Proposed mortgage plan could aid markets

WASHINGTON - A component of the government's tentative economic stimulus package announced Thursday would give an immediate lift to buyers and sellers in higher-priced housing markets.

The package agreed upon by Democratic and Republican members of the House would allow government-sponsored Fannie Mae and Freddie Mac to buy mortgages up to 75 percent more expensive than the current $417,000 limit. The Senate and White House still must sign off on the proposed stimulus plan, which also includes tax rebates for Americans.

Raising the limit on so-called conforming loans will allow a larger pool of borrowers to find lower rates when buying a new home or refinancing an existing mortgage.

"It's good for homebuyers who have prime credit, have some money to put down and can meet tougher underwriting standards that are in place now," said Guy Cecala, publisher of Inside Mortgage Finance, a trade publication. For homeowners with blemished credit who are struggling to pay their mortgage bills, the change offers little benefit, he added.

House Speaker Nancy Pelosi and Republican Leader John Boehner of Ohio announced the deal in a press conference Thursday.

The higher cap, to be effective until the end of December, would breathe life into housing markets in New York, California and other pricey areas because lenders would feel more comfortable knowing Fannie and Freddie can buy and package the loans into securities that investors consider to be relatively safe.

Fannie and Freddie would be allowed to purchase loans up to $730,000, though that limit would differ based on the median home price in a particular metropolitan area.

The same limits would also apply for loans backed by the Federal Housing Administration, which insures loans made to borrowers with poor credit, though the change would be permanent for FHA-backed loans, which had been capped at $367,000.

The Bush administration has long been critical of how Fannie and Freddie operate, and officials have pointed to the companies' multibillion-dollar accounting scandals in recent years to bolster their case that Fannie's and Freddie's massive mortgage holdings are improperly managed and pose risks to the financial system.

But as the mortgage-market crisis that began last spring has deepened, Democrats have stepped up calls for Fannie and Freddie to back larger loans and hold more of them in their portfolios.

Treasury Secretary Henry Paulson, speaking to reporters after the deal was announced, said he did not support raising Fannie and Freddie's loan limits without strengthening government power over the companies.

"I got run down by a bipartisan steamroller," on the issue, Paulson said, adding that he believes lawmakers would still pursue a broad overhaul of government regulation for the two companies.

James B. Lockhart, director of the Office of Federal Housing Enterprise Oversight — which oversees the two companies — said in a statement that raising the limits for Fannie and Freddie without providing stronger government oversight "would be a mistake."

Michael Cosgrove, a spokesman for McLean, Va.-based Freddie Mac, said the change "would be in the best interest of the economy and consumers," but noted that extra capital the company is required to hold on its books "creates a significant challenge for Freddie Mac as we continue to operate under severe capital constraints."

Amy Bonitatibus, a spokeswoman for Washington-based Fannie Mae, said, "If policymakers choose to raise the loan limit, we are supportive and committed to doing what we can to help."

Groups representing Realtors, bankers and home builders, which have been hit hard by the mortgage market downturn, have been lobbying for such changes for months.

The National Association of Realtors has been pushing for a permanent expansion of the Fannie and Freddie limits. The trade group calculates that borrowers could save $3,000 to $5,000 per year in reduced interest costs as a result and projects up to 210,000 foreclosures could be prevented since refinancing into lower-rate loans would be easier.

Dale Stinton, the group's chief executive, said in a statement Thursday that increasing the loan limits "is a truly meaningful economic stimulus and should be enacted quickly."

Shares of Fannie Mae fell 59 cents to close at $34.19, while shares of Freddie Mac fell 52 cents to close at $32.

Japanese prices rise at record pace

Consumer prices in Japan rose last month at their fastest pace in nearly a decade, but Bank of Japan Governor Toshihiko Fukui pledged to parliament to maintain a loose monetary policy.

Consumer prices shot up at twice November's pace on the back of higher oil and other commodity prices rather than strong demand. Core consumer prices, excluding food, rose 0.8 per cent from a year earlier, the Statistics Bureau said.

Fuel costs jumped 3.6 per cent from December 2006. Omitting food and energy costs, consumer prices dropped 0.1 per cent last month, the same rate as November.

The uncertain international environment resulting from the subprime debacle combined with lacklustre Japanese domestic growth makes it difficult for the BoJ to raise interest rates from the current 0.5 per cent level. Despite the rise in inflation, markets are pricing in a higher chance that Japan will cut rates than raise them.

"In Japan, the underlying economy is slowing while a rise in the consumer price index is accelerating. But looking ahead, the economy will likely expand moderately under stable prices towards next fiscal year," Mr Fukui told a parliamentary committee Friday. "Based on such judgment, we firmly believe that we can continue to realise stable economic growth by providing the current accommodative monetary conditions for a while."

He added that recent stock market declines could also reduce consumption. The BoJ left rates unchanged when it finished meeting Tuesday. The central bank said then that it expected growth in the world's second-largest economy to be slower than its previous 1.8 per cent forecast for the year ending March 31 due in part to the sharp slowdown in housing investment after more stringent earthquake regulations were implemented last year.

Japanese consumers are facing rising daily costs without the benefit of higher wages to offset them, leaving many households reluctant to spend. Surveys show consumer confidence is fading, with the public expecting prices to increase over the next year. Families also face uncertainty over future pension payouts, which may also be eroding a will to spend.

Bush, Congress strike deal on economic plan

WASHINGTON (Reuters) - President George W. Bush and congressional leaders agreed on Thursday on a $150 billion package of tax rebates and business incentives meant to ward off a recession in the world's largest economy.

The deal between the White House and leaders of the House of Representatives provides for tax rebates of up to $600 for individuals and $1,200 for married couples. Families with children would receive an additional $300 per child.

It marked a rare show of election-year cooperation between Bush and the Democratic-led Congress who want to pump money into the softening economy in hopes of countering the blow from a mortgage crisis, credit crunch and a surge in oil prices.

"This agreement was the result of intensive discussions and many phone calls, late-night meetings and the kind of cooperation that some predicted was not possible here in Washington," Bush told reporters.

The hope is that the package will help calm fears of a U.S. recession and encourage consumer and business spending to boost economic growth.

The legislation is intended to work in tandem actions by the Federal Reserve, which cut a key interest rate by three-quarters of a percentage point on Tuesday. Financial markets appear to have been buoyed by the developments.

The Dow Jones industrial average closed up 108 points at 12378.61 as news of the stimulus deal helped lift investor sentiment.

House Speaker Nancy Pelosi, House Republican Leader John Boehner and Treasury Secretary Henry Paulson hammered out the deal after Bush returned from a Middle East trip a week ago.

"It is timely, it is targeted and it is temporary and it was done in record time since our conversation with the president," Pelosi said.

But the California lawmaker suggested that Democrats might propose additional legislation if the stimulus package fails to spur the economy.

"I can't say that I'm totally pleased with the package," she said. "But ... I do know that it will help stimulate the economy, and if it does not then there will be more to come."

ONE PERCENT OF GDP

The proposal could undergo some changes when it reaches the Senate, where its price tag could climb even higher than the current $150 billion, or about 1 percent of U.S. gross domestic product.

John Sweeney, president of the AFL-CIO labor federation said the deal was not enough. "It is up to the Senate to extend unemployment benefits and increase food stamps to get money into the hands of those who will spend it quickest and need it most," he said in a statement.

Senate Majority Leader Harry Reid said he hoped the plan could be sent to Bush's desk to be signed into law by mid-February.

But Reid held open the possibility of additions to the bill. "We're going to take another look at it when it comes here (to the Senate)," the Nevada Democrat said.

The plan also includes provisions aimed at shoring up the battered housing market by increasing the size of mortgages that can be insured by the Federal Housing Administration and temporarily boosting the size of "conforming mortgages" to nearly $730,000 that can be financed by housing giants Fannie Mae and Freddie Mac. This would help lower the interest rates on these high-cost loans.

The rebate plan would phase out for higher income people -- individuals making more than $75,000 in adjusted gross income and married couples making more than $150,000. Paulson said that for every $1,000 over those income levels, the rebates would be reduced by 5 percent.

One issue of contention was whether the rebates would be distributed only to those who paid income taxes or whether low-income people who do not earn enough to owe taxes would also receive cash. Democrats had sought to ensure that the rebates would be given to these workers as well.

Under the package, workers who reported income of at least $3,000 last year and paid no income taxes would be eligible for a check of $300 for individuals and up to $600 for married couples. They would also be eligible for the child rebates.

The package includes incentives for businesses to make new equipment purchases and other investments. Businesses would be able to immediately deduct 50 percent of the costs. Small businesses would be able to immediately write off up to $250,000 in purchases.

Existing single-family home sales drop

WASHINGTON - Sales of existing single-family homes plunged in 2007 by the largest amount in 25 years, closing out an awful year that saw median prices fall for the first time in at least four decades.

The National Association of Realtors reported Thursday that sales of single-family homes fell by 13 percent last year, the biggest decline since a 17.7 percent drop in 1982. The median price of a single-family home fell to $217,800 in 2007, down 1.8 percent from 2006.

It marked the first annual price decline on records that the Realtors have going back to 1968. Lawrence Yun, the Realtor's chief economist, said it was likely the country has not experienced a decline in home prices for an entire year since the Great Depression.

Private economists said the size of the sales plunge and the decline in prices underscored the severity of the housing slump. Last week, the government reported that construction of new homes fell by 24.8 percent in 2007, the second biggest decline on record, exceeded only by a 26 percent plunge in 1980.

