Tuesday, February 26, 2008

Widespread power outages reported across Florida

Widespread power outages reported across Florida

Gary Taylor and Kristen Reed

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As many as 800,000 customers are without power today as Florida is experiencing widespread power outages.

The state's largest electric company says it has not determined a cause.Local utility officials said two nuclear power plants in South Florida went out.

Blackouts were reported throughout parts of Central Florida, as well as the Tampa Bay area and area from Miami to Jacksonville.

In the Orlando area, schools, businesses and intersections are without power this afternoon.

In Orange County, Dommerich Elementary, Maitland High and Riverside Elementary are without power. Schools in the southwest area, including Freedom High and Sadler Elementary, briefly lost power earlier today.

Customers also reported the power failed at a Wal-Mart in Apopka.

In Volusia, motorists are reporting traffic signals out at intersections from Ormond Beach in northeast Volusia to Deltona and DeBary in the southwest part of the county, Sheriff's spokesman Brandon Haught said.

About 7,000 customers of Kissimmee Utility Authority lost power for about 20 minutes today. Spokesman Chris Gent said the system, sensing a blackout, shut itself down to protect the equipment and then went back online. All KUA customers now have power.

Early reports say the areas of Miami, Doral, Westchester and Pembroke Pines are without power, as is the Port of Miami. The outages began shortly after 1 p.m. EST.

Miami-Dade Police Department spokesman Nelda Fonticiella tells WSVN-TV that they are working with Florida Power & Light to assess the situation. It is unclear how many people are affected.

An FPL spokeswoman told The Miami Herald the company is investigating the problem. Earlier, CNN reported as many as 4 million customers lost power, but FPL said in a news release that from 600,000 to 800,000 customers experienced blackouts.

In Dade County, students were being held at schools for safety reasons due to large numbers of traffic signals being out due to power failures, said Quintin Taylor, media relations specialist for Miami-Dade County Public Schools.

Students were only being released to the care of a parent or guardian, he said. All school transportation was suspended due to the non-functional traffic lights, he said

Kathleen Bergen, spokeswoman for the Federal Aviation Administration, said control towers at South Florida's airports are operating on engine-driven generators. She said the emergency generators kick on "automatically when commercial power fails, regardless of the cause."

Major hospitals in Broward were also relatively unaffected by the outage, thanks to back-up generators, officials said.

"We just had a momentary blip," said Kathy Capstack, spokeswoman for Broward General Medical Center, in Fort Lauderdale.

Sarah Marmion, a spokeswoman for FPL, said initial reports indicated the problem is confined to South Florida, "but it could be a wider area."

There was no estimate on when power will be back on or how many customers are being affected.

"It's statewide, going all the way up to Daytona," said Bill Huff, Miramar's Chief of Emergency Medical Services, speaking from the Broward Emergency Operations Center.

Why the War on Obama

Why the War on Obama

While some cynics still view Barack Obama’s appeal for “change” as empty rhetoric, it’s starting to dawn on Washington insiders that his ability to raise vast sums of money from nearly one million mostly small donors could shake the grip that special-interest money has long held over the U.S. government.

This spreading realization that Obama’s political movement might represent a more revolutionary change than previously understood is sparking a deepening resistance among defenders of the status quo – and prompting harsher attacks on Obama.

Right now, the front line for the Washington Establishment is Hillary Clinton’s struggling presidential campaign, which has been stunned by Obama’s political skills as well as his extraordinary ability to raise money over the Internet. Obama’s grassroots donations have negated Clinton’s prodigious fundraising advantage with big donors.

Powerful lobbies – from AIPAC to representatives of military and other industries – also are recognizing the value of keeping their dominance over campaign cash from getting diluted by Obama’s deep reservoir of small donors. It’s in their direct interest to dent Obama’s momentum and demoralize his rank-and-file supporters as soon as possible.

