But an early rally in U.S. stocks faded about midday in New York after Treasuries rose as investors swooped in to take advantage of sharp losses on Friday.

Oil rose to a 10-month high near $75 a barrel and other commodities also surged as optimism that major economies were pulling out of recession drove hopes of rebounding demand. .

Global stocks as measured by MSCI’s all-country world index <.MIWD00000PUS> rose 1.2 percent and was on track for a fifth straight session of gains.

The yen fell while the U.S. dollar slid against commodity currencies, such as the Australian and New Zealand dollars, as investors became more comfortable with riskier trades given the upbeat assessment of the world economy.

“Economic data is in favor of a stronger recovery than expected. We can be quite bullish on risky assets,” said Romain Boscher, head of equity management at Groupama Asset Management.

Euro zone industrial new orders in June rebounded 3.1 percent month-on-month, or more than expected, the European Union statistics office Eurostat said.

In the United States, economic activity improved again in July from extremely weak levels earlier this year, suggesting the recession is waning, a report from the Federal Reserve Bank of Chicago showed.

In addition, China’s latest data for July indicated that while growth was moderating after a strong second quarter, the recovery remained on track to achieve the government’s goal of 8 percent growth for the full year.

“The Chinese news was good and we had some positive news out of Europe as well,” said Rob Montefusco, a trader at Sucden Financial in London. “Technicals are pointing upwards.”

But U.S. stocks pared earlier gains. About 1 p.m. (1300 GMT), the Dow Jones industrial average <.DJI> was up 15.34 points, or 0.16 percent, at 9,521.30. The Standard & Poor’s 500 Index <.SPX> was up 1.11 points, or 0.11 percent, at 1,027.24. The Nasdaq Composite Index <.IXIC> was down 1.49 points, or 0.07 percent, at 2,019.41.

European shares hit their highest closing level in nearly 10 months, boosted by banks and miners.

The FTSEurofirst 300 <.FTEU3> index of top European shares ended 0.9 percent up at 975.19 points, the highest closing level since early November.

Banks were among top gainers, with DJ STOXX banking index <.SX7P> rising 1.8 percent.

Japan’s Nikkei average <.N225> jumped 3.4 percent, booosted by hopes for a global recovery and lifted by camera maker Canon Inc <7751.T> and other exporters.

Investors increased their risk-taking in the wake of stronger-than-expected U.S. existing home sales data and upbeat comments from Federal Reserve Chairman Ben Bernanke.

Copper prices rose to their highest in more than a week, helped by strong investment demand and bets the economic crisis is petering out.

Jesper Dannesbee, a senior commodities strategist at Societe General, said real demand has not improved that much it but will improve gradually through the year.

“This is follow through from Friday. There is a general appetite for risky assets driven by cheap money and lax monetary policy,” Dannesbee said.

Gold edged below $950 an ounce, under pressure from a firmer dollar, but remained rangebound as support from higher oil prices and investor demand prevented it falling further.

Spot gold was at $949.80 per ounce

U.S. Treasury debt prices rose, with the 30-year bond gaining more than a full point, as investors did some bargain hunting after Friday’s sharp losses and after the Federal Reserve bought government debt.

The benchmark 10-year U.S. Treasury note was up 19/32 in price to yield about 3.49 percent.

Benchmark euro zone government bonds ended flat as data bolstered the recovery view, but caution on its sustainability eased the selling pressure.

“The stock market has been the barometer for growth and potential inflation,” said Troy Buckner, managing principal of NuWave Investment Management in Morristown, New Jersey. “And yes. it’s been an extreme correlation between equity market movements and commodities, especially copper, aluminum and crude oil.”

But Buckner said that prices have climbed “too far too fast,” leading his firm to short crude and heating oil, while reducing long positions in copper and aluminum.

Euro zone government bonds ended flat as economic data bolstered the view the global economic recovery is under way but caution about the recovery eased selling pressure. Investors worried whether new U.S. debt issuance this week would be welcomed by buyers.

U.S. crude rose 51 cents to $74.40 a barrel.

Aug 24 (Reuters)

Oil hovered around $61 a barrel as worry about the strength of global fuel demand was offset by news of strong economic growth in China.