"We are closing the book on the worst year for housing possibly since the Depression," said Joel Naroff, chief economist at Naroff Economic Advisors. "I keep thinking a bottom is near, but we haven't gotten there yet."

The year ended on an exceptionally weak note, with total sales of both single-family homes and condominiums dropping by 2.2 percent in December to a seasonally adjusted annual rate of 4.89 million units.

David Wyss, chief economist for Standard & Poor's, said he believed sales of existing homes would continue declining until the middle of this year with prices probably falling for all of 2008.

"When you look at the inventory levels, there are just a lot of unsold homes on the market that we have got to get rid of," Wyss said.

The report showed the inventory of unsold homes did fall 7.4 percent to 3.91 million units in December, but part of that probably reflected disappointed homeowners just taking their houses off the market.

The 13 percent drop in single-family home sales last year followed an 8.1 percent decline in 2006 that occurred after sales had set record highs for five straight years.

That housing boom fueled a speculative frenzy in many parts of the country, luring many investors into the market hoping to buy homes and flip them for quick profits as home prices in those areas soared at double-digit rates. The abrupt end to the boom has been a severe drag on the economy and resulted in record levels of mortgage defaults and the prospect of millions more homeowners losing their homes because they cannot afford sharply higher monthly payments as their introductory mortgage rates reset to sharply higher levels.

The Bush administration brokered a deal with the mortgage industry to freeze the rates on certain subprime mortgages for five years, hoping that will prevent a further cascade of mortgage defaults. The administration and leaders of the House of Representatives also agreed Thursday on an economic stimulus plan in an effort to keep the economy from tumbling into a recession.

Part of the package includes a one-year boost in the limit on so-called jumbo loans that can be purchased by Fannie Mae and Freddie Mac to a maximum of $729,750, up from $417,000 currently. Realtors officials said that increase will help boost sales especially in high cost areas like California, Florida and parts of the Northeast.

The housing market appeared to be starting to stabilize earlier this year but then faltered after the August shock to financial markets, triggered by rising defaults on subprime mortgages, — loans offered to buyers with weak credit histories.

While there is concern that the housing and credit troubles could be enough to push the country into a full-blown recession, the Federal Reserve cut a key interest rate by the largest amount in more than two decades on Tuesday and signaled further rate cuts, possibly as soon as next week. The Fed acted after a worldwide stock sell-off roiled global markets Monday.

The Fed's assurances plus the agreement between the administration and House leaders on a stimulus package spurred a second day of strong gains on Wall Street on Thursday. The Dow Jones industrial averaged finished the day up 108.44 points at 12,378.61. The Dow had risen 299 points Wednesday.

For December, home sales were down in all regions of the country, falling 4.6 percent in the Northeast, 1.7 percent in the Midwest, 1 percent in the South and 2.1 percent in the West.

In other economic news, the Labor Department said Thursday that the number of laid off workers filing claims for unemployment benefits fell for a fourth straight week, dropping by 1,000 to 301,000, the lowest level in four months. Analysts said the claims figure is being distorted currently by seasonal adjustment problems with claims still expected to start rising in coming weeks.

Tentative deal reached on economic package

WASHINGTON (Reuters) - The White House and the Democratic-led Congress on Thursday reached a tentative deal on an economic stimulus package of tax rebates for families and incentives for business investment with a cost that a top Democrat said may exceed $150 billion.

Aimed at warding off a recession in the world's largest economy, the deal provides for tax rebates of up to $600 for individuals and $1,200 for married couples along with tax breaks for business investment.

The package was hammered out in negotiations that marked a rare show of cooperation between President George W. Bush and the Democratic lawmakers.

The plan also includes provisions aimed at shoring up the battered housing market by boosting the limits on the size of mortgages that can be financed by housing giants Fannie Mae and Freddie Mac.

Confirming the deal to reporters, Senate Majority Leader Harry Reid emphasized that the plan, which he hoped could be sent to Bush's desk to be signed by mid-February, could undergo changes.

"We're going to take another look at it when it comes here (to the Senate)," the Nevada Democrat said.

White House spokeswoman Dana Perino said Bush would make a statement later.

Individuals with annual incomes above $75,000 in adjusted gross income (AGI) and married couples making $150,000 in AGI would get less depending how high their incomes are above those thresholds.

The size of the package is equivalent to around 1 percent of U.S. gross domestic product.

Congress and the Bush administration have been negotiating for several days in an attempt to inject money into consumers' pockets to minimize the fallout from an economic slowdown, prompted by the mortgage and credit crises, that some fear could slide into a recession.

Fears of a U.S. recession prompted a worldwide sell-off in financial markets this week. But expectations of a stimulus package and an emergency interest-rate cut of three-quarters of a percentage point by the Federal Reserve on Tuesday appear to have helped soothe financial markets.

Housing picture still dire, but labor market steady

WASHINGTON (Reuters) - Sales of previously owned U.S. homes fell more than expected in December, ending a year that brought the sharpest housing slowdown since 1982 and the first annual drop in prices since the Great Depression.

But as the economy has taken a hit from the housing slump and credit crisis, the labor market over the past few weeks has been holding steady, leaving economists in a quandary over how far the world's richest economy will sink.

"I think the economy is pretty darn weak, but you can't declare that we are in a recession yet," said Robert MacIntosh, chief economist at Eaton Vance Corp in Boston.

U.S. government bond prices fell on the stronger-than-expected job data, while U.S. stocks jumped in late afternoon trading.

But investors were focusing on the details of a stimulus package designed to stave off a recession. The plan, worked out between the Bush administration and lawmakers, would include up to $1,200 in tax rebates for married couples and tax incentives for businesses.

Meanwhile, Labor Department data on Thursday showed that the number of U.S. workers applying for jobless benefits fell unexpectedly last week to the lowest level in four months. That led economists to believe the unemployment picture at the start of this year will be better than it seemed a month ago.

"The data seems to be suggesting a stronger payroll in January after the weak December," said David Sloan, senior economist at 4Cast Ltd in New York.

A mere 18,000 new jobs were created in December, intensifying speculation that U.S. growth would slacken and turn negative.

But even with a fairly steady labor picture, an end to the housing crisis is still not in sight.

Data out from the National Association of Realtors on Thursday showed a 2.2 percent drop in sales of previously owned homes during December to the slowest pace in nearly a decade.

For the year, sales of single-family homes -- the bulk of the homes covered in this data -- were down 13 percent, the biggest downward spiral since 1982.

FIRST ANNUAL DROP IN HOME PRICES

The national median price of a single-family home fell 1.8 percent in 2007. It was the first recorded annual price decline since the Realtor group began tracking home sales data in 1968, but officials there say it is also the first annual decline since the 1930s when the economy was in the throes of the Great Depression, its biggest economic downturn in history.

While a decrease in home prices is likely to help shave some excess from the bloated inventories of unsold homes and eventually bring the housing slump to an end, economists warn that falling home prices could cut into consumer spending.

"The decline in home prices is clearly negative for household net worth and consumer spending. If it's matched with a similar drop in the equity market, it will begin to take a toll," said Richard DeKaser, chief economist at National City Corp in Cleveland.

Still, he called December's 7.4 percent decrease in inventories to 3.91 million units at month's end a good sign. That represents a 9.6-month supply of existing homes at the current sales pace, down from the 10.1-month supply in November.

"It's encouraging to see the pare-down in excess," DeKaser said.

The climate for buying homes has improved with lower prices and historically low rates on 30-year fixed rate mortgages, according to Lawrence Yun, the Realtor group's chief economist.

"Wall Street made a big gamble," Yun said of the subprime mortgage market debacle, adding that for home buyers, conditions are good.

Interest rates on 30-year mortgages have fallen to an average of 5.48 percent, the lowest since 2004, according to the latest survey from Freddie Mac. A year ago, they averaged 6.25 percent.

Tax rebates deal announced

WASHINGTON - Congressional leaders announced a deal with the White House Thursday on an economic stimulus package that would give most tax filers refunds of $600 to $1,200, and more if they have children.

House Speaker Nancy Pelosi said Congress would act on the agreement — hammered out in a week of intense negotiations with Republican Leader John A. Boehner and Treasury Secretary Henry Paulson — "at the earliest date, so that those rebate checks can be in the mail."

President Bush praised the agreement at the White House, saying that it "has the right set of policies and is the right size."

The rebates, which would go to about 116 million families, had appeal for both Democrats and Republicans. Pelosi's staff noted that they would include $28 billion in checks to 35 million working families who wouldn't have been helped by Bush's original proposal. Republicans, for their part, were pleased that the bulk of the rebates — more than 70 percent, according to an analysis by Congress' Joint Tax Committee — would go to individuals who pay taxes.

Individuals who pay income taxes would get up to $600, working couples $1,200 and those with children an additional $300 per child under the agreement. Workers who make at least $3,000 but don't pay taxes would get $300 rebates.

The first rebate payments could begin going out in May, and most people could have them by July, Paulson said, noting that the IRS will already be overwhelmed processing 2007 tax returns. The rebates were expected to cost about $100 billion, and the package also includes close to $50 billion in business tax cuts.

The package would allow businesses to immediately write off 50 percent of purchases of plants and other capital equipment and permit small businesses to write off additional purchases of equipment. A Republican-written provision to allow businesses suffering losses now to reclaim taxes previously paid was dropped.

