-farm payrolls fell 80,000, biggest decline in five years.

It also said the March unemployment rate jumped to 5.1% from 4.8%, highest since a matching rate in September 2005. The 5.1% rate is still relatively low by historical standards.

Adding to the bleak picture, the department revised the first two months of the year's job losses to a total of 152,000 from a previous estimate of 85,000.

The March job report was more bleak than expected. Economists had forecast a decline of 60,000 in non-farm payrolls and a rise in the unemployment rate to 5%.

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"There doesn't appear to be any silver lining. It shows that we're right in the middle of a recession that will probably take a while," said Carl Lantz, U.S. interest rate strategist at Credit Suisse in New York.

"Our expectation is that it will be a longer recession than the last two and we're just in the beginning," Lantz added.

During the first quarter of this year job losses averaged 77,000 a month, compared to average monthly gains of 76,000 in the last half of 2007, according to Keith Hall, Bureau of Labor Statistics commissioner.

Job losses were widespread in March. Construction, manufacturing, retailing, financial services and various business services all racked up losses. That overwhelmed gains elsewhere, including in education and health care, leisure and hospitality as well as in government.

With the pace of hiring slowing down, the number of unemployed people increased to 7.8 million in March; workers with jobs saw only modest wage gains at the same time.

Average hourly earnings for jobholders rose to $17.86 in March, a 0.3% increase from the previous month. That matched economists' forecasts. Over the past 12 months, wages grew 3.6%. With lofty energy and food prices, workers may feel like their paychecks are shrinking.

The economy is suffering the effects of a housing collapse, a credit crunch and a financial system in turmoil. That's causing people and businesses to hunker down, crimping spending, capital investment and hiring. Those things in turn further weaken the economy in what has become a vicious cycle.

For the first time, Federal Reserve Chairman Ben Bernanke acknowledged Wednesday that the country could be heading toward a recession, saying federal policymakers are "fighting against the wind" in combating it. Many other economists and the public believe the recession already has arrived.0

Gasoline prices rise to a record $3.30 and head higher

By John Wilen, AP Business Writer
NEW YORK — Retail gasoline prices surged to a record above $3.30 a gallon Friday and appear poised to rise further in coming weeks as gasoline supplies tighten.
Oil prices, meanwhile, supported the gas price rally, jumping more than $2 a barrel after a dismal employment report sent the dollar lower.

At the pump, gas prices rose 1.4 cents overnight to a national average of $3.303 a gallon, according to AAA and the Oil Price Information Service. That's the latest in a series of records, and about 60 cents higher than a year ago.

While oil's surge above $100 a barrel the last month has boosted gasoline prices so far this year, analysts now expect gas prices to continue rising regardless of what direction crude takes. The Energy Department expects prices to peak near $3.50 a gallon later in the spring, but many analysts predict the spike could approach $4.

That's because gasoline supplies are falling, in part because producers are cutting back production due to the high cost of crude — the more expensive crude is, the more refiners have to pay and the lower their profit.

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They're also in the process of switching over from producing winter grades of gasoline to the less polluting but more expensive grade of fuel they're required to sell in the summer.

"That cuts back on some of the supply and helps to pump up the price," says Mike Pina, a spokesman for AAA.

The margin between the price refiners pay for crude and what they get for selling the products they make from it is around $11 to $12 a barrel right now, according to the Oil Price Information Service. However, that margin has slipped into negative territory some days and is well below margins of $37 a barrel refiners earned last spring.

On Thursday, ConocoPhillips said high crude prices were significantly hurting refining margins. Last week, Valero Energy cut output at its Corpus Christi, Texas, refinery due to high supplies and falling demand. Analysts believe many other refiners are adopting similar tactics.

Friday's price spike is a sign those cutbacks may be working, giving everyone in the supply chain, from refiners to retailers, the ability to raise prices to try to boost margins. Many gas retailers say they make more on the sale of coffee and sundries in their convenience stores than from selling gasoline.

Of course, that's not good news for consumers also paying higher food prices and watching their home values slide. Food prices are high due in part to diesel prices, which held steady overnight at a national average $4.023 a gallon, near recent records.

High oil prices are also hurting airlines. Aloha Airlines shut down and ATA Airlines filed for bankruptcy protection in recent weeks, citing high fuel prices as a cause of their failures.

In futures trading, meanwhile, oil futures rose Friday after the Labor Department said employers cut payrolls by 80,000 jobs last month, much more than analysts had expected. The unemployment rate rose to 5.1%. That news sent the dollar lower and pushed light, sweet crude for May delivery up $2.40 to settle at $106.23 a barrel on the New York Mercantile Exchange. Gasoline futures for May delivery rose 3.24 cents to settle at $2.7567 a gallon.

Gasoline futures were also boosted Friday by a fire that shut down part of a Los Angeles refinery.

Much of crude's price moves in recent months have been tied to the dollar. Many investors view crude, gold and other hard commodities as hedges against a falling dollar and rising prices. Also, crude becomes less expensive for overseas investors when the dollar is falling.

'Trillion Dollar Meltdown' paints scary economic picture

By Kerry Hannon, Special for USA TODAY
Charles Morris, author of The Trillion Dollar Meltdown, isn't one for sugarcoating. His analysis is dour and grim, but certainly not dull. And when read against a backdrop of an ever-weaker economy, increasingly anxious economists and a stream of gloomy predictions, it can be downright scary.
Morris, a lawyer and former banker who has written 10 books, argues that the subprime mortgage crisis is only a taste of the mayhem that will play out across an array of financial assets.