The U.S. dollar initially fell to a six-week low against major currencies after JPMorgan’s reported record investment banking and trading results, providing further evidence of recovery in the financial system, but weak U.S. manufacturing data and concern about the impact of the possible failure of U.S. lender CIT re-introduced a bid for safer-assets.

CIT’s talks about aid with the U.S. Treasury ended Wednesday night, leaving the lender to its own devices, and endangering the future of some of the one million customers of the lender to small businesses. U.S. Treasury debt prices rallied after three days of falls partly on a resulting flight-to-safety bid

A fall in a reading of the Federal Reserve Bank of Philadelphia’s index of business conditions in the U.S. Mid-Atlantic region to minus 7.5 in July from minus 2.2 the month before also helped push up bond prices.

The benchmark 10-year U.S. Treasury note was up 20/32 in price to yield 3.53 percent. The 2-year U.S. Treasury note was up 4/32 in price to yield 0.96 percent.

“We are in a difficult position at the moment because we are caught on the cusp between is this a sense of sustainable recovery or a possibility of a relapse?” said Richard McGuire, fixed income strategist at RBC Capital Markets in London.

“There’s no real convincing evidence yet on either side,” he said.

European shares hit a one-month closing high on improved sentiment following JPMorgan’s results and data that showed the number of U.S. workers claiming new jobless benefits fell last week.

But U.S. stocks faltered after a run-up this week that pushed the benchmark Standard & Poor’s 500 Index up 6.1 percent, the best three-day rally following a surge after U.S. equities hit a decade low in March.

Shortly after 1 p.m. (1700 GMT), the Dow Jones industrial average was up 3.18 points, or 0.04 percent, at 8,619.39. The Standard & Poor’s 500 Index was down 1.30 points, or 0.14 percent, at 931.38. The Nasdaq Composite Index was up 3.41 points, or 0.18 percent, at 1,866.31.

The FTSEurofirst 300 index of top European shares ended 0.4 percent higher at 866.81 points, fourth straight advancing session.

The number of U.S. workers filing new claims for jobless benefits fell last week to their lowest since January, but the seasonally adjusted government data was again distorted by earlier layoffs in the automotive industry.

“There’s a lot of conflicting data here, and I think that the market is reflecting that,” said Kim Caughey, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.

Asian shares across the region outside of Japan rose 1.3 percent to their highest since mid-June, while Japan’s benchmark Nikkei underperformed with a rise of 0.8 percent.

China reported economic growth quickened to 7.9 pct in the second quarter, beating forecasts.

The U.S. dollar was down against a basket of major currencies, with the U.S. Dollar Index off 0.02 percent at 79.299.

The euro was up 0.14 percent at $1.4124, while against the yen, the dollar was down 0.74 percent at 93.56.

Crude oil prices fell as investors tried to decide how high oil prices can rise given a still fragile global economy, said Mike Fitzpatrick, vice president at MF Global in New York.

U.S. light sweet crude oil fell 49 cents to $61.05 a barrel.

“$60 is the fulcrum balancing the price lever that tips whenever one contention or another is bolstered by news or economic data,” Fitzpatrick said.

Gold slipped as the dollar pared losses against the euro, with lacklustre demand for physical stocks of the metal also pressuring prices. Spot gold prices fell $1.20 to $937.25 an ounce.

NEW YORK, July 16 (Reuters)

Appearing on CBS network’s 60 Minutes, Bernanke told correspondent Scott Pelley that concerted efforts by the government likely averted a depression similar to the 1930s. He also stated the nation’s largest banks are solvent and that he doesn’t expect any of them to fail; and that the U.S. recession will come to an end “probably this year.”

Is this finally the light at the end of the tunnel for the U.S. economy?

We don’t want to appear as perpetual gloom-and-doomers, but fact is, when Bernanke tries to predict the future, he’s usually wrong.

Prediction: The subprime mess is grave but largely contained, Bernanke reassured the Federal Reserve Bank of Chicago in a speech on March 15, 2007.

While rising delinquencies and foreclosures will continue to weigh heavily on the housing market, it will not cripple the U.S. economy, he said. “Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited.”

Reality: The median price of a home sold in the U.S. fell to $170,300 in January 2009, down 26% from a year and a half earlier, according to the National Association of Realtors. This housing crash has spread pain more widely than any before it. Home prices fell about 30% during the Great Depression, according to calculations by Yale University economist Robert Shiller. But back then, the nation was less concentrated in urban centers, and much fewer Americans owned homes.