So, neoconservatives and other ideological movements – heavily dependent on grants from the same special interests – are now joining with the Clinton campaign to tear down Obama by depicting him as unpatriotic, un-vetted, possibly a “closet Muslim.”

On Feb. 25, the New York Times’ new neocon columnist William Kristol attacked Obama’s patriotism by citing the Illinois senator decision to stop wearing an American flag lapel pin because, Obama said, he saw how George W. Bush was exploiting the flag to stampede the nation toward war with Iraq.

“You know, the truth is that right after 9/11, I had a pin,” Obama said when asked about his lack of a flag pin in October 2007. “As we’re talking about the Iraq War, that became a substitute for I think true patriotism, which is speaking out on issues that are of importance to our national security, I decided I won’t wear that pin on my chest.”

In a column entitled “It’s All About Him,” Kristol mocked this explanation as an example of both Obama’s dubious claim to patriotism and his pomposity.

“Leaving aside the claim that ‘speaking out on issues’ constitutes true patriotism,” Kristol wrote. “What’s striking is that Obama couldn’t resist a grandiose explanation. … Moral vanity prevailed. He wanted to explain that he was too good – too patriotic! – to wear a flag pin on his chest.”

Kristol then turned on Michelle Obama for her comment about how excited she was by the public outpouring for political change that has surrounded her husband’s campaign: “For the first time in my adult lifetime, I’m really proud of my country,” she said.

Kristol wrote: “Can it really be the case that nothing the U.S. achieved since [the mid-1980s] has made her proud? Apparently.” [NYT, Feb. 25, 2008]

Clinton Money Woes

Meanwhile, the Clinton campaign – having burned through $130 million and needing a $5 million emergency loan from the Clintons’ personal finances – has gone hat in hand to some of the special interests with a strong stake in protecting the Washington status quo.

For instance, campaign finance director Jonathan Mantz met with donors from the American Israel Public Affairs Committee in a Washington hotel lobby when these pro-Israel AIPAC supporters were in town for other business, the Wall Street Journal reported on Feb. 14.

The approach made sense because these pro-Israeli lobbyists remain wary of Obama’s advocacy of high-level talks with Iran, his opposition to the Iraq War, and his skimpier record of supporting Israel when compared with Hillary Clinton or John McCain.

One former Israeli official told me that the Israeli government feels it can work with Obama, Clinton or McCain, but that the Israeli lobby in the United States is adamantly opposed to Obama, preferring Clinton because “they own her.” The ex-official said the lobby has some concern, too, with McCain because of his independent streak.

Like other powerful lobbies, AIPAC is threatened by Obama’s ability to raise large sums of money from everyday Americans, thus reducing the need of Washington politicians to hold out their tin cups to AIPAC’s legendary network of wealthy donors. [For details, see Consortiumnews.com’s “How Far Will the Clintons Go?”]

After having lost 11 consecutive contests, the Clinton campaign is now turning to what its “kitchen sink” strategy of throwing whatever it has at Obama.

Over the past few weeks, Clinton surrogates have been spreading rumors about Obama’s association with people with Arab names and contributions he has received from 1970s-era student radicals (though they’re now gray-haired, middle-class professionals). Some are packaging the attacks under the title, “The Obama Scandals.”

On Feb. 26, Internet gossip Matt Drudge reported that a Clinton staffer e-mailed a photo taken of Obama during a 2006 trip to Kenya when he was dressed in a turban and other traditional garb of a Somali Elder. That reinforced earlier rumors spread about Obama as a secret Muslim, though he has long belonged to a Christian church in Chicago.

Obama’s campaign manager David Plouffe denounced the Clinton campaign for circulating the photo with the goal of “shameful offensive fear-mongering.”

The Clinton campaign denied knowledge of how the photo was disseminated, but campaign manager Maggie Williams attacked the Obama campaign for overreacting. “If Barack Obama’s campaign wants to suggest that a photo of him wearing traditional Somali clothing is divisive, they should be ashamed,” she said.