He lays out the likely course of write-downs and defaults on a whole gamut of assets — residential mortgages, commercial mortgages, high-yield bonds, leveraged loans, credit cards and the complex bond structures that sit atop them. It comes to about $1 trillion, according to Morris. "The sad truth, however, is that subprime (losses he estimates as high as $500 billion) is just the first big boulder in an avalanche of asset write-downs that will rattle on through much of 2008," he predicts.

He doubts it will be an orderly deleveraging. "There will inevitably be margin calls, panicked selling, clamors from shareholders, and the flight from all risky assets that could double or triple the damage."

The subject is complex. But for the most part, Morris serves up a sharp, thought-provoking historical wrap-up of the U.S. economy and its markets, along with clear scrutiny of today's economic woes.

His account runs from the 1950s to the great inflation of the 1970s and traces the financial boom through three critical developments of the 1980s and 1990s — the birth of "structured finance," the expansion of derivatives markets and the mathematization of trading. All of them flowed together to create the great credit bubble that is now imploding around us, according to Morris.

How did we get to such a place? "The current conservative, free-market cycle that commenced with the Reagan presidency, with all its achievements, seems to have long since foundered in the oily seas of gross excess," he writes.

But a few years ago, it lurked beneath the surface. "The early 2000s were a nervous, quarrelsome time — terrorism, airport check-in lines, a discouraging war, energy disruption, nasty politics. But to be a banker, or a high-rolling investor was very heaven," he writes.

He compares the popping of the Japanese asset bubble of the 1980s to events in the USA today. "In proportional scale and market mechanics, it is quite similar to the crisis we are facing now. But the tight network of Japanese government and finance executives chose instead to deny and to conceal, and almost 20 years later Japan still has not recovered," Morris asserts.

To restore credibility, he declares, "American officials and financial leaders must forthrightly admit the scale of the problem and proceed to purge the absurd valuations, the phony triple-A ratings, the inflated balance sheets, and the hidden liabilities that are marbled through financial balance sheets."

The cost of not doing so? "The loss of faith in American markets will be far greater than a one-time trillion-dollar asset write-down."

The sad fact is there isn't much the Federal Reserve can do now, he contends. He lays blame on former Fed chairman Alan Greenspan. He describes the term "Greenspan put" as commonplace on Wall Street in the early 2000s. "A 'put' is an option that allows the owner to sell an asset to some third party at a fixed price, no matter what." In this case, "no matter what goes wrong, the Fed will rescue you by creating enough cheap money to buy you out of your troubles."

It's not a pretty picture. "The 'wall of money' that has kept American markets afloat also created a global dollar tsunami that has left a waterlogged world in its wake," Morris writes.

From his vantage point, those days are kaput. The Fed will have to keep interest rates higher than we would like to avert a currency rout. And with America heading into a recession and a continued collapse in the dollar, that will inevitably trigger price increases in imported goods, much as it is doing in oil, he writes. The credit crunch will have to march its way though the financial markets over the next year or so without "soothing fountains of new dollars coming out of Washington," he contends.

Morris believes that the 1980s change from a "government-centric style of economic management toward a more markets-driven one" was vital in the American economic upturn of the 1980s and 1990s. But the "breadth of the current financial crash suggests that we've reached the point where it is market dogmatism that has become the problem, rather than the solution. And after a quarter-century run, it's time for the pendulum to swing in the other direction."

His fundamental solution: After we've dug out of our financial markets debacle, "The very first priority will be to restore effective oversight over the finance industry." Bankers and high rollers take note.

Survey of managers shows jobs picture isn't exactly rosy

By John Waggoner and Barbara Hansen, USA TODAY
In another sign of a stagnant economy, relatively few companies have plans to hire more workers over the next three months, according to a survey of employers released Wednesday.
Just 29% of managers plan to increase hiring in the second quarter of 2008, according to an online survey for USA TODAY and CareerBuilder.com by Harris Interactive. The proportion of employers with plans for increased hiring is unchanged from the last quarterly survey.

The survey, conducted Feb. 11 to March 13, involved 2,757 hiring managers and human resource professionals. CareerBuilder.com is a job-finding site jointly owned by Tribune, McClatchy, Microsoft and USA TODAY parent Gannett.

The new survey follows two monthly reports from the U.S. Department of Labor showing declines in the number of payroll jobs in the USA. In January and February, payrolls declined by a total of 85,000 jobs, the government said.

The department is scheduled to issue its employment report for March on Friday. According to a Thomson Financial survey, the consensus among economists is that payroll employment declined again in March.

In the new CareerBuilder survey, 7% of those surveyed plan to lay off workers, a solid improvement from the first quarter, when 11% planned layoffs.

Fifty-nine percent of those surveyed said they plan no changes in the size of their workforce, about the same as the last quarterly survey. The job market is weakest in the Midwest, the survey shows. "The Midwest is being hammered by layoffs in the vehicle industry, and Michigan and Ohio are in recession," says Mark Zandi, chief economist for Moody's Economy.com.

Six percent of those surveyed in the Midwest said their companies planned to decrease payroll in the second quarter, the same as the national average. But just 25% of Midwest companies plan to expand, vs. 29% nationally.