Other housing downturns in recent decades have been regional; this one is national. Prices in the fourth quarter of 2008 fell in nearly 90% of the top 150 metro areas, according to the Realtors group. And 5.4 million homeowners, about 12%, were in foreclosure or behind on mortgage payments at the end of last year. The Federal Reserve now estimates home prices could fall 18%-29% more by the end of 2010.

Prediction: “I expect there will be some failures” of smaller banks, said Bernanke in February 2008. “Among the largest banks, the capital ratios remain good and I don’t anticipate any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our banking system.

Reality: IndyMac Bank failed in July 2008, with $32 billion in assets. Washington Mutual failed in September 2008, the largest bank failure in history with $307 billion in assets. Wachovia was sold to Wells Fargo in October 2008, amid concerns about its financial health, and Citigroup still scrambles to raise cash from both the government and private sources.

Fortunately for Bernanke, and unlike us at Casey Research, he doesn’t make a living by being right about the future. If he did, we strongly suspect that by this time, he would find himself without subscribers.
Thus, it is a mystery to us why the mainstream media still seem to eagerly soak up his every word, much like a devout Catholic would absorb a papal ex cathedra proclamation. But until the last American has woken up to Bernanke’s fallibility, that likely won’t change.

In the meantime, we recommend using the Fed chair’s economic outlooks as a contrarian indicator – if he says the market looks good, run for cover as fast as you can.
***
Bernanke may be wrong more often than not and still keep his job – we at Casey Research cannot afford that luxury. Our subscribers depend on us researching, correctly analyzing, and predicting market currents and emerging trends… which also includes the movements and changing policy decisions of Big Politics.
Our fresh-off-the-presses, FREE special report Obama’s Newer Deal, Part 2 tells you all about the president’s Stimulus Plan, its impact on and implications for your personal life and finances. Don’t miss it – click here now!

Source: When Bernanke Says All Is Well, It’s Time to Duck and Cover

But almost forgotten in the headlong rush to devise measures to create jobs and save the financial system is the total cost of the government’s commitment to solving the economic crisis.

Bloomberg News reported yesterday (Monday) that the tally of U.S. government spending could reach as much as $9.7 trillion – enough to pay off more than 90% of the nation’s home mortgages.

Already, the U.S. Federal Reserve, Treasury Department and Federal Deposit Insurance Corp. (FDIC) have lent or spent almost $3 trillion over the past two years and pledged another $5.7 trillion if needed. That adds up to almost two-thirds of the value of the entire gross domestic product (GDP) for the U.S. economy last year.

As astonishing as the number itself is a continuing lack of transparency in how and to whom the funds are being distributed.

“We’ve seen money go out the back door of this government unlike any time in the history of our country,” Sen. Byron Dorgan, D-N.D., said on the Senate floor Feb. 3. “Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. How much from the FDIC? How much from TARP? When? Why?”

Notably, only the stimulus package currently on the table – along with the $700 billion Troubled Asset Relief Program (TARP) and last year’s $168 billion tax rebate – have actually been voted on by lawmakers.  An additional $8 trillion is in the form of government lending programs and guarantees.

In fact, Bloomberg filed a federal Freedom of Information Act (FOIA) lawsuit against the Federal Reserve Bank Nov. 7 seeking to force disclosure of borrower banks and their collateral. Arguments in the suit may be heard as soon as this month.

Meanwhile, the spending goes on. 

The Senate is to vote this week on a stimulus package totaling at least $780 billion that President Obama says is needed to avert a deeper recession.  If it passes the Senate, it would have to be reconciled with an $819 billion plan the House approved last month.

Treasury Secretary Geithner delayed announcing his new plan for addressing the banking crisis, details of which were reported yesterday in Money Morning.  The tab for that bailout is widely expected to total near $1 trillion. 

But questions remain as to what effects the stimulus package and bank bailout will actually have on the economy, both near and long term.
The nonpartisan Congressional Budget Office reported last week that the measure is likely to create between 1.3 million and 3.9 million jobs by the end of 2010, lowering a projected unemployment rate of 8.7% by as much as 2.1 percentage points.