Pelosi, D-Calif., agreed to drop increases in food stamp and unemployment benefits during a Wednesday meeting in exchange for gaining the rebates of at least $300 for almost everyone earning a paycheck, including those who make too little to pay income taxes.

"I can't say that I'm totally pleased with the package, but I do know that it will help stimulate the economy. But if it does not, then there will be more to come," Pelosi said.

Boehner said the agreement "was not easy for the two of us and our respective caucuses."

"You know, many Americans believe that Washington is broken," Boehner said. "But I think this agreement and I hope that this agreement will show the American people that we can fix it and will serve to move along other bipartisan agreements that we can have in the future."

Paulson said he would work with the House and Senate to enact the package as soon as possible, because "speed is of the essence."

The Treasury Department has already been talking to the IRS about getting the checks out "as quickly as possible, recognizing that the tax filing season is ongoing," said Treasury spokesman Andrew DeSouza.

The rebates would phase out gradually for individuals whose income exceeds $75,000 and couples with incomes above $150,000, aides said. Individuals with incomes up to $87,000 and couples up to $174,000 would get partial rebates. The caps are higher for those with children.

The agreement left some lawmakers in both parties with a bitter taste, complaining that their leaders had sacrificed too much in the interest of striking a deal. Many senior Democrats were particularly upset that the package omitted the unemployment extension.

"I do not understand, and cannot accept, the resistance of President Bush and Republican leaders to including an extension of unemployment benefits for those who are without work through no fault of their own," Rep. Charles B. Rangel, D-N.Y., the Ways and Means Committee chairman, said in a statement.

Sen. Max Baucus, D-Mont., the Finance Committee Chairman, said leaving out the unemployment extension was "a mistake," as he announced plans to craft a separate stimulus package in the Senate starting next week.

Majority Leader Harry Reid said the goal is to send the package to the White House by Feb. 15 for President Bush's signature, but he noted the Senate would likely try to add more spending to the package.

"I expect that the (Finance) Committee and other senators will work to improve the House package by adding funds for other initiatives that can boost the economy immediately, such as unemployment benefits, nutrition assistance, state relief and infrastructure investment," Reid said in a statement.

Bush has supported larger rebates of $800-$1,600, but his plan would have left out 30 million working households who earn paychecks but don't make enough to pay income tax, according to calculations by the Urban Institute-Brookings Institution Tax Policy Center. An additional 19 million households would receive only partial rebates under Bush's initial proposal.

To address the mortgage crisis, the package also raises the limits on Federal Housing Administration loans and home mortgages that Fannie Mae and Freddie Mac can purchase to as high as $725,000 in high-cost areas. Those are considerable boosts over the current FHA limit of $362,000 and the $417,000 cap for Fannie Mae and Freddie Mac's loan purchases.

After a key Wednesday night meeting in which the parameters of an agreement were reached, Pelosi and Boehner spoke again Thursday to cement the accord.

In the talks, Pelosi pressed to make sure tax relief would find its way into the hands of lower-income earners while Boehner pushed to include upper middle-class couples, according to congressional aides.

The package was drawing fire from liberal activists and labor unions upset that proposals to extend unemployment insurance and boost food stamps had been dropped. Many Democratic lawmakers had assumed those proposals would make it into the package, and critics of the deal said those ideas could pump money into the economy more quickly than tax rebate checks that won't be delivered until June.

Democrats wanted to extend unemployment benefits for people whose 26 weeks of benefits have run out, but Republicans resisted.

Conservative Republicans, meanwhile, were likely to be restless over tax rebates going to those without income tax liability.

Democratic aides said greater GOP flexibility over giving relief to poor families with children — who would not have been eligible under Bush's original tax rebate proposal — was the catalyst that moved the talks forward.

Greenspan disputes US recession signs

The US economy may not be growing at all, but it is not yet clear that it is falling into recession, former Federal Reserve chairman Alan Greenspan has told the Financial Times.

Mr Greenspan said: "The reason we have had this extraordinary volatility in stock markets over recent days is that there is extreme uncertainty about the financial and economic outlook."

In a series of interviews with the FT, Mr Greenspan argued that the hallmark of a recession was discontinuity in the economic data. "You don't gradually fall into recession, you jump," he said.

"We are beginning to see discontinuities in the data - for instance, the employment report and the Philadelphia Fed survey," he said.

But other indicators continued to give more positive signals. "The hard data that we are in recession is by no means conclusive," he said.

He questioned the utility of using standard economic models to forecast whether the US would now go into recession or not.

"The models never forecast recession, because the parameters are dominated by what happens in normal times when the economy is growing," he said. "In fear-driven periods the parameters are quite different from the periods of euphoria."

Mr Greenspan said there had been a "stand-off" between relatively benign macroeconomic data and the forces that had been driving financial market turmoil.

Companies had been insulated from financial developments because they had strong cash flows and had taken advantage of a long period of low interest rates to lock in long-term funds.

"In addition, companies have very significant buffers," he said. "They could access a lot of potential financing merely by reducing or eliminating the current level of repurchase of shares."

However, Mr Greenspan said "the stand-off now appears to be ending".

Mr Greenspan said the uncertainty over the size of losses facing financial institutions would not disappear until it was clear at what level US house prices would stabilise.

He said prices would begin to stabilise when the rate of liquidation of unsold new homes peaked, adding: "We are not there yet."

But the former Fed chief said: "We seem to be getting some evidence of potential stabilisation in new home sales" - largely because the share of sales financed by subprime loans had already fallen to almost zero.

Also on the positive side, Mr Greenspan said: "The initial [unemployment] claims data are not signalling recession."

Carmakers reduced their inventories of unsold vehicles in the fourth quarter, he added, suggesting there would be no need to slash production in the early months of this year.

However, Mr Greenspan said there was likely to be "some erosion in business capital investment" in the months ahead. "Profit margins, I believe, have peaked and the capital investment opportunities in the US are declining," he said.

He said his assumption has long been that the consumer "should be exhibiting weakness owing to the wealth effect of falling asset prices and the high price of oil - which is clearly a suppressant on consumer markets".

The consumer "is weakening", he said, "but the question is how much? Motor vehicle sales in December, which are more reliable than retail sales, remained stable".

Enron creditors seek remedies from benefits firm

NEW YORK (Reuters) - Enron Corp creditors said on Thursday they have filed court documents seeking remedies from benefits outsourcing firm Hewitt Associates Inc (HEW.N) for mistakes made in allocating funds from legal settlements stemming from the energy trader's collapse.

Enron Creditors Recovery Corp, the successor to bankrupt Enron, said it had filed two motions in recent days before U.S. District Court Judge Melinda Harmon in Houston regarding the matter.

Thousands of settlement fund claimants were incorrectly distributed funds due to Hewitt's admitted mistakes, including an internal software error, according to the Enron creditors.

Wall St. jumps with tax-rebate deal, Qualcomm

NEW YORK (Reuters) - Stocks rose on Thursday, after government leaders agreed on a plan for tax rebates to stimulate the U.S. economy and a healthy outlook from cell- phone chip maker Qualcomm helped drive the Nasdaq up sharply.

Concerns that the economy is on the verge of recession eased after Congress and the White House agreed on the outlines of an economic stimulus package that would give 117 million U.S. families a tax rebate.

The quick agreement, less than a week after President Bush said a proposal was in the works, helped stocks extend Tuesday's rally. It marked only the second time the market has achieved back-to-back gains this year.

Technology shares surged after Qualcomm Inc (QCOM.O) posted a rise in quarterly profit and relieved investors by signaling that the mobile phone market was still vibrant even though the economy was slowing.

"Investors are encouraged (legislators) came up with an agreement in principle, in a quick fashion," said Angel Mata, managing director of listed equity trading at Stifel Nicolaus Capital Markets in Baltimore.

The Dow Jones industrial average (.DJI) gained 108.44 points, or 0.88 percent, to settle at 12,378.61. The Standard & Poor's 500 Index (.SPX) advanced 13.47 points, or 1.01 percent, to 1,352.07. The Nasdaq Composite Index (.IXIC) shot up 44.51 points, or 1.92 percent, to 2,360.92.

Qualcomm shares jumped 10.3 percent to $40.41 and led the Nasdaq's major advancers.

AMBAC, MICROSOFT SOAR LATE

After the closing bell, shares of Ambac Financial Group Inc (ABK.N) surged 15.1 percent to $13.05 after the UK's Evening Standard newspaper reported that billionaire investor Wilbur Ross is in talks to take over the bond insurer. The stock of another bond insurer, MBIA Inc (MBI.N), also gained.

Shares of software maker and Dow component Microsoft Corp (MSFT.O) jumped more than 4 percent to $34.70 as the company posted a quarterly profit that handily beat Wall Street's forecasts. Its shares had ended at $33.25, up 4.1 percent on the Nasdaq.

During the regular session, another bright spot was Thursday morning data showing the number of U.S. workers applying for jobless benefits last week fell unexpectedly to a four-month low, suggesting the labor market remained stable even as the economy slowed.

XEROX RALLIES, eBAY SLIDES

In other earnings news, shares of Xerox Corp (XRX.N), the leading provider of digital printers and document management services, surged 8.2 percent to $14.33 after it posted a stronger-than-expected rise in quarterly profit and said it was on track to meet its 2008 full-year profit forecast.

Lockheed Martin Corp (LMT.N) shares climbed 3.8 percent to $105.90, after the defense contractor reported a quarterly profit and raised its full-year forecast.