Nationally, only 22% of smaller companies plan to increase their number of permanent, full-time employees, vs. 33% for large companies.

Overall, pay raises will be modest in the next three months: 41% of the survey respondents said raises would be in the 1% to 3% range, even though inflation averaged 4% for the 12 months ended in February.

Not all companies are holding back the cash. Jerry Travis, controller at Sierra Cheese in Compton, Calif., says Sierra rewarded its employees with cost of living raises to thank them for staying with the company in hard times. The company had been clobbered by milk prices, which rose from $12 per hundred pounds to $20 last year. "You can't make and sell cheese at that price," Travis says. Milk prices have since fallen to about $16 per 100 pounds.

But the company had put money aside for tough times and had enough to reward its employees. "These people have been with us forever, and we take care of the people who stay here," he says.

Bad economic news expected to pile up

By John Waggoner and Christine Dugas, USA TODAY
Last week's economic news wasn't good, and data released this week aren't going to be much better, economists say.
April will probably be a particularly cruel month for retailers, as the companies reveal just how weak sales are. J.C. Penney (JCP) led the way last week by slashing its first-quarter earnings forecast by a third, to 50 cents a share.

Despite soaring prices, consumers still have to buy food, gas and energy. So retailers that sell things that consumers can do without, like a new blazer or a new purse, are the ones that are likely to lose business, says Patricia Edwards, retail analyst at Wentworth Hauser and Violich.

"The stores that cater to middle-income consumers are going to be the ones that are hardest hit," Edwards says.

Home-improvement retailers such as Lowe's (LOW) are also facing a slump in sales because many families have seen their home values slip, so they're not spending much money to improve their homes unless they have to.

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Even high-end retailers, such as Nordstrom (JWN) and Neiman Marcus, are feeling the pinch. Middle-income consumers had been upgrading their shopping and buying more affordable luxury items. "They frankly had a bad case of affluenza and now the bill is due," Edwards says.

Consumer spending gained 0.1% in February, the smallest since September 2006, the Commerce Department said Friday.

And consumer confidence, as measured by the Reuters/University of Michigan survey, slumped to the lowest in 16 years in March.

Many of this week's reports reflect economic activity in March, and economists are bracing for bad news. "You had rising gas prices, a caving stock market, weak housing, (the collapse of investment bank) Bear Stearns. … March was not a good month," says Mark Zandi, chief economist for Economy.com. Reports out this week:

•The Chicago Purchasing Managers index, out today, will probably remain below 50 — a warning sign of recession.

•March new vehicle sales, out Tuesday, should show a 13.3% decrease, to 1.33 million units, from March 2007, Edmunds.com says.

•Payroll employment, out Friday, should show a loss of 75,000 jobs in March. Excluding striking workers, the number falls to 35,000, Zandi says. He expects the unemployment rate to rise to 5% from 4.8% in February. The closely watched report is a key measure of how the economy is faring.

Despite the widespread gloom, the fact that consumers are tightening spending may be a good sign, some experts say. When there is a downturn, consumers are the last segment to react to it. "We could very well be closer to the bottom of the pit than we think," says Marshal Cohen, chief retail analyst at NPD Group.

Could an economic lesson from Sweden work in the U.S.?

By David J. Lynch, USA TODAY
As U.S. officials hunt for solutions to what many economists are calling the most serious financial crisis since the Depression, they might draw lessons from another painful and costly banking emergency.
In the early 1990s, a massive Swedish real estate bubble burst, littering the Nordic economy with broken finance companies, failing businesses and jobless workers. It was the first systemic banking crisis in an industrialized country since the 1930s and it saw the Swedish economy actually shrink for three straight years — something that hasn't happened in the United States since the rapid demobilization after World War II.

The Swedish and American crises share many traits: Both followed periods of financial deregulation, and both featured newly daring banks relying upon bookkeeping maneuvers to take on unsustainable amounts of debt. Happily, despite economic conditions that were far worse than in the USA today — and unlike a similar episode in Japan — Sweden quickly recovered.

Yet, it did so in a manner that would be highly controversial in the United States. Sweden used taxpayer money — and lots of it — to rebuild its wounded banks. "In Sweden's case, the solution ultimately ended up on the government's balance sheet. … The government ended up recapitalizing the system," says economist David Rosenberg of Merrill Lynch. "There's a lesson here."

Sweden's successful crisis management may offer a road map for U.S. officials. But the Swedish cleanup wasn't cheap. It cost the public an estimated 6% of annual economic output; an equivalent bill for the U.S. today would be nearly $850 billion. And Sweden was able to implement a free-spending government rescue only because of a broad political consensus that is difficult to imagine amid the hyper-partisan atmosphere of a U.S. presidential election year.

"There was a tradition in Sweden of cooperation across party lines. … It was such an obvious crisis, everyone was really frightened," says Peter Englund of the Stockholm School of Economics.

A familiar story

To anyone who's been paying attention to deteriorating financial conditions in the USA, the Swedish episode seems eerily familiar. First, there was the multiyear expansion, with incomes surging and good times appearing all-but-permanent.