But the CBO also warned the long-term effect of that much government spending over the next decade could “crowd out” private investment, lowering long-term economic growth forecasts by 0.1% to 0.3% by 2019.

And simple mathematics calls into question assertions that another bailout will rescue banks teetering on the edge of insolvency.

Bank losses from the write-offs of bad loans and faulty derivatives add up to $1.5 trillion so far. Additionally, regulators are forcing banks to account for $5 trillion to $10 trillion worth of off-balance-sheet structured investment vehicles.

Given that banking rules require banks to keep assets on hand equal to 10% of those funds, banks will need as much as $1 trillion in the next year. Adding $1.5 trillion in losses means banks will need as much as $2.5 trillion in new capital to remain solvent under current rules.

“The banking system simply has no capital. All the money that’s been allocated so far has been like pouring water into a bucket with a hole in the bottom.” Satyajit Das, a credit expert from Johannesburg, South Africa, told MSNBC.

So is the $9.7 trillion pledged by the government going to be enough to pull the U.S. economy out of the fire? Who knows?

But here are a few facts:

• $9.7 trillion would be enough to send a $1,430 check to every man, woman and child alive in the world, Bloomberg reported.
• It’s 13 times what the U.S. has spent so far on wars in Iraq and Afghanistan.
• And it’s almost enough to pay off every home mortgage loan in the United States, calculated at $10.5 trillion by the Federal Reserve.

Although economists have been throwing around words like “trillion” like it’s nothing, $9.7 trillion is still is a lot of money.

Source: The $9.7 Trillion Pledged to Fix the Financial Mess Could Have Paid off 90% of America’s Mortgages, Report Says

The nomination of Geithner to succeed current U.S. Treasury Secretary Henry M. Paulson Jr. was leaked over the weekend, and was reported by Money Morning yesterday.

Geithner (pronounced: GITE-ner) obtained a Master of Arts degree in International Economics and East Asian Studies from Johns Hopkins University’s School of Advanced International Studies in 1985. He also has studied Japanese and Chinese and has lived in present-day Zimbabwe, India, Thailand and China.

As the nation’s top financial authority, Geithner will inherit oversight of the Bush administration’s $700 billion bailout for Wall Street and a U.S. economy struggling with recession.

He will be flanked by former Treasury chief Lawrence Summers, who will head Obama’s National Economic Council. Analysts say this appointment puts Summers in line to succeed Ben S. Bernanke as chairman of the U.S. Federal Reserve in 2010.

New Mexico Gov. Bill Richardson, who ran against Obama in the Democratic primary, will take over the Commerce Department, and Congressional Budget Office Director Peter Orszag will head the Office of Management and Budget.

In other key appointments, economist Christina Romer will be the director of his Council of Economic Advisors, which provides economic analysis and advice to the president, and Melody Barnes will be the director of his Domestic Policy Council (DPC). Before being tapped by Obama, Barnes was executive vice president for policy at the Center for American Progress.

“I’ve sought leaders who could offer both sound judgment and fresh thinking, both a depth of experience and a wealth of bold, new ideas, and most of all who share my fundamental belief that we cannot have a thriving Wall Street without a thriving Main Street,” Obama said at a press conference in Chicago.

Obama’s economic team will be faced with the grand task of restoring confidence to Americas stricken financial sector, and may have to wrestle the U.S. economy out of its worst downturn in decades. President-elect Obama made it clear that the first priority for he and his team will be to pass an economic stimulus package.

“The main thing right now is to get this economic recovery package on the road, to get money in the pockets of the middle class, to get these projects going, to get America working again,” David Axelrod, Obama’s chief campaign strategist, said in an interview with Fox News Sunday. “That’s where we’re going to be focused in January.”

Obama’s 2009 Stimulus

Obama and his aides remain vague on exactly what that package will look like. Over the weekend, however, the incoming president outlined a plan to create or save 2.5 million jobs by 2011.

“It will be a two-year, nationwide effort to jump-start job creation,” Obama said of the plan. “We’ll put people back to work rebuilding our crumbling roads and bridges, modernizing schools that are failing our children, and building wind farms and solar panels.”

Tax cuts will also be a critical fixture in the stimulus. And they’d be preferable to rebates because they would have a more immediate impact on the economy. Of course, the question is who will receive those tax benefits.