On the downside, eBay Inc (EBAY.O) shares fell 6.1 percent to $27.18 and kept gains in the Nasdaq and the S&P in check. The Internet auctioneer and retailer warned about its profit outlook late on Wednesday.

Earnings have been "a bit of a mixed bag, but there have been no shockingly alarming surprises to the downside, and that's good news," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.

On Wednesday, stocks snapped a five-day losing streak.

But the start of 2008 is still set to be one of the bumpiest of any year for Wall Street.

Trading was heavy on the NYSE, with about 2.18 billion shares changing hands, above last year's estimated daily average of roughly 1.9 billion, while on the Nasdaq, about 2.96 billion shares traded, exceeding last year's daily average of 2.17 billion.

Advancing stocks outnumbered declining ones by a ratio of about 5 to 3 on the NYSE and by 4 to 3 on Nasdaq.

New data cap dismal year for US housing market

The US housing market closed the books on a dismal year on Thursday, recording a 2.2 per cent drop in the pace of existing home sales in December to an annual rate of 4.89m units, which was slower than expected.

The consensus on Wall Street was that the National Association of Realtors' figures would show a drop to about 4.95m units.

The disappointing data for December caps a year in which existing home sales overall fell 12.8 per cent and the national median home price fell by 1.4 per cent to $218,900, according to the NAR.

The downturn in the US housing market has been at the heart of the credit crisis that has shaken global markets and worsened the outlook for US economy.

Earlier in the day, however, the labour department issued a more upbeat set of figures on the US economy, showing that the number of new jobless claims fell 1,000 to 301,000 in the week ending January 19. The downward move marked a surprise compared to analysts' expectations of a small rise. It was the fourth weekly decline in new jobless claims.

U.S. existing home sales fell 2.2 pct in December

WASHINGTON (Reuters) - The pace of existing home sales in the United States fell by 2.2 percent in December to a slower-than-expected 4.89 million-unit annual rate, the National Association of Realtors said in a report on Thursday.

The inventory of homes for sale fell 7.4 percent to 3.91 million units at the end of last month. That represents a 9.6-month supply at the current sales pace, down from the 10.1-month supply in November.

 

While the inventory decreased, NAR chief economist Lawrence Yun cautioned that sales will likely remain slow through the first quarter of this year and possibly into the next as troubles from the subprime mortgage and credit crisis work their way through the economy.

Prices on U.S. government bonds trimmed earlier gains and U.S. stock markets pushed higher.

"Home prices are lower, mortgage interest rates continue to decline and incomes are higher, but many potential buyers are delaying a purchase," Yun said.

Economists polled by Reuters were expecting home resales to slip to a 4.95 million unit pace after hitting a 5.00 million pace in November.

Yun noted that for homebuyers, conditions have improved, with prices falling and mortgage rates at low levels. Troubles on Wall Street may continue for some time, he predicted.

"Wall Street made a big gamble," Yun said. "I think there will be further write-downs going forward."

For all of 2007, existing home sales fell 12.8 percent and the national median home price fell by 1.4 percent to $218,900. It was the first annual decline in the median home price since 1999, when the realtor group began tracking both condos and single-family home data together.

For the year, single-family sales, which account for 80 to 90 percent of all existing home sales, fell 13 percent. It was the biggest decrease since a 17.7 percent decrease in 1982.

US home sales slump further, close 2007 on sour note

WASHINGTON (AFP) - US existing home sales fell 2.2 percent in December as the beleaguered housing market saw no relief from its woes, data releases Thursday showed.

The National Association of Realtors reported an annualized sales pace of 4.89 million units, below most economist forecasts for a rate of 5.0 million and the weakest since the group began tracking sales in 1999.

The median price for housing, another sign of the unrelenting slide, showed a drop of six percent to 208,400 dollars.

Over the past 12 months, home sales are down 22 percent, suggesting that the worst housing slump in decades has not yet hit bottom.

Oil jumps on stimulus plan agreement

NEW YORK - Oil futures jumped more than $2 a barrel Thursday after the Bush administration and Congressional leaders agreed to an economic stimulus plan that will give most Americans tax rebates of $600 to $1,200, or even more if they have kids.

Prices were already higher after the government reported a drop in heating oil supplies and as investors anticipated a stimulus plan. But futures took off, posting their largest gains in over three weeks, on word that an agreement had been reached.

"What's boosting us up today is a little economic optimism because people are going to get a little free money," said Phil Flynn, an analyst at Alaron Trading Corp., in Chicago.

Light, sweet crude for March delivery rose $2.42 to settle at $89.41 a barrel on the New York Mercantile Exchange.

The weekly inventory report from the Energy Department's Energy Information Administration showed supplies of distillates, which include heating oil and diesel fuel, fell 1.3 million barrels last week, surpassing the average forecast of analysts surveyed by Dow Jones Newswires, who said distillate supplies would remain unchanged.

That decline was countered by domestic gasoline inventories, which jumped by 5 million barrels, more than triple analyst expectations. Crude inventories rose by 2.3 million barrels, slightly more than analysts had expected.

Because the report was mixed, investors' attention returned to the economy. Oil prices have fallen in recent days, following equity markets which dropped earlier this week on recession worries. But the stock market's recovery on Wednesday, as well as overnight rallies by stock markets in Europe and Asia, helped push energy futures higher even before the Energy Department issued its report.

Energy investors often view stocks as a proxy for economic growth, fearing that a slowdown would curtail demand for oil and petroleum products such as gasoline and heating oil.

Other energy futures also rose Thursday. February gasoline rose 3.2 cents to settle at $2.2828 a gallon on the Nymex, and February heating oil rose 5.32 cents to settle at $2.4763 a gallon.

February natural gas rose 18.1 cents to settle at $7.802 per 1,000 cubic feet on the Nymex. In a separate report, the EIA said natural gas inventories fell last week by 155 billion cubic feet, in line with expectations.

In London, March Brent crude rose $2.45 to settle at $89.07 a barrel on the ICE Futures exchange.

At the pump, meanwhile, gas prices slipped 0.4 cent overnight but are still holding above $3 a gallon at a national average of $3.006 a gallon, according to AAA and the Oil Price Information Service. Gas prices have mostly fallen lately since rising early in the month as oil hit a record above $100 a barrel. But pump prices remain 86 cents higher than a year ago.

The high prices may be having an impact on consumer behavior. Demand for gasoline fell last week by 152,000 barrels, though demand over the past four weeks — which included the busy holiday travel period — rose by 1.1 percent over the same period last year.

"People are feeling the pain of high energy prices," Flynn said.

Thursday's EIA report, which was delayed by a day due to the Martin Luther King Jr. holiday on Monday, also showed that refinery activity fell by 0.6 percentage point last week to 86.5 percent of capacity. Analysts had expected refinery activity to remain unchanged.

The jump in crude supplies came despite a 233,000 barrel a day decline in crude imports.

U.S. plan could forestall recession: Nasdaq CEO

DAVOS, Switzerland (Reuters) - Nasdaq Stock Market (NDAQ.O) President and Chief Executive Bob Greifeld said on Thursday a U.S. stimulus package had the ability to forestall a recession in the world's largest economy.

"I think the stimulus package that's been proposed by the President and Secretary (Henry) Paulson, to the extent that this is passed in rapid fashion by Congress I think has the ability to forestall a recession," Greifeld told Reuters.

Greifeld was speaking at the annual meeting of the World Economic Forum in the Swiss resort of Davos.

U.S. President George W. Bush and leaders of the Democratic-led Congress have vowed to move quickly to work out the details of a $150 billion stimulus package for the U.S. economy as recession worries roil global markets.

"At the moment, our business is doing better than it ever has because the volumes have been incredibly high," Greifeld said. "So, it's been very good for us."

Bernanke in hot seat as market turmoil spikes

WASHINGTON (AFP) - Federal Reserve chairman Ben Bernanke is facing the biggest challenge of his career amid fears the US economy is sinking into a recession, analysts say.

Market criticism of Bernanke, who presided over a surprisingly deep interest rate cut Tuesday, has picked up in recent weeks as major US banks divulged big losses and Wall Street stocks went on a roller-coaster.

The Dow Jones Industrial Average tumbled more than 300 points Wednesday and then surged back to close nearly 300 points up. But few were willing to predict the market's direction in the coming days.

"Unfortunately, Mr. Bernanke seems to act strongly only when pushed to the wall," Joel Naroff of Naroff Economic Advisors said in a briefing note, referring to the Fed's 75 basis point cut in its main base rate to 3.50 percent on Tuesday.

The 54-year-old former academic is walking a tightrope. If the US economy avoids a recession he will likely be cheered as an economic savior, but his reputation could be tarnished if the world's biggest economy tips into a recession.

Bernanke and his fellow policymakers are using the federal funds interest rate -- the bank-to-bank overnight lending rate -- as their main gauge to keep economic momentum underpinned and out of recession.

Tuesday's dramatic cut in the rate will likely cheapen a wide range of consumer loans marketed by banks, such as car loans, and could even impact mortgage rates.

The US economy grew at a robust 4.9 percent pace in the third quarter, but most economists say growth has slown markedly since then amid a worsening housing slump and a related credit crunch that has plagued Wall Street.

The government is due to release fourth-quarter growth figures on Wednesday and most analysts expect growth slowed sharply to around 1.2 percent.