Amid the boom, however, seeds of future trouble were sown in Sweden. A comprehensive deregulation of the credit markets in 1985 introduced bankers to new customers, products and markets that neither they nor their government regulators fully understood. "The supervisory authority was not prepared for the new environment that emerged after credit market deregulation. This meant that during the 1980s the banks were able to grant loans on doubtful and sometimes even directly unsound grounds without any supervisory intervention," wrote Urban Backstrom, at the time a senior Finance Ministry official.

Much of the avalanche of new borrowing poured into an overheated property market, where prices for commercial real estate more than doubled in the latter half of the 1980s. The first signs of trouble appeared among the finance companies that were responsible for the bulk of such investment. In September 1990, a company called Nyckeln — known as "The Key" — folded when it was unable to renew its financing.

Many of the finance companies were owned by the handful of major banks that dominated Sweden's economy. Companies like Nyckeln financed their operations with a new type of commercial paper called marknadsbevis (marknads-BAY-vees) which the banks had guaranteed. When Nyckeln defaulted, the market for these securities suddenly collapsed and the losses ricocheted back onto the banks' balance sheets, much as U.S. banks today have been hurt by losses from complex securities they held off their balance sheets.

"There's a striking similarity with what is happening now," says Staffan Viotti, senior adviser to the head of Sweden's central bank.

By late 1991 there were indications that two of Sweden's major banks had exhausted their capital reserves and were barreling toward bankruptcy. Property prices, which once seemed capable only of rising, plunged by 50% in 18 months.

The economy shrank in 1991 for the first time in 10 years, then continued shrinking in 1992 and 1993. Unemployment took a sudden leap from 1.6% in 1990 to as high as 12% in 1993. Government officials debating their response met in "an atmosphere of national emergency of an almost war-like kind," according to Viotti.

Fearing that a collapse of the banking sector would capsize the economy, the Swedish government in September 1992 issued a blanket guarantee of all of the banks' obligations. Depositors, lenders and trading partners would be protected from loss. But to avoid encouraging financially risky behavior in the future, shareholders were made to suffer. In return for public money, the government received equity in the banks while the existing owners saw their stakes reduced.

Swedish lawmakers created an independent agency — the Bank Support Authority — to preside over the rehabilitation of the battered banking sector and gave the agency a blank check. But any bank that sought government help had to submit to a detailed assessment of each of its loans. In practice, that meant a government-organized process of financial triage, separating the healthy parts of the banking industry from those that were rotten.

The "good" parts of the industry were saved with injections of fresh capital from both government and private sources. The "bad" parts were placed with two government-created asset-management companies and sold off. One major bank, Gota Bank, went bankrupt and was merged into the healthy Nordbanken in 1993 (today known as Nordea).

"One of the most important lessons is that authorities must be able to intervene as quickly as possible when a bank faces problems," Stefan Ingves, the architect of the rescue operation and the current head of the Riksbank, Sweden's central bank, later wrote.

Pennies on the dollar

The government's decisive handling of the situation led to an economic recovery almost as sudden as the crisis that preceded it. The economy expanded at an annual rate of nearly 4% in both 1994 and 1995. The emergency bank guarantee was eliminated in 1996 and replaced with a deposit insurance system akin to the Federal Deposit Insurance Corp. in the USA.

Sweden's sure-handed resolution of the crisis won applause from economists, including then-chairman of the Federal Reserve Alan Greenspan, who said in 1999 that the episode showed that "speedy resolution is good." The IMF drew on the Swedish case in preparing a list of "best practices" for Asian countries trying to survive their own crises in the late 1990s.

Today, Treasury Department spokeswoman Brookly McLaughlin says officials are aware of the Swedish experience but do not consider it "an example for us."

There are differences between the Swedish and U.S. situations, which some say argue for caution. Sweden, after all, is a small country. Its annual economic output is equal to about 10 days' worth of activity in the USA. Sweden's troubles also were exacerbated by provisions of its tax system and an ill-advised defense of a fixed exchange rate. That led authorities, amid a general European currency crisis in late 1992, to briefly increase overnight interest rates to a commerce-killing 500%.

Today's U.S. financial woes also are unprecedented in their complexity. The current crisis isn't limited to the commercial banks and traditional lending practices. Instead, investment banks and a host of securities that didn't even exist in the early 1990s — such as credit default swaps, collateralized debt obligations and structured investment vehicles — play starring roles today.

"It was much easier in those days as an outsider to assess the financial situation of a specific bank," says Goran Lind, a senior Riksbank official. "Today, things are a lot more opaque."

Still, some see indications that the U.S. already is applying lessons learned from Sweden. Anders Aslund, a Swedish economist at the Peterson Institute for International Economics in Washington, D.C., points to the swift sale of the troubled Bear Stearns investment bank to JPMorgan Chase as a key example. The deal, midwived by the Federal Reserve, avoided the danger that a collapse of Bear Stearns would topple additional financial institutions. And it left shareholders with pennies on each dollar of their investment.

Paying the price

"Bear Stearns looks, to my mind, exactly out of the book how Sweden handled the banking crisis," he says.

Edward Kane, a Boston College finance professor, says the Fed's decision to facilitate the sale by backing $29 billion worth of Bear Stearns' assets is the first sign of what amounts to a government takeover of the financial system. "They've implicitly provided guarantees to any number of these firms. There is a nationalization (occurring). It is implicit and unacknowledged," says Kane, who has consulted for the Fed, the International Monetary Fund and foreign central banks.