Obama has repeatedly sounded calls for middle-class tax relief, but he also hinted that he might refrain from repealing tax cuts initiated by President George W. Bush that favored the wealthy – those who make more than $250,000 a year.

Other measures that Obama has proposed in the past include:

• Suspending penalties and income tax on early withdrawals from IRA and 401(k) accounts.
• Offering a temporary tax credit of $3,000 to companies for each new full-time employee hired in the United States.
• Extending unemployment benefits by a period of 13 weeks and temporarily suspending income taxes on those benefits.
• Requiring a 90-day moratorium on foreclosures for homeowners.

Clinton Stretch, a tax principal at accounting firm Deloitte & Touche LLP, told Bloomberg that two other Obama tax proposals could be good candidates for inclusion in a stimulus package.
The first is Obama’s “Make Work Pay” tax credit, which would provide a partial Social Security payroll tax holiday for most taxpayers, worth up to $500 for individuals and $1,000 for married couples.

The second would be an extension of the Earned Income Tax Credit, which favors low-income workers.

Of course, the pending stimulus package could include any of these measures, or none at all. The only certainty is that the stimulus will be costly. Sen. Charles Schumer, D-NY, said the amount set aside for a new stimulus package could equal or surpass the $700 billion designated for the TARP fund, more than half of which has been used to shore up U.S. banks and insurer American International Group Inc. (AIG).

Martin Baily, who was the White House’s chief economist under President Bill Clinton, told Bloomberg that the stimulus could exceed $1.2 trillion. That would dwarf the $175 billion package Obama proposed just one month ago, and even the $168 billion tax-break stimulus package President Bush issued earlier this year.

“We’re out with the dithering, we’re in with a bang,” Austan Goolsbee, a senior Obama economic adviser, said on CBS’ Meet the Press.

Source: Obama Unveils Economic Team, Plans 2009 Stimulus Package

• The U.S. economy entered recession in April and will last a total of 14 months, according to a survey of economists by the Federal Reserve Bank of Philadelphia. The survey also predicted that non-farm payrolls would contract by 222,400 jobs during the fourth quarter, Reuters reported.

• Target Corp. (TGT) saw its profit drop by 24% in the third quarter, as fewer shoppers showed up at the retailer. Though slightly better than the average forecast, it marked the fifth consecutive drop in quarterly profit, Reuters reported.

• Merrill Lynch lowered its 2009 growth estimate for Brazil from 3.1% to 2.9%. Merrill cited a “massive depreciation” of Brazil’s currency, forcing the central bank to hold interest rates despite falling consumer demand, Bloomberg reported.

• Hong Kong officially entered a recession in the third quarter, with its gross domestic product contracting 0.5%, MarketWatch reported. The good news: that’s actually an increase from the 1.4% decline Hong Kong the economy saw in the second quarter.

• The Securities and Exchange Commission (SEC) yesterday (Monday) charged Mark Cuban, owner of the Dallas Mavericks and potential owner of the Chicago Cubs, with insider trading. The SEC filed a civil lawsuit against Cuban accusing him of selling his 6.3% stake in Mamma.com to avoid more than $750,000 in losses, The Associated Press reported.

• Lowe’s Cos. Inc. (LOW) yesterday (Monday) posted a 24% drop in profit from a year ago. The company earned $488 million, or 33 cents per share during the three months ended Oct. 31 – down from $643 million, or 43 cents per share, in 2007. Revenue actually climbed 1.4% to $11.73 billion.

• Industrial output 1.3% in October, the Federal Reserve said yesterday (Monday).  Output had plunged 3.7% in September – the largest drop since February 1946.

Source: Global Investing Roundups Tuesday, November 18th, 2008

With the nation’s economic landscape laid to waste, it should be no surprise that home foreclosures were soaring, too: Residential real-estate foreclosures doubled between 1926 and 1929 – before the Great Depression actually began. According to a new study by the Federal Reserve Bank of St. Louis, the foreclosure rate jumped from 3.6 per 1,000 mortgages in 1926 to 13.3 in 1933. In that year, in fact, 1,000 home mortgages were being foreclosed each day.

By Jan 1, 1934, as many as half of all residential mortgages were delinquent, putting them at risk of foreclosure.