"If the economy dodges a serious or prolonged recession, the task will be to unwind the recent monetary and fiscal stimulus before inflation expectations become un-anchored," Bob Eisenbeis, a former executive vice president of the Federal Reserve Bank of Atlanta, wrote in a briefing paper for Cumberland Advisors.

In other words, if the Bernanke Fed makes borrowing costs too cheap, it could inadvertently trigger sharp price hikes and spur inflation.

While the current market mayhem has placed Bernanke in the public spotlight, the Fed's ability to control the economy -- while powerful -- is also limited and it is not yet certain that a recession will occur.

Some market observers say Bernanke's push to slash rates also could give the impression that the Fed chairman is acting as an emergency doctor to save an ailing stock market and wealthy investors, giving a so-called "put option," or ability to sell, to speculators.

Jan Hatzius, a Goldman Sachs economist, said that while disagreeing with such a notion, the Fed's cut "may reinforce the perception of a 'Fed put,' the idea that the Fed will always cut interest rates to save the stock market."

Some commentators have criticized the cut, saying that stock markets are retreating to more realistic levels and that banks and mortgage companies should have come clean with their losses more promptly.

"Why would anyone want to interrupt that process by bringing back the cheap credit? The short and oversimplified answer can be summed up in three words: the Great Depression," columnist Steven Pearlstein wrote in The Washington Post newspaper.

Others are rallying to Bernanke's defense.

Alan Reynolds, a senior fellow at the free-market Cato Institute, contrasted Bernanke's management with the Fed's stance during the 1990-1991 recession under former chairman Alan Greenspan.

"Regardless of whether the Fed's actions prove excessive or inadequate, it would be unreasonable to describe them as too little or too late," Reynolds said, pointing out that the Greenspan Fed kept the fed funds rate much higher during the early 1990s recession.

With market volatility persisting and the Fed due to meet January 29-30 to mull rates further, the focus on Bernanke is not likely to ease any time soon.

Sovereign Bancorp posts $1.6 billion loss

NEW YORK (Reuters) - Sovereign Bancorp Inc (SOV.N), the second-largest U.S. savings and loan, on Wednesday posted a $1.6 billion quarterly loss and canceled its dividend following a larger-than-expected write-down for consumer credit losses and a 2006 bank acquisition.

The fourth-quarter net loss equaled $3.34 per share, and compared with a loss of $129 million, or 28 cents per share, a year earlier.

Operating profit, excluding charges, fell 44 percent to $94 million, or 18 cents per share, from $167 million, or 33 cents, a year earlier, Philadelphia-based Sovereign said.

Analysts on average expected profit of 16 cents per share, according to Reuters Estimates. Forecasts by analysts typically exclude one-time items.

Sovereign canceled its 8 cents per share quarterly dividend "to help bolster capital and mitigate risk during the ongoing challenges in the financial services industry," Chief Executive Joseph Campanelli said in a statement. It expects to pay a dividend once "industry conditions normalize," he said.

Sovereign wrote down $1.58 billion of goodwill, or $3.08 per share, which was $180 million more than it estimated on January 14. It attributed the increase to interest-rate changes that affected its consumer and New York-area operations.

Part of the write-down reflected weakness in consumer lending, which has been hurt by deteriorating credit and a decision to halt auto loans in southeast and southwest U.S. states. The rest covered New York operations, which consist largely of the former Independence Community Bank Corp.

As expected, Sovereign also took a $180 million charge for mortgage investments, reducing earnings by 23 cents per share.

Critics had complained when the company's former chief executive, Jay Sidhu, paid $3.6 billion for Independence, and simultaneously sold a 20 percent stake in Sovereign for $2.4 billion to a Spanish bank, Banco Santander SA (SAN.MC). Santander's stake later rose to about 25 percent.

Sovereign is one of many banking companies this month to announce write-downs related to deteriorating credit conditions. It joined Citigroup Inc (C.N), National City Corp (NCC.N) and Washington Mutual Inc (WM.N), the largest U.S. thrift, among companies to cut their dividends since November.

Sovereign operates about 750 banking offices in eight Northeastern U.S. states, and ended the year with $84.7 billion of assets.

On a day of broad gains in the banking sector, Sovereign shares closed Wednesday up $1.03, or 10.2 percent, at $11.15 on the New York Stock Exchange.

Sovereign announced results after markets closed. Through the close, the shares were down 54 percent in the last year, while the KBW Regional Bank Index (.KRX) was down 24 percent.

Bush: Economic stimulus package to be "robust"

WASHINGTON (Reuters) - President George W. Bush insisted on Wednesday that the economic stimulus package he is working on with Congress will be robust enough to help the U.S. economy.

"I talked to them about my desire to work with the Congress to get a stimulus package passed, one that's going to be robust enough to affect the economy, simple enough for people to understand it and efficient enough to have an impact," Bush told reporters after a White House meeting with a group of city mayors.

"I'm confident that we can get something done," he added. "There's a spirit that says we need to take a fundamentally sound economy and help it ... deal with the uncertainty with a pro-growth package."

Bush was speaking a day after he and leaders of the Democratic-led Congress vowed to move quickly to work out the details of a $150 billion stimulus package for the U.S. economy. Recession fears have roiled world financial markets.

A rout of global stock markets at the start of the week sent the Federal Reserve scrambling to slash U.S. interest rates on Tuesday by three quarters of a point, the largest cut in more than 23 years.

Most Americans believe U.S. economy in decline: Zogby

WASHINGTON (Reuters) - Most Americans believe their country's economy is in decline and that its cities are experiencing economic troubles on a variety of fronts, according to a Zogby International Poll released Wednesday.

Americans also count five economic issues among the top 10 problems cities face, said John Zogby, speaking at a meeting of the U.S. Conference of Mayors, which sponsored the poll. These include affordable housing, the housing market, local job development, health care and property taxes.

But they are also worried about their individual well-being, the survey of 32,085 people found.

More than two-thirds of respondents said they get less spending power from their paychecks than they did five years ago, and more than a quarter say unemployment has risen in their cities in the past five years.

About a quarter said homelessness has increased in their cities over the last half-decade as well. In Detroit, Orlando, Tampa and Sacramento, more than a third said the homeless population increased.

Immigration is a leading issue for Americans, Zogby said, and more than half of those surveyed said stricter immigration laws will help their local economies. Nearly half believe illegal immigration has hurt their communities' economies, and two-fifths said any form of immigration hurts their cities.

The mayors' group is encouraging cities to take action against climate change, and Zogby found city dwellers believe "going green" could help their local economies by creating jobs in the environmental sector and attracting businesses.

While Zogby did not explain which green programs Americans prefer, he said a majority of respondents said they would use mass transit if it were easily available in their cities.

The poll was conducted between November 21 and December 12.

U.S. mayors want more federal grants, mortgage bonds

WASHINGTON (Reuters) - Mayors from across the country called on the federal government on Wednesday to quickly create a stimulus package that includes home ownership and local economic assistance.

"People in our cities need help right now," said Trenton Mayor Douglas Palmer at a press conference.

Palmer, who is also president of the U.S. Conference of Mayors, said the mayors would like the federal government to increase Community Development Block Grants and raise the cap on tax-exempt mortgage revenue bonds within the next 30 to 45 days.

The grants fund city efforts to improve housing and public services. The bonds finance low-cost mortgages for struggling homeowners, but federal law limits the amount states can issue each year.

"Housing is the backbone of our economies," he told the annual gathering of mayors. "Right now, our backbone is in traction."

While the mayors did not propose a comprehensive economic solution to the current downturn, they emphasized the federal government must create any stimulus soon.

"It really has to be an effort that also involves the federal government, the state governments, and the nonprofits," said Miami Mayor Manuel Diaz, the conference's vice-president.

No recession expected this year: Congressional Budget Office

WASHINGTON (Reuters) - The slowing U.S. economy is unlikely to sink into an election-year recession and an economic rebound could begin as early as next year as housing and financial market turmoil fades, the Congressional Budget Office forecast on Wednesday.

In the meantime, the U.S. budget deficit will grow to $219 billion this year, up from the $163 billion registered last year, according to a CBO report submitted to Congress.

But that forecast by Congress' nonpartisan budget analyst does not include the cost of an economic stimulus measure that is quickly moving through Congress and could cost around $150 billion or more. The deficit projection for fiscal 2008, which ends September 30, also does not include more money Congress is likely to approve this year for the war in Iraq.

While CBO noted an elevated risk of recession, its outlook was weighted more toward the United States working through its current economic problems and escaping a full-blown recession.

"Although recent data suggest that the probability of a recession in 2008 has increased, CBO does not expect the slowdown in economic growth to be large enough to register as a recession," CBO said.

"CBO expects the economy to rebound after 2008, as the negative effects of the turmoil in the housing and financial markets fade," the semi-annual budget and economic report said.

Surveys of U.S. employers, CBO said, so far do not suggest they plan large future reductions in hiring. However, CBO noted that "such labor-market indicators could deteriorate suddenly."

House Budget Committee Chairman John Spratt, a South Carolina Democrat, said the CBO report offered "some sobering news" for the U.S. economy.

"CBO shows the deficit for fiscal year 2008 is larger than the deficit for fiscal year 2007," Spratt noted, adding, "Under (Bush) administration policies, the $5.6 trillion (budget) surplus projected in 2001 has collapsed and been replaced by record deficits, which complicate our response to the current slowdown."

That slowdown will bring rising unemployment this year, a presidential and congressional election year, CBO forecast.