Such a guarantee makes the government a part-owner of the country's major financial institutions. In Sweden, for example, at the height of the crisis, the government held 22% of the banking system. When the crisis eased and banks returned to profitability, the Swedish taxpayer shared in the gains.

Kane says the U.S. government should embrace the Swedish remedy and issue a formal guarantee of the country's financial institutions, so that taxpayers can benefit from any rebound. "To get the upside, we have to make it explicit. … The public is owed a better description of what's going on than they're getting," he says.

Swedish officials, such as Lind, say the government ultimately recovered all of the money it spent to recapitalize the banks through sales of the non-performing assets. The World Bank's definitive "Banking Crisis Database," however, puts the net cost at a still high 4% of gross domestic product.

Even as the economy regained momentum, Sweden continued to pay for its earlier profligacy. Unemployment remained above pre-crisis levels throughout the 1990s and the Swedish government, which had run a surplus in the 1980s, suffered budget deficits for seven consecutive years. Swedes' relative living standards also took a hit.

Sweden ranked third in per-capita income among the 30-nation Organization for Economic Co-operation and Development in 1970 behind only the USA and Switzerland. By 1991, it had fallen to 14th, where it ranks today.

Harvard University professor Kenneth Rogoff, co-author of a recent study of modern financial crises, says the cost of fixing the troubled U.S. financial system will be at least as much as Sweden spent. And maybe more.

Factory orders tumble for second month

WASHINGTON — Orders to U.S. factories fell for a second month, a worse-than-expected performance that reinforced worries that the risk of recession is rising.
The Commerce Department reported Wednesday that factory orders dropped 1.3% in February, about double the downturn that economists had been expecting. Orders had fallen an even bigger 2.3% in January, the largest decline in five months.

The falloff in demand was widespread, with steep declines in orders for motor vehicles, various types of heavy machinery and demand for iron and steel.


BERNANKE: No growth possible for first half 2008

Many economists believe a prolonged housing slowdown and credit crunch have already pushed the country into a recession. Federal Reserve Chairman Ben Bernanke, testifying before the Joint Economic Committee on Wednesday, said that the economy could shrink over the first half of this year, his most pessimistic assessment to date.

"It now appears likely that gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly," Bernanke told lawmakers. Under one rule, six straight months of declining GDP would constitute a recession.

Bernanke said he still expects economic growth to strengthen in the second half of the year but he said, "In light of the recent turbulence in financial markets, the uncertainty attending this forecast is quite high and the risks remain to the downside."

The report on factory orders showed demand falling 1.1% for durable goods, items expected to last at least three years, while orders for non-durable goods, products such as oil and chemicals, fell 1.5%.

The weakness in manufacturing occurred even though orders for commercial airplanes rose by 5.1% in February, rebounding from a big decline in January. Orders for motor vehicles fell 2% in February after no gain in January. Automakers are struggling with weak demand in the face of soaring gasoline prices.

Overall, orders for transportation products posted a 1.8% rise in February as the strength in commercial and defense aircraft orders as well as higher demand for ships and boats offset the drop in motor vehicles.

Orders for heavy machinery plunged 12.3% in February, the biggest decline since January 2004, while orders for iron and steel fell 2.3%.

Mortgage demand drops after rocketing; key rate at 5.75%

By Julie Haviv, Reuters
NEW YORK — Mortgage applications plunged last week, largely reflecting a drop in demand for home refinancing loans, although 30-year fixed-rate mortgage rates remained below 6%, an industry group said Wednesday.
The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended March 28 fell 28.7% to 688.3.

The index, however, gained 48.1% the previous week.

Overall mortgage applications last week were 6.0% above their year-ago level. The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was up 0.1% to 744.5.

The U.S. housing market is currently suffering one of the worst downturns in its history.

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Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.75%, up 0.01 percentage point from the previous week.

Interest rates were below year-ago levels of 6.13%.

Fixed 15-year mortgage rates averaged 5.27%, up from 5.23% the previous week. Rates on one-year adjustable-rate mortgages decreased to 7.00% from 7.02%.

The MBA's seasonally adjusted purchase index, widely considered a timely gauge of new-home sales, dropped 11.8% to 356.0. The index came in below its year-earlier level of 402.9, a drop of 11.6%.

The group's seasonally adjusted index of refinancing applications plummeted 38.1% to 2,636.0. The index surged 82.2% the previous week.

The index was up 25.6% from its year-ago level of 2,098.3.

Consumers seeking to refinance their existing home loans tend to be highly sensitive to shifts in interest rates.

The refinance share of applications decreased to 53.4% from 62.0% the previous week. The ARM share of activity increased to 5.4%, up from 3.8% the previous week.

While the battered U.S. housing market has not bottomed out yet, data last week suggested it may be nudging closer to recovery, particularly a better-than-expected existing home sales report for February from the National Association of Realtors.

An unwieldy supply of homes for sale remains one of the biggest obstacles facing the hard-hit sector.

Fed chief Bernanke defends Bear Stearns deal

By Sue Kirchhoff, USA TODAY
WASHINGTON — Federal Reserve Chairman Ben Bernanke said Wednesday that the economy could fall into recession, as housing and financial markets remain distressed despite dramatic Fed interest rate cuts and emergency lending.
"It now appears likely that (the economy) will not grow much, if at all, over the first half of 2008 and could even contract slightly," Bernanke told the Joint Economic Committee. He expects activity to pick up into 2009 but warned that major risks remain. "We are fighting against the wind," Bernanke said.