Clearly something had to be done, elected officials believed. In an attempt to slow that surge, 27 states changed key laws in a way that created a temporary moratorium on foreclosures. Still other state and municipal governments passed permanent measures that made it tough for aggrieved lenders to foreclose on properties whose mortgages were delinquent.

With the benefit of hindsight, it’s not at all clear that the benefits of these moves outweighed the costs – many of which were unintended, says Daniel C. Wheelock, a St. Louis Fed economist and the author of the new research study, “Changing the Rules: State Mortgage Foreclosure Moratoria During the Great Depression.” The study appears in the November/December issue of the St. Louis Fed’s Review magazine, which covers national and international economic developments – especially when there’s a monetary impact.

“Governments cause both immediate and long-term effects when they rewrite the terms of contracts between private parties,” Wheelock wrote. “One immediate effect of mortgage-relief legislation during the Depression was reduced [disclosure rates on farms, which were being hit even harder than the residential real estate sector]. However, over the longer run, foreclosure moratoria and other changes in mortgage laws may have made loans costlier or more difficult to obtain” for future borrowers.

Indeed, the study shows that future borrowers had to face a marketplace where loan capital was in short supply and interest rates were sky high. Lenders made loans tough to get – and then charged a lot for them via high interest rates – because they needed to compensate for the very real possibility that these new laws would restrict their ability to foreclose on delinquent loans.

Fast-forward 74 years, to 2008. Nearly 1% of U.S. home mortgages entered foreclosure during the first quarter; by the time that three-month stretch came to an end, nearly 2.5% of all U.S. mortgages were in foreclosure.

And the news keeps getting worse. In the July-September quarter, 18% of all properties with a mortgage were “underwater” – that is, worth less on the market than what the owner owed on the loan, data supplier First American CoreLogic Inc. told BusinessWeek. It gets worse. That statistic represents more than 7.5 million properties, and another 2.1 million mortgages were within 5% of shifting “upside down.”

All told, nearly a quarter (23%) of U.S. mortgages were underwater or were in a near-negative-equity position. Nevada (48%) and Michigan (39%) led the nation with the highest percentages of negative equity, followed by Florida (29%), Arizona (29%), California (27%), Georgia (23%), and Ohio (22%).

In late July, U.S. President George W. Bush signed the Housing and Economic Recovery Act of 2008, whose provisions included a $300 billion increase in Federal Housing Administration loan guarantees – which were designed to induce lenders to refinance delinquent home mortgages.

A foreclosure-prevention mentality took hold, with loan modification plans and programs such as Hope for Homeowners becoming increasingly common, HousingWire.com reports. Such states as Massachusetts, as well as some local cities, have sought to put foreclosure moratoriums in place; federal legislators, too, have tried to get in the act.

A tentative Bush Administration plan aimed at keeping as many as 3 million homeowners who are behind on their mortgages from losing their houses will be difficult to administer, and could end up costing the country hundreds of billions of dollars more than the plan’s architects expect, a Money Morning contributing editor and credit-crunch expert says.

R. Shah Gilani, a retired hedge-fund manager and Money Morning contributing editor who is emerging as an expert on the worldwide financial meltdown, noted that the plan was apparently still that – a plan. Even so, he said that “any bailout plan that directly addresses foreclosures is political posturing that will ultimately be overwhelmed by inevitable economic realities.”

The plan – which would be part of the $700 billion banking-system rescue package the government approved early this month – would cost $40 billion to $50 billion, with the money being used to cover future losses on loans that are deemed eligible for federal support.

The New York Times carried the first reports of the Bush Administration’s new housing rescue proposal last Thursday. According to the newspaper report, this program would be the most sweeping and direct government initiative aimed at home-loan borrowers since the financial crisis started last year.

Unfortunately – at least with respect to the contentions made by the St. Louis Fed study – this program is a classic foreclosure-moratorium initiative.

As proposed, the federal government would incur half the loss on a home loan if the mortgage company that controls the loan agrees to lower the borrower’s monthly payment for at least five years. On any given loan, the mortgage company would reduce the payment borne by the homeowner by writing off part of the loan balance, reducing the loan’s interest rate or changing other loan terms, sources told The Times.