JOBLESS

The jobless rate, currently at 5 percent, is expected to average 5.1 percent this year, but rise to about 5.3 percent by the end of 2008, around the time voters in November will pick a new U.S. president and decide whether Democrats continue their majority in the U.S. House of Representatives and Senate.

CBO said it sees an average 5.4 percent unemployment rate next year and an average 4.9 percent a year in 2010-13.

CBO envisions a $198 billion budget deficit in fiscal 2009 and sees the deficit rising to $241 billion in 2010.

CBO, which bases its estimates on existing law, forecast a fiscal 2011 deficit of $117 billion and a budget surplus of $87 billion in 2012. But that assumes President George W. Bush's 2001 and 2003 tax cuts expire at the end of 2010 and that a temporary measure to fix the alternative minimum tax also expires.

In August, CBO predicted the fiscal 2008 budget deficit would be $155 billion. That was before the pinch of an unfolding economic slowdown became apparent.

CBO said it sees interest rates on Treasury securities remaining low this year and increasing in 2009 as the economy emerges from its current difficulties.

CBO said the weak U.S. dollar and relative economic strength of U.S. trading partners should boost exports and help offset the sluggishness in domestic demand.

It also said emerging economies have become increasingly less dependent on U.S. demand to fuel their economies and as a result have become less vulnerable to slowdowns in the U.S. economy.

Consumer spending, CBO said, is likely to fall off, curtailed by a drop in housing wealth (home equity), increased costs for borrowing, the high price of oil and slower growth of real income.

World Economic Forum opens in Davos

DAVOS, Switzerland - The outlook for the global economy this year is decidedly dour, but leading economists at the World Economic Forum in Switzerland had mixed views Wednesday about the possibility of a global recession.

"If there is a tremendous slowdown in the U.S. economy, then we must be worried about it," said Yu Yongding, director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.

He said China's growth could help it weather any slowdown as that nation boosts trade with countries outside the United States.

The potential for a global slowdown triggered by a U.S. recession was a top issue among economists from Asia, the United States and government ministers from India and China.

Stephen Roach, chairman of investment bank Morgan Stanley in Asia, said there would be global ramifications should the world's largest economy falter.

Asked by a Mexican businessman if his country could sidestep a U.S. recession, Roach was blunt.

"My good friend from Mexico, you're in trouble," Roach said. "Mexican exports to the U.S. account for 25 percent of your GDP. Same number for Canada. How can the U.S. go into recession and Mexico be fine?"

Nouriel Roubini, chairman of New York-based Roubini Global Economics, cited the maxim that if the U.S. economy sneezes, the rest of the world catches a cold, but said this time the diagnosis for the U.S. was worse.

"In this case the U.S. is going to have a protracted case of pneumonia," he said.

The impact of the sluggish U.S. economy, and what it may portend for other nations, hung over talks even after the U.S. Federal Reserve Bank cut its benchmark refinancing rate to 3.5 percent from 4.25 percent Tuesday to counter a global market slide.

"The United States economy will correct itself," said David O'Reilly, chairman and CEO of Chevron Corp. "I'm an optimist when it comes to the length of what may be a slowdown or a mild recession. ... the outlook is still pretty good."

Economists also split over the role of central banks and whether institutions like the Fed were equipped to steer the global economy out of danger.

John Snow, the former U.S. Treasury secretary, said central banks have performed remarkably over the last two decades — better than any time in history, perhaps — and continue to make the necessary adjustments.

"The issue of whether central banks are capable of vigorous action, bold action, was answered yesterday," Snow said, referring to the Fed's interest rate cuts. "They can't see the world ahead perfectly, but who can?"

Joseph Stiglitz, the 2001 Nobel Prize winner for economics and a critic of free market champions, and billionaire philanthropist George Soros, disagreed.

"What we have now are the foreseeable consequences of bad economic management," Stiglitz said.

Lawrence Summers, former Harvard University president and Treasury secretary under U.S. President Bill Clinton, said central banks have lost their way.

"I think it's hard to give central banks a very high grade over the last couple of years on recognition of ... bubbles and the ability to address them," he said. "I think it's hard to give a high grade over the last 6 months when the bubbles have been bursting and (the banks) have been behind the grade."

Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development, said the Fed must send stronger and clearer messages to financial markets to ward off a steep slowdown.

"Alan Greenspan became famous because nobody could understand a word that he said," Gurria said. "You can't run a financial system like that."

Others wondered why the European Central Bank, which has kept its benchmark rate unchanged at 4 percent since last summer, had not acted in accordance with central banks in the U.S. and Britain.

"Europe is not going to get special dispensation from a global economic slowdown," Roach said.

The forum, now in its 38th year, will also touch on the effects of terrorism, a workable peace process in the Middle East and how technology is ushering in a new age of global social networking.

U.S. Secretary of State Condoleezza Rice and Afghan President Hamid Karzai were scheduled to address the opening reception later Wednesday.

Rice is also expected to meet with Pakistan President Pervez Musharraf and Karzai in closed-door sessions.

Her meeting with Musharraf will be the first since the assassination in December of opposition leader Benazir Bhutto, which pushed the nuclear-armed Pakistan into near chaos.

In a nod to concern about climate change, Rajendra K. Pachauri, chairman of the U.N.'s Intergovernmental Panel on Climate Change is to speak. Al Gore, who shared the 2007 Nobel Peace Prize with the panel, is also participating in the five-day meeting.

A year ago, Davos attendees foresaw a strong economy. The credit crisis brought on by massive exposure to subprime mortgage securities has changed that.

"It's not about a soft landing or a hard landing," Roubini said, but "rather how hard a landing it will be."

"We're seeing a financial system that is under severe stress," he said. "The Fed cannot prevent this recession from occurring."

The meeting itself will feature participants from 88 countries, including British Prime Minister Gordon Brown and Microsoft Corp. co-founder and chairman Bill Gates.

Oil prices starting to affect U.S. economy: Bodman

CAIRO (Reuters) - Oil prices are starting to have an impact on the level of economic activity in the United States, but it is too early to say the economy has entered a recession, Energy Secretary Sam Bodman said on Wednesday.

"Our economy has been able to withstand the big run-up in prices but with (oil prices at) $100 (a barrel) it's starting to have an impact on the level of our economic activity," Bodman told businessmen at a lunch in Cairo.

Oil has eased from the record high of $100 struck early this month to trade around $88 a barrel on Wednesday.

 

Bodman said a $150 billion stimulus package for the U.S. economy was not "too little, too late" and, combined with a surprise U.S. Federal Reserve rate cut, could have an immediate impact on the U.S. economy.

Any improvement in the U.S. economy could cause a moderate increase in energy prices, Bodman said.

Bodman, in Cairo after a tour of Gulf Arab countries, said OPEC member countries would not cut supply, but it was unclear if they would boost output. OPEC next meets on February 1.

Asked if the United States would dip into its strategic oil reserves, Bodman answered: "No."

MPC damps aggressive cut expectations

The Bank of England's monetary policy committee voted eight to one to leave interest rates unchanged last month, according to minutes of the meeting published on Wednesday, while official statistics showed growth slowed slightly less than expected in the fourth quarter.

The MPC felt that "the short-run inflation outlook had worsened markedly" as higher commodity prices and a sharp decline in sterling increased the risks of inflation rising further above target.

Those risks offset the possibility that "there could be a much sharper fall in growth" than the Bank's central projection in its November inflation report. Only the persistently dovish David Blanchflower voted for a quarter point cut in rates.

Separately, the Office for National Statistics said gross domestic product grew 0.6 per cent in the fourth quarter, above forecasts for a 0.5 per cent rise, taking growth over the whole of 2007 to 3.1 per cent.

The figures show that the economy slowed less than expected as the credit crunch kicked in, although the deceleration appeared largely due to weakness in financial intermediation.

The tabular content relating to this article is not available to view. Apologies in advance for the inconvenience caused.

Economists said the minutes' hawkish tone, coupled with evidence that growth remained relatively strong at the end of 2007, signalled that the Bank would not cut interest rates as aggressively as the US Federal Reserve, although they still expect the MPC to vote for a quarter point cut to 5.25 per cent in February.

The pound fell 0.2 per cent to $1.9579 against the dollar and dropped 0.6 per cent to Y207.69 against the yen.

"The pace of monetary loosening in 2008 still looks likely to be relatively slow - perhaps one cut per quarter - as the MPC grapples with rising inflation," said Jonthan Loynes at Capital Economics.

Ben Broadbent, economist at Goldman Sachs, said the MPC had never cut rates in a month when it released its Inflation Report unless quarterly GDP growth was below 0.5 per cent. "While we we expect this rule to be broken in February, the chances of 50 basis points look remote," he said.

The minutes' emphasis on rising inflation risks was echoed by Mervyn King, the Bank's governor, on Tuesday when he acknowledged the possibility "that inflation could rise to the level at which I would need to write an open letter of explanation, possibly more than one, to the Chancellor".

But while the Bank accepts that inflation is likely to rise further above its 2 per cent target in the coming months, it considers it crucial for the credibility of monetary policy to keep medium-term expectations of inflation in check.

"A second period during which inflation was significantly above target, so soon after the one in Spring 2007, might be more likely to lead people to revise up their expectations of future inflation, particularly if the rise in inflation persisted for longer," the minutes said.

Michael Saunders, economist at Citigroup, said the MPC was likely to signal in its February 13 inflation report "that easing will be relatively gradual compared to the deterioration in growth prospects, and will not be pre-emptive or aggressive enough to avoid a marked economic slowdown this year."