Bernanke staunchly defended the Fed's decision last month to broker JPMorgan Chase's (JPM) takeover of investment bank Bear Stearns, (BSC) including approval of a loan backed by $30 billion of Bear Stearns assets.


MORTGAGE DEMAND DROPS: Interest rates remain below 6%.
PREPARED TESTIMONY: Text of Bernanke's remarks.

Given "exceptional pressures" on the global economy and financial system, the damage caused by a potential Bear Stearns default could have been "severe and extremely difficult to contain," Bernanke said. He stressed that the move wasn't a bailout but an effort to preserve the integrity of the overall financial system.

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The Fed, which doesn't directly regulate Bear Stearns, had just 24 hours' notice that the nation's No. 5 investment bank could file for bankruptcy. A Bear Stearns default could have sparked a "chaotic unwinding" affecting the overall economy, Bernanke said.

"Perhaps in a more robust environment we would have made a different choice," Bernanke said. "The financing … has never happened before, and I hope it never happens again."

Even though the economy is slowing, inflation — boosted by high energy and food prices — remains a concern and constraint for the central bank. The Fed has sliced a key interest rate to 2.25% from 5.25% since September. Bernanke did not spell out the direction of policy, though his downbeat tone suggests the Fed is likely not done cutting rates.

Brian Bethune of economic consulting firm Global Insight expects the Fed to cut its target for short-term rates into midsummer.

The economy grew at an anemic 0.6% annual pace in the final quarter of 2007. Employers are shedding jobs, consumer confidence and spending have been shaken, and lenders have pulled back.

Bernanke said the extraordinary Fed moves — including invoking Depression-era authority to lend to investment banks — had helped but that financial markets are still under "considerable stress."

He said Congress should act to help stabilize the housing market. He rejected the notion that the Fed had helped Wall Street but ignored Main Street, saying interest rate cuts had at least offset some of the headwinds from financial markets. Bernanke said a company hired by the Fed to oversee Bear Stearns assets has said the Fed should be able to get its money back.

Senate agrees on compromise to help homeowners

WASHINGTON — Senate leaders on Wednesday night announced a multibillion-dollar bipartisan compromise measure to aid families facing foreclosure amid the sharp housing downturn.
The proposal, which could be debated as early as Thursday, contains funding to provide foreclosure counseling to beleaguered households, help local governments buy and refurbish foreclosed properties and increase the limit on loans backed by the Federal Housing Administration.

But negotiators for both parties could not reach agreement on a provision that would give foreclosed homeowners more lenient treatment in bankruptcy proceedings.

Lawmakers were also forced to shelve a more ambitious FHA mortgage rescue plan but promised to continue working on the issue.

"This is not a complete package. Obviously, there is a lot more work that needs to be done," said Banking Committee Chairman Chris Dodd, D-Conn.

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"This will be the first reaction. It will not be the last," said Alabama Sen. Richard Shelby, the Banking Committee's top-ranking Republican.

The compromise includes:

•Foreclosure aid. A $4 billion package to aid communities hard hit by foreclosures and mortgage delinquencies. Local governments could use the funds to buy and rehabilitate foreclosed homes at a discount.

•Government-backed mortgages. Increased loan limits for FHA-guaranteed mortgages.

•Financial counseling. About $100 million in new funding for housing counseling to help up to 250,000 families.

•Tax credit. A $7,000 tax credit, over two years, for buyers of foreclosed homes or properties on which foreclosure action has been filed.

•Business tax relief. Authority for home builders and other firms that are losing money to reclaim taxes paid up to four years ago vs. two years now.

The package was negotiated against a backdrop of increasingly bleak housing market news.

During February, new foreclosure filings — including default notices, bank repossessions and auction sale notices — were reported on 223,651 properties nationwide, according to RealtyTrac, an online marketplace for foreclosure properties. That's up 60% from a year earlier.

Many business groups applauded the compromise. The Mortgage Bankers Association said the plan would "keep at-risk borrowers in their homes."

But a coalition of consumer, housing and civil rights groups criticized the failure to reach agreement on bankruptcy changes they say would help 600,000 families avoid foreclosure.

The omission represents "a win for the financial services industry that brought us this mess," the coalition said.

Clinton's goals for economy? Big change

WILKES-BARRE, Pa. — Sen. Hillary Rodham Clinton plans, if elected president, to aggressively use federal tax and regulatory policy to promote key sectors of the U.S. economy. She also vows to take a more skeptical view of foreign investment in companies involved in defense work.
In an interview with USA TODAY, she proposed stripping tax benefits from sectors such as the oil industry and using government policies to boost industries such as automakers, wind turbine producers and steel companies. And she rejected criticism that her plans amounted to a form of industrial policy that would represent a dramatic departure from traditional U.S. practice.

"We subsidize the oil companies. We think it's important that we give them our tax dollars so they can go out and explore and extract and produce oil. That's a clear decision right along the lines of an industrial policy," she said. "We subsidize all kinds of industries. We don't call it that. But we've made a decision we're going to subsidize them. I think that what we subsidized in the past is not what we should be subsidizing right now."