In this case, the devil truly will be in the details: Trying to take a massive rescue plan – and matching the benefits up with individual homeowners – may be just too much to ask, Money Morning’s Gilani says.

“Who will be eligible, how will that be determined, what will happen when prices continue to fall and mortgage holders eventually walk away” are just some of the tough questions a workable plan would have to answer, Gilani said. Plus, “is the government going to shackle them to their mortgages the same way they’re shackling taxpayers to all these other ill-begotten bailout schemes?

When it comes to the idea that money from the federal government’s Troubled Assets Relief Program (TARP) may be used to manage a bailout of troubled mortgages, all options are still on the table, and the plans under consideration have been stuck in the negotiating room for some time, HousingWire reported.

In a story earlier this week, The Wall Street Journal suggested that “disagreements over how to structure a federal foreclosure-prevention program are complicating and potentially delaying what is likely to be the Bush Administration’s last attempt to forestall sliding home prices.”

According to another HousingWire report, one plan that may be gaining some support is the idea of a federal subsidy for troubled borrowers. On Sunday night, a source near the Pennsylvania office of U.S. Sen. Robert P. Casey, D-Pa., provided the housing news service a copy of a memo that’s said to have sparked some of the ongoing negotiations now taking place.

The memo outlines the mechanics of a mortgage bailout that would cost as much as $441 billion, relying primarily on a three-year subsidy for troubled borrowers that would be repaid in five years, with interest. At that point, the participants would likely be able to sell their homes or refinance the mortgages at amounts that would enable them to repay the loan.

The subsidy plan reportedly represents the thoughts of Assured Guaranty Ltd. (AGO) Chief Executive Officer Dominic J. Frederico, who had been asked by legislators to provide his thoughts a few weeks earlier.

Other proposals are being studied, as well.

No matter what shape or form they take, however, Wheelock, the economist, warns that there will be a price to pay. There’s something to be said for allowing the marketplace to work – and an operational free market includes defaults and foreclosures, with the end result being that only the strongest borrowers remain in the end.

It’s a lesson we should have learned during the Great Depression, Wheelock says.

Wrote the St. Louis Fed economist: “The [foreclosure] moratoria reduced … foreclosure rates in the short run, but they also appear to have reduced the supply of loans and made credit more expensive for subsequent borrowers. The evidence from the Great Depression demonstrates how government actions to reduce foreclosures can impose costs that should be weighed against potential benefits.”

Source: Study of Great Depression  Shows Intervention Postpones Foreclosures, But Causes Mortgage Rates to Spike

“The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures,” the Fed said in a statement. “Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports.

“Moreover,” the statement added, “the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.”

The Fed also lowered its discount rate – the rate at which it lends directly to banks and Wall Street firms – by a half-percentage point to 1.25%.

A wave of failures among banks and financial institutions have stymied lending and roiled global credit markets. The world economy faces a significant uphill battle as a result.

The U.S. economy expanded by 2.8% in the second quarter, but that expansion was largely the product of government stimulus checks and a weak dollar. The federal government returned roughly $168 billion back to American taxpayers in the form of rebate checks earlier this year. The tax rebates, which were mailed through May, kept U.S. consumers afloat, while a weak dollar accelerated a torrent of exports out of the country.

Since then, consumer spending has been undermined by rising unemployment and the dollar has strengthened substantially.  The advance estimate for third quarter gross domestic product (GDP) is to be released today (Thursday), and most analysts anticipate the U.S. economy shrunk during the three months ended Sept. 30.

“The growing reality is that this is not just a slowdown, but a true recession,” Joel Naroff, president and chief economist of Naroff Economic Advisors said in an interview with Money Morning.

“U.S. GDP contracted significantly in the third quarter,” said Naroff, who believes the economy may have contracted by 2.5% to 3.0% in the quarter. “Such a sharp slowdown is not expected.”

Citigroup Inc. (C) analysts Geoffrey Dennis and Jason Press said last week that they now expect an entire year of contraction before the economy gets back on track in the second half of 2009.

“We are now expecting one of the sharpest recessions in the post-war period,” Dennis and Press wrote in a report to clients on Oct. 21.

The Fed statement said the rate cut “should help over time to improve credit conditions and promote a return to moderate economic growth,” but noted “downside risks to growth remain.”