Home loan applications jump as rates fall

NEW YORK (Reuters) - Applications for home mortgages jumped for a third consecutive week as plunging interest rates encouraged more homeowners to seek refinancings, an industry group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of refinancing applications surged 16.9 percent in the week ending January 18 to 4,178.2, the highest level since March 2004. The activity was up 92 percent since the beginning of November and more than offset a 4.6 percent fall last week in the index for home purchase applications to 439.9, it said.

Refinancings accounted for two-thirds of all applications.

The MBA's market composite index, a measure of overall mortgage loan application volume, rose last week by 8.3 percent to 981.5.

The rise followed a drop in the average 30-year fixed mortgage rate to 5.49 percent last week from 5.62 percent in the previous week and 6.18 percent in mid-December, the trade group said.

"It is clear that borrowers are responding to the 40-80 basis point drop in rates we have seen since November 2 across" mortgage products, Jay Brinkmann, vice president of research and economics at the MBA, said in a statement.

Tighter lending conditions make it hard to estimate how many of the applications will be successful, he said. Lenders have pulled back on credit to borrowers of all credit histories after soaring delinquencies on subprime loans created billions of dollars in losses.

Mortgage rates have declined amid signs the housing downturn and less consumer spending will push the economy into recession, cooling the growth that fuels faster inflation. The Federal Reserve on Tuesday surprised markets with a 0.75 percentage point cut in its target interest rate, citing a weakening economic outlook, less availability of credit and softening labor markets.

The 10-year Treasury yield that roughly guides long-term mortgage rates declined by more than 0.2 percentage point since the MBA survey was conducted, suggesting 30-year mortgage rates are below levels measured on Friday.

Rates on short-term loans also fell. The average rate on a one-year adjustable mortgage declined to 5.51 percent last week from 5.77 percent in the prior period, the MBA said.

Pound eases after MPC minutes

The pound lost ground against the dollar on Wednesday after the release of the minutes of the Bank of England's monetary policy committee suggested the central bank was not set to follow the Federal Reserve with an aggressive cut in UK interest rates.

The Fed implemented an emergency 75 basis point cut in its Fed funds rate to 3.5 per cent on Tuesday in a bid to stem a violent sell-off in global equity markets.

However, the minutes of the Bank of England's January monetary policy committee meeting revealed an 8-1 vote in favour of keeping rates on hold, with the only dissenter David Blanchflower, who has consistently expressed a dovish view on interest rates.

The minutes revealed that worries over inflation had been behind the decision, with members worrying that back-to-back cuts in UK interest rates would signal the central bank was now targeting demand rather than inflation.

Furthermore, the committee said that some UK monetary easing had already been affected via a weaker pound.

Neil Mellor at Bank of New York Mellon said the expected deterioration in short-term inflation would probably mean that the Bank of England was unable to implement rate cuts at a pace that would soothe market fears over the prospects for the UK economy.

"We strongly suspect the pound will continue on its downward path against both the euro and the dollar," he said.

"The 2007 low of $1.9217 against the greenback is only one or two poor data releases away."

The pound fell 0.2 per cent to $1.9579 against the dollar and dropped 0.6 per cent to Y207.69 against the yen.

However sterling rose 0.1 per cent to £0.7454 against the euro.

The euro lost ground after a survey suggested the eurozone economy was set to weaken, strengthening the view that the European Central Bank might have to abandon its hawkish stance on interest rates.

The eurozone purchasing managers' index fell from 53.3 last month to 52.7 in January, lower than consensus and implying growth slowed below its trend rate at the start of the year.

Marco Valli at UniCredit said while the data might not change the ECB's hawkish rhetoric in the very near term, it was becoming increasingly clear that eurozone growth has started to slide.

"We suspect the pace of weakening will intensify in coming quarters as manufacturing starts feeling the pain of currency appreciation and slowing world growth," he said.

"A more cautious ECB stance seems warranted at this stage. We expect them to start cutting rates sometime in the third quarter."

The euro eased 0.2 per cent to $1.4595 against the dollar and dropped 0.6 per cent to Y154.83 against the yen.

On the federal deficit, candidates stay mostly vague

Washington - Here's some straight talk you're unlikely to hear from most presidential candidates: The next occupant of the Oval Office may have to make some very tough budget choices.

A flood of retiring baby boomers – plus rising healthcare costs – will soon send spending on federal entitlement programs soaring. Revenue won't keep pace, unless Washington allows President Bush's tax cuts to expire and stops shielding the middle class from the bite of the Alternative Minimum Tax.

Even then, Social Security and Medicare costs, piled on top of the expense of the Iraq war, could eventually cause the deficit to explode. It's a structural economic problem that most of the major candidates address only in the vaguest of terms.

"I don't think you're getting a lot of realistic rhetoric or plans from candidates overall," says Robert Bixby, executive director of the Concord Coalition, a budget watchdog group.

In their Jan. 21 debate in Myrtle Beach, S.C., Sen. Hillary Clinton and Sen. Barack Obama clashed over many things, including who would be the most fiscally responsible candidate in the Democratic race. Each charged that the other's ideas for new programs weren't fully offset by new revenues or cuts in other programs. In addition, Senator Obama took a shot at Republican orthodoxy, saying that it now included ideas such as "moving back from a balanced budget and a surplus to deficit and debt."

Candidates face enormous pressure to please voters with expensive promises that appeal to the party faithful. For Democrats, that usually means new or expanded government programs. For Republicans, it's often lower taxes.

Yet "the next President will inherit a fiscally lethal combination of changing demographics, rising health care costs, and falling national savings," according to a Brookings Institution analysis of the economic outlook facing the victor.

While the deficit has dipped to $163 billion for fiscal year 2007, the first members of the baby boom generation, born in 1946, will be eligible for Social Security this year. Over the next two decades, more than 80 million boomers will become eligible for US entitlement programs. That's about 10,000 people per day.

Thus deficits may widen again during the next administration. If Congress stops passing its annual AMT shield, and the Bush tax reductions expire as scheduled, the red ink could surpass $500 billion a year by 2016.

"Without reforms in the near term, the dramatic increases in [entitlement spending] will ultimately require substantial tax increases, major benefit reductions, or massive and unsustainable amounts of borrowing," notes the White House Office of Management and Budget in a 2008 Budget review.

At issue are the candidates' long-term fiscal plans, not their short-term stimulus package ideas for avoiding a recession.

On the Republican side, most of the candidates pledge to make the Bush tax cuts permanent. (Former Arkansas Gov. Mike Huckabee and US Rep. Ron Paul would eliminate the income tax altogether.) Sen. John McCain and former Sen. Fred Thompson of Tennessee have promised to eliminate the Alternative Minimum Tax, while Rudy Giuliani, former mayor of New York, would index it to inflation.

On spending, former Massachusetts Gov. Mitt Romney says he would allow the US discretionary spending budget to increase at only the rate of inflation, minus one percent. Mr. McCain vows all-out war against congressional earmarks, the local projects lawmakers insert into appropriations bills to win the favor of voters at home. Mr. Giuliani's self-described "plan to restore fiscal discipline" includes the reduction of the civilian federal work force by 20 percent through attrition and retirement.

Mr. Paul, who advocates extremely limited government, proposes to eliminate entire executive branch departments.

Most of the GOP contenders acknowledge the need to reform the big entitlement programs, while avoiding specifics. However, in the past McCain has said he would be willing to lift the cap on income subject to Social Security taxes as part of an entitlement reform deal. And Mr. Thompson has produced a fairly detailed response to the entitlement problem, which includes a reduction in future Social Security benefits produced by linking benefit increases to the rate of inflation, not wage growth.

The Democratic candidates say they would all repeal the Bush tax cuts, to varying degrees. Mrs. Clinton has talked about changing, but not eliminating, the AMT.

Mr. Obama calls for the enforcement of congressional pay-as-you-go budgeting rules, in which new programs or tax cuts are paid for by reductions in other programs, or new revenue. He also vows to end to what he judges wasteful spending, including subsidies to the oil and gas and private student loan industries. And the first move to make to strengthen Social Security, he says, is to raise the Social Security tax income cap, currently $97,500 per worker.

Clinton would also restore pay-as-you-go discipline, she says. She criticizes Obama's proposal to raise the cap on income subject to the Social Security payroll tax, calling it a "trillion-dollar increase on middle-class families." If elected, she will call for a bipartisan commission to address entitlement program problems.

Former Sen. John Edwards of North Carolina says he is committed to not making the deficit worse, but that he does not view deficit reduction as important as universal health care or global warming. On Social Security, he says he is opposed to raising the retirement age or cutting current or future benefits.

In general, the 2008 presidential candidates are talking about taxes and spending as separate propositions, complains Mr. Bixby of the Concord Coalition.

Rolling back the Bush tax cuts would pay for only a relatively small portion of the projected future rise in entitlements, he says, and given the sheer size of Social Security, Medicare, and defense spending, ending earmarked local projects would have little overall fiscal effect.

"What voters should look for" in a candidate he says, is, "Is there an acknowledgement that there are hard choices ahead?"

Fed rate cut to boost auto sales: Chrysler CEO

DETROIT (Reuters) - Chrysler Chief Executive Bob Nardelli said the Federal Reserve's emergency 75 basis point rate cut would help consumer confidence and boost auto sales in 2008.