As the Democrats prepare for this state's critical April 22 primary, Clinton's remarks illustrate the sweeping nature of the changes Corporate America would face in its dealings with the federal government if she were elected the nation's first female president.

She offered few details of how business incentives would be reshaped other than to vow to preserve auto manufacturing and steelmaking capacity and promote alternative energy industries. But she insisted that government subsidies are needed to counteract the market's tendency to "punish" investments that don't deliver swift returns. The interview came amid a global credit crunch that has the U.S. economy stumbling like a sailor on shore leave. Signs of financial weakness are evident at home — where house prices, consumer confidence and jobs are all sliding — and abroad, where the value of the U.S. dollar is down more than 17% against the euro since early 2006.

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In her comments, Clinton made it clear that she regards the free-market doctrine that has held sway in Washington for a generation to be both inequitable and ill-suited to the sharp-elbowed global competition the U.S. now faces. Leaving economic outcomes to the market has resulted in stagnant incomes for the typical family and special treatment for the well-connected, she says.

"People say all the time, 'We can't pick winners and losers.' Well, then fine. Take every single dollar of subsidy out of the federal tax code. Get rid of all of it. … Let's have a real level playing field where nobody gets a penny in subsidy," she said. "Then see what happens. You'd hear the squeals of protest from Wall Street to Houston to Silicon Valley."

Clinton was interviewed in a small gym office at King's College, a Catholic institution founded in 1946, after holding a "town hall" meeting with voters. The conversation, which came as she prepared to wrap up a six-day campaign swing focused on the economy, continued by phone as she was driven to the airport.

She was sharply critical of the Bush administration, but made no mention of her opponent, Sen. Barack Obama, D-Ill.

Her most impassioned remarks in the interview came as she blistered the oil companies and the "moneyed class" she said has reaped the economy's rewards. Indeed, the share of national income going to the top 1% of wage-earners has doubled over the past 25 years, according to Robert Lawrence, a professor of trade and investment at Harvard University.

"Americans have been sold a bill of goods about the way the economy should work through a very concerted ideological effort at propaganda," she said.

Clinton, whose lead in the polls here over Obama is shrinking, said she believes that parts of the U.S. economy already are in a recession. But she said there is still time for policymakers to avert a lengthy and punishing downturn.

Struggling town identifies with message

In Wilkes-Barre, a working-class bastion of Luzerne County, residents already are feeling the pain. The average weekly wage here in March was $679, less than 80% of the state average. The unemployment rate is 6.6%, well above the 4.8% national figure.

So Clinton's full-throated economic populism struck a responsive chord when she appeared before a crowd of college students and local residents. Standing on a low stage, flanked by giant American flags, she was greeted by a sign reading, "We've got your back Hillary." As she began her remarks, one man in the crowd yelled: "I love you, Hillary!"

Prowling the stage, Clinton touted the economic record of her husband, President Bill Clinton, during the 1990s. And she promised to create 3 million jobs by investing in building roads and bridges.

The New York senator, who hails from the Midwest and spent 12 years as first lady of Arkansas, has ties to the Scranton/Wilkes-Barre area through the family of her father, the late Hugh Rodham. In a play for the hometown vote, she waxed nostalgic about "all those happy times in Scranton."

Much of the interview revolved around the challenge of preserving a prosperous middle class amid a ferociously competitive global economy. With U.S. median wages stagnant since 2000, Clinton made it clear that she takes a more skeptical view of the unrestrained market than do its most robust defenders. If she makes it to the White House, she will push for a more active government role in shaping globalization's effect upon the economy, including identifying key industries for protection, she said.

"We have to adjust our view of this. … What is it we really believe the United States should continue to make? I would put certain defense items in that category. I would put certain basic goods in that category, like steel," she said. "If you look at every other country, they make such judgments like that. We are competing against countries that directly and indirectly subsidize what they have concluded to be in their national interest."

One symptom of U.S. economic ills is the sagging dollar. Clinton did not respond directly when asked whether she favored coordinated central bank intervention to halt the greenback's decline. But she said the dollar could be in danger of losing its status as the world's reserve currency and suggested a change in the White House would reverse the tide.

"It is in danger with respect to being a reserve currency," she said. "A lot of the problem is of our own making. I think we could see the dollar start to creep up if we had a different president."

Clinton said the country has been "trapped the last seven years … in an ideological container" that has prevented a needed rethinking of how to regulate a financially globalized world. She criticized President Bush for not acting on the current housing crisis with sufficient urgency and dismissed Treasury Secretary Henry Paulson's proposal for a revamp of financial markets regulation. "What the administration has done up until now is just not adequate," she said.

But she shied from attacking Alan Greenspan, the former Federal Reserve Board chairman, whom some economists say opened the door to the current financial turmoil.

Greenspan publicly praised the adjustable-rate mortgages, many of which were sold to borrowers who proved unable to afford them in the long term, as well as the process of securitization that spread financial weakness through multiple countries and markets. Last month, Clinton called on the president to name an emergency working group on home foreclosures and recommended it include Greenspan.

In the interview, Clinton said that "legitimate questions" have been raised about the former Fed chairman's responsibility for the crisis. But she said he remained a valuable economic figure because of his "calming influence on Wall Street."

At issue: Sending U.S. jobs abroad

During her town hall appearance, Clinton vowed to "take a hard look at every trade agreement" and said she would add tougher labor and environmental standards to any new deal. Enforcing such requirements, she said, would reduce the incentive for companies to shift jobs overseas.