This is the ninth time that the central bank has lowered rates since September 2007. The Fed has also loaned hundreds of billions of dollars to banks through a new lending program and earlier this week began loaning money directly to major businesses by purchasing commercial paper.

The Fed yesterday lowered the interest rates it will charge to buy unsecured commercial paper to 1.84%, down from 1.89% on Tuesday. It lowered the interest rate on asset-backed commercial paper to 3.84% yesterday, down from 3.89% the day prior.

The central bank created its program to buy 90-day commercial paper directly from issuers on Oct. 7, meaning it’s now three weeks old.

The Fed’s new loan programs have expanded assets on its balance sheet by 104% during the past year to $1.804 trillion, or 12.6% of GDP, Bloomberg reported.
Rate Reductions Around the World

While the Federal Reserve struggles to keep the U.S. economy from sinking into a second Great Depression, central banks in Europe and Asia are also on the defensive and could soon join the Fed in slashing rates – if they haven’t already.

The British Office for National Statistics last week said that, after a flat second quarter, the U.K. economy contracted 0.5% in the three months ended Sept. 30. It’s likely that Germany, France and Italy have already entered into a recession, as their second-quarter GDP fell 0.5%, 0.3% and 0.3%, respectively.

The International Monetary Fund (IMF) said last week that the economy of the 15-country Eurozone would grind to a virtual standstill in 2009.

The European Central Bank (ECB), which raised rates as recently as July, backtracked and cut its benchmark rate by half a point on Oct. 8, dropping it down to 3.75%. ECB President Jean-Claude Trichet said Monday that the central bank’s Governing Council could take additional steps at its next meeting, currently scheduled for Nov. 6.

“I consider it possible that the Governing Council would decrease interest rates once again at its next meeting,” ECB President Jean-Claude Trichet said yesterday. “Taking into account the recent substantial decline in commodity prices together with a substantial weakening in demand which has emerged lately, upside risks to price stability have diminished.”

Nick Parsons, head of markets strategy at nabCapital (OTC: NABZY) in London, told The Guardian that the Bank of England (BOE) could also follow the Fed’s move with a one-point cut of its own. That would leave the BOE’s rate at 4.5%

China, on the other hand, wasted no time in following the lead of the U.S. Fed. The People’s Bank of China cut its interest rates yesterday, reducing its key one-year lending rate from 6.93% down to 6.66%.  The rate cut was the central bank’s third reduction in two months.

China’s economy registered a solid GDP expansion of 9% in the third quarter – a noticeable step down from the 11.9% pace set in 2007.  Beijing is clearly worried about the effects a global recession would have on its economy and wants to ensure growth does not slow any further.

Of course, lowering rates will also help keep the Chinese currency, the yuan, from appreciating against the dollar and the euro as central banks in the West pull out all the stops in dealing with the credit crisis.

“This cut was driven by the slowdown in the third quarter and the likelihood that the U.S. and other central banks will cut rates,” Xing Ziqiang, an economist at China International Capital Corp. in Beijing, told Bloomberg.

GDP growth in China has slowed for the past five quarters but so long as the nation keeps inflation in check it should be able to maintain a “reasonable” economic expansion of at least 8% next year, said Liu Erh-fei, managing director and chairman for China at Merrill Lynch & Co. Inc. (MER).

Whether Chinese banks were “wise, lucky, or better regulated,” they avoided exposure to the risky subprime mortgages and derivative products that caused the current financial firestorm,” said Liu. “There is no systemic risk in China’s banks that could spill over into a full blown financial crisis.”

China has more than enough economic weapons at its disposal to ensure strong growth going forward, including a world-leading $1.9 trillion in foreign currency reserves. China also has a budget surplus of 2% of GDP, according to Stephen Green, of Standard Chartered PLC. And public sector debt is just 16% of GDP.

Earlier this year, Beijing shifted the focus of its policy to growth rather than inflation – a choice analysts say is now paying dividends.

Inflation in China, and worldwide, is beginning to ease alongside commodities prices. Inflation in China receded to 4.9% in the year to August, from 8.7% in February. And Goldman Sachs Group Inc. (GS) forecasts that it will fall as low as 1.5% in 2009.

Source: Federal Reserve, Bank of China Cut Interest Rates as Financial Crisis Deepens