"We are very pleased with the cut," Nardelli told reporters on the sidelines of the Automotive News World Congress on Tuesday. "It demonstrates a tremendous awareness that we need to improve some liquidity."

Earlier on Tuesday, the U.S. Federal Reserve cut interest rates by three-quarters of a percentage point to 3.5 percent in an effort to save the economy from a recession.

"For us, for the auto industry, it gives the auto financing companies the ability to really bring some more credit into the marketplace...it's going to help consumer confidence."

Nardelli, who has predicted industrywide sales of 15.5 million to 16 million vehicles for 2008, said the move could help U.S. auto sales climb above the 16 million mark this year.

"It could. That would be great," Nardelli said. "If it gets better...the auto industry will be very happy. It will give us some robustness, it will give us some wind in our sail to go through 2008.

U.S. auto sales fell for the second consecutive year in 2007, dragged down by a slowing economy, a slumping housing market and tighter credit markets that pinched less credit-worthy borrowers.

Full-year 2007 sales dropped almost 3 percent to 16.14 million vehicles, the lowest since 1998.

While the consensus view among Wall Street analysts and high-profile investors points to a further decline in auto sales in the world's single-largest market in 2008, there is still a debate about how deep it will go -- especially if the U.S. economy tipped into recession.

Earlier on Tuesday, Ford Motor Co (F.N) Chief Executive Alan Mulally said the Fed's interest-rate cut -- which was its largest in more than two decades -- was a "positive" for the auto industry.

The Fed's decision to "move decisively like this is very positive for all of us," Mulally said, speaking on the sidelines of the same conference.

But billionaire distressed investor Wilbur Ross told the conference the United States appeared to be slipping into a consumer-led recession despite the rate cut.

Industry experts and analysts have said the Detroit automakers -- General Motors Corp (GM.N), Ford and Chrysler -- will face increasing competition in 2008 and be forced to boost incentives to maintain sales volume amid weak consumer confidence.

All three automakers had been calling for a rate cut to boost confidence among U.S. consumers -- many of whom have been deferring purchases of big-ticket items such as vehicles.

Bush says stimulus deal can be reached quickly

WASHINGTON (Reuters) - U.S. President George W. Bush predicted on Tuesday that a deal could be reached with the U.S. Congress soon on a fiscal stimulus package and said it was needed to deal with "uncertainty" in the economic outlook.

"I'm confident that we can get an agreement passed, and we can get an agreement passed in relatively short order," Bush told reporters at an event to unveil a new program on financial literacy. "All of us want to get something done, all of us want to get something done that will be temporary and effective, and all of us want to get something done as fast as possible."

Bush said he and his advisers are carefully monitoring the troubles in the economy that have caused global financial markets to fall sharply.

"We have confidence in the long-term strength of America," Bush said. "But there is some uncertainty that we're going to have to deal with."

The Short View: Markets' demands

Give traders what they ask for and they still want more. No sooner had the US Federal Reserve delivered its sudden 75 basis point cut in the Fed Funds rate than some in the Chicago futures pits were moaning that Ben Bernanke had not eased monetary policy by a full percentage point.

The problem for the Fed is that for such moves to carry real heft it helps if they come as a pleasant surprise. The only surprise in yesterday's move was the timing - the market had already assigned a 75 per cent probability of such a move at the Fed's end-of-month rate-setting meeting.

Nevertheless, in spite of the initial curmudgeonly reaction, investors welcomed the Fed's largesse, trimming an opening 450-point loss on the Dow to a 150-point deficit by lunchtime in New York.

Considering the bloodletting in Asian markets earlier in the day, this was some feat, and was partly based on expectations that Mr Bernanke would knock another 25 basis points off rates next week.

But is the market right to imbue the Fed with such healing powers? Not according to Richard Bernstein, chief investment strategist at Merrill Lynch. He says investors are wrong to focus on interest moves by central banks because they only control the price of credit. "In simple terms, they cannot force financial institutions to either start or stop lending," he argues.

The Fed's inability to crimp private sector lending from 2004 to 2006 when it was tightening policy and the Bank of Japan's long-term failure to encourage lending in spite of rates nearly at zero are cited as examples of the monetary authorities' relative impotence when faced with entrenched attitudes.

The worry for investors is that today's wariness induced by the credit-crunch may prove to be another of those periods when lenders are immune to the Fed's inducements.

Why the financial turmoil is like an elephant in a dark room

"I was gradually coming to believe that the US economy's greatest strength was its resiliency - its ability to absorb disruptions and recover, often in ways and at a pace you'd never be able to predict, much less dictate." Alan Greenspan, 'The Age of Turbulence'.

We all hope that Mr Greenspan proves right about the US economy. The Federal Reserve's rate cut on Tuesday will succeed if Mr Greenspan's view is correct. Yet many fear he is wrong. Many, too, blame him for the current mess. So how did the world economy fall into its predicament?

One view is that this crisis is a product of a fundamentally defective financial system. An email I received this week laid out the charge: the crisis, it asserted, is the product of "greedy, immoral, solely self-interested and self-delusional decisions made throughout the 2000s, and earlier, by very real human beings at the very top of the financial food chain".

The argument would be that a liberalised financial system, which offers opportunities for extraordinary profits, has a parallel capacity for generating self-feeding mistakes. The story is familiar: financial innovation and an enthusiasm for risk-taking generate rapid increases in credit, which drive up asset prices, thereby justifying still more credit expansion and yet higher asset prices. Then comes a top to asset prices, panic selling, a credit freeze, mass insolvency and recession. An unregulated credit system, then, is inherently unstable and destabilising.

This is the line of argument associated with the late Hyman Minsky, who taught at Washington University, St Louis. George Magnus of UBS distinguished himself by arguing early that the present crisis is a "Minsky moment": "A collapse of debt structures and entities in the wake of asset price decay, the breakdown of 'normal' banking functions and the active intervention of central banks". This follows an extraordinary dependence on credit growth in the recent cycle (see chart).

Economists would offer contrasting explanations for this fragility. One is in terms of rational responses to incentives. Another is in terms of the short-sightedness of human beings. The contrast is between misdirected intelligence and folly.

Those who emphasise rationality can readily point to the incentives for the financial sector to take undue risk. This is the result of the interaction of "asymmetric information" - the fact that insiders know more than anybody else what is going on - with "moral hazard" - the perception that the government will rescue financial institutions if enough of them fall into difficulty at the same time. There is evident truth in both propositions: if, for example, the UK government feels obliged to rescue a modest-sized mortgage bank, such as Northern Rock, moral hazard is rife.

Yet it is also evident that everybody involved - borrowers, lenders and regulators - can be swept away in tides of all-too-human euphoria and panic. To err is human. That is one of the reasons regulation is rarely countercyclical: regulators can be swept away, as well. The financial deregulation and securitisation of the most recent cycle merely encouraged an unusually wide circle of people to believe they would be winners, while somebody else would bear the risks and, ultimately, the costs.

Yet there is a different perspective. The argument here is that US monetary policy was too loose for too long after the collapse of the Wall Street bubble in 2000 and the terrorist outrage of September 11 2001. This critique is widely shared among economists, including John Taylor of Stanford University.* The view is also popular in financial markets: "It isn't our fault; it's the fault of Alan Greenspan, the 'serial bubble blower'."

The argument that the crisis is the product of a gross monetary disorder has three variants: the orthodox view is simply that a mistake was made; a slightly less orthodox view is that the mistake was intellectual - the Fed's determination to ignore asset prices in the formation of monetary policy; a still less orthodox view is that man-made (fiat) money is inherently unstable. All will then be solved when, as Mr Greenspan himself believed, the world goes back on to gold. Human beings must, like Odysseus, be chained to the mast of gold if they are to avoid repeated monetary shipwrecks.

A final perspective is that the crisis is the consequence neither of financial fragility nor of mistakes by important central banks. It is the result of global macroeconomic disorder, particularly the massive flows of surplus capital from Asian emerging economies (notably China), oil exporters and a few high-income countries and, in addition, the financial surpluses of the corporate sectors of many countries.

In this perspective, central banks and so financial markets were merely reacting to the global economic environment. Surplus savings meant not only low real interest rates, but a need to generate high levels of offsetting demand in capital-importing countries, of which the US was much the most important.

In this view (which I share) the Fed could have avoided pursuing what seem like excessively expansionary monetary policies only if it had been willing to accept a prolonged recession, possibly a slump. But it had neither the desire nor, indeed, the mandate to allow any such thing. The Fed's dilemma then was that the only way to sustain domestic demand at levels high enough to offset the capital inflow (both private and official) was via a credit boom. This generated excessively high asset prices, particularly in housing. It has left, as a painful legacy, stretched balance sheets in both the non-financial and financial sectors: debt deflation, here, alas, we come.

When I read these analyses, I am reminded of the story in which four people are told to go into a dark room, hold on to whatever they find and then say what it is. One says it is a snake. Another says it is a leathery sail. A third says it is a tree trunk. The last says it is a pull rope.

It is, of course, an elephant. The truth is that an accurate story would be a combination of the various elements. Global macroeconomic imbalances played a huge part in driving monetary policy decisions. These, in turn, led to house-price bubbles and huge financial excesses, particularly in securitised assets. Now policymakers are forced to deal with today's symptoms as best they can. But they must also tackle the underlying causes if further huge disturbances are not to come along. What those responses should ideally be at both national and global levels will be the subject of my post-World Economic Forum column next week.