In the interview, Clinton singled out drugmakers that have shifted production overseas in recent years. Higher product safety and quality standards might lead to them bringing jobs back to the USA, she said.

But when pressed, Clinton said she was unable to provide even a rough estimate of the likely impact on employment or the trade deficit of writing such standards into new trade deals. "I don't know," she said.

In Pittsburgh on Wednesday, she unveiled a proposal to eliminate a provision in the corporate tax code that economists say encourages companies to invest abroad. That would bring in an estimated $7 billion in additional revenue, which could be used to encourage investments in the USA, she said.

Clinton also had tough talk for one of the USA's top trading partners, China, which she accused of manipulating its currency, violating American copyrights and rigging its domestic market to benefit government-backed firms.

She said she would prevent the offshoring of defense-related production, citing an Indiana company that once produced sophisticated magnets for the Pentagon's precision-guided missiles. In 2003, the company, Magnaquench, shuttered its last Indiana factory and shifted operations to China. That anecdote drew a startled "oooh" from the crowd.

In 2000, while campaigning for a Senate seat, Clinton supported normal trade relations with China, despite what she described as lingering doubts about the country's human rights record. In the interview, she acknowledged that she has been "surprised" by the way the commercial relationship between the U.S. and China has evolved.

Housing regulator: Freezing mortgage rates a bad idea

WASHINGTON (Reuters) — With housing markets are showing signs of improvement, the idea of freezing mortgage rates would be a mistake, the director of the Office of Federal Housing Enterprise Oversight said Friday.
"You'd really cause market dislocations," said OFHEO director James Lockhart on CNBC television, when asked about a proposal put forward by Sen. Hillary Clinton, a contender for the Democratic presidential nomination.

"I think we're going to let the market work and interest rates have come down dramatically and people are going to be able to refinance," Lockhart said.


MORTGAGE RATES: 30-year rates average 5.85%

He said lower interest rates should make it somewhat less painful for holders of adjustable-rate mortgages who face "resets" to higher rates in coming months.

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Lockhart said there were "some good signs" that the severe downturn in housing markets might be approaching an end, although he said it will take some months to be sure.

"It's going to take a while but we're starting to see some bottoms," Lockhart said, referring to a prolonged dip in construction starts on new homes. "It may take another six months or so, but hopefully we'll start pulling out of it."

He said that government-sponsored enterprises Fannie Mae and Freddie Mac are taking steps that should help keep mortgage rates lower. Regulators eased capital requirements for the two biggest U.S. mortgage finance sources so they can provide more funds for stressed mortgage markets.

"Fannie and Freddie are doing billions and billions a month refinancing people out of subprime mortgages and I think that is the way to go," Lockhart said.

In response to questions, Lockhart said he supported the idea of consolidating the regulation of Wall Street investment banks and other financial market participants that have come under criticism as credit markets have come near seizing up.

"I think that's a good idea," he said, adding that Fannie Mae and Freddie Mac need a strong regulator as they keep growing.

One reason they need to be strongly regulated is to prevent the possibility that, should they get in trouble, they could cause problems for the whole financial system, he said.

"Systemic risk is a big issue with these two companies. When you have 76% market share in just two companies, obviously they are the system," Lockhart said, calling that "a key reason" for legislative action to tighten regulation.

JC Penney cuts sales, earnings forecast; shares tumble

NEW YORK (Reuters) — Department store operator J.C. Penney (JCP) on Friday slashed its first-quarter earnings forecast, saying sales through the Easter holiday were below expectations and noting that consumer confidence is at a multi-year low.
Penney's shares fell sharply, dragging down shares of other retailers.

Department store operators that cater to middle-income Americans have been hit hard by the slowdown in consumer spending as these shoppers forgo purchases of clothes, jewelry or home furnishings amid fears of a U.S. recession.

But even upscale department store chains like Nordstrom (JWN) and Neiman Marcus are starting to feel the strain of the spending slowdown.

"J.C. Penney operates in a very challenged part of the retail sector," said Craig Johnson, president of retail consulting firm Customer Growth Partners. "The mid-tier mall-based department stores are the center of the retail sector difficulties. ... They are the bull's eye of it."

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The retailer expects first-quarter earnings of approximately 50 cents a share, compared with its previous view of 75 to 80 cents a share.

It also expects a low-double-digit decline in March sales at stores open at least a year, known as same-store sales, and a high-single-digit decline in same-store sales for the first quarter. Its previous view was for same-store sales in March and the first quarter to decline in the low single digits.

"J.C. Penney counts half of American families as its customers, and they are feeling macro-economic pressures from many areas, including higher energy costs, deteriorating employment trends and significant issues in the housing and credit markets," said Myron "Mike" Ullman, chairman and chief executive.

"The sharp decline in sales is reflective of these trends," he said.

In February, Penney reported a nearly 10% decline in quarterly profit and said there was no clear indication the consumer environment would improve in 2008.

It also posted a 6.7% drop in February sales at stores open at least a year while analysts, on average, were expecting a decline of just 1.9%.

Those disappointing February sales figures prompted JPMorgan analyst Charles Grom to downgrade his rating on the retailer's shares to "neutral" from "overweight," and he said at the time that the company's outlook for its March sales was "too aggressive."