Two Faces of Hillary

Sen. Clinton herself seemed torn between showing voters her softer side and releasing her inner combative persona.

At the end of a Texas debate on Feb. 21, Sen. Clinton extended her hand to Obama and expressed how “proud” she was to be on the same stage with him. But she soon switched tactics and launched harsh attacks on Obama.

On Feb. 23, reacting to flyers that the Obama campaign distributed in Ohio criticizing her positions on the North American Free Trade Agreement and the mandate included in her health insurance plan, Clinton rebuked her rival.

“Shame on you, Barack Obama,” Clinton shouted, before instructing him to “meet me in Ohio, and let’s have a debate about your tactics and your behavior in this campaign.”

To some observers, Clinton’s outburst had the look of an angry queen scolding a misbehaving servant boy, or a principal pulling a wayward student by the ear to the school office.

“Enough with the speeches and the big rallies and then using tactics right out of Karl Rove’s playbook,” she added, suggesting that the flyers contrasting the positions of the two rivals were somehow a novel or diabolical concept.

In reality, the Obama flyers were pretty standard stuff, more from the playbook of Tom Paine than Karl Rove. If Rove’s playbook were in use, the flyers would have claimed to come from a pro-Hillary group while advocating legalization of child pornography.

But the Clinton campaign was only warming up. On Feb. 24, during a stop in Rhode Island, Clinton mocked Obama’s speeches calling for change:

“Now, I could stand up here and say, ‘Let’s just get everybody together. Let’s get unified. The sky will open. The light will come down. Celestial choirs will be singing, and everyone will know we should do the right thing and the world will be perfect.”

Amid some chuckles from her supporters, Clinton added, “Maybe I’ve just lived a little long, but I have no illusions about how hard this is going to be. You are not going to wave a magic wand and the special interests disappear.”

Though this Clinton line of attack is popular among some of her backers – ridiculing the supposed naivety of Obama’s young supporters – Obama has never suggested that countering the entrenched special interests of Washington would be easy.

Obama’s argument has been that only an energized American public can elect representatives to bring about change and then the people must stay vigilant to make sure there is no backsliding.

While it’s true Obama doesn’t spell out all the difficulties ahead, his argument is at least as realistic as Clinton’s – that Republican obstructionism can be countered with “hard work.” That approach failed miserably when her initial health care plan collapsed in 1994 despite her strenuous efforts on its behalf.

More to the immediate point, however, Obama’s success in getting out from under the special-interest financial dependency may be the most significant political development of this election cycle.

That success also helps explain the emerging war on Obama – and the rising hysteria among Establishment figures about his surging candidacy.

Crude surpasses $101

Crude surpasses $101 as cold weather lingers

Heating oil surges to new high; natural gas at highest level in two years

By Moming Zhou

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Crude-oil futures rallied more than $2 on Tuesday to above $101 a barrel as cold weather in the U.S. continued. Heating oil surged to a new record high.

Crude for April delivery gained $2.3, or 2.3%, to a new high of $101.11 a barrel on the New York Mercantile Exchange in early afternoon trading. The intraday high surpasses crude's last record of $100.65 hit last week.

Other energy futures also surged. Heating-oil futures for March delivery surged to $2.8174 a gallon, the highest a front-month contract has ever seen, and natural-gas futures for March delivery gained 21.1 cents to $10.212 per million British thermal units, the highest since January 2006.

Heavy snow is expected to develop in the Northeast U.S. later today through Wednesday, where some areas could see 1 to 2 feet of snow by tomorrow evening, according to the Weather Channel.

Cold weather "kept heating oil, natural gas and crude oil all relatively firm, providing a steadier tone for the broader markets," said Edward Meir, an analyst at futures brokerage MF Global.

Also helping Tuesday's rally in oil prices was the weaker dollar. The index, which tracks the value of the greenback against a basket of other major currencies, fell 0.6% to 75.08. See Currencies.

A weaker greenback makes dollar-denominated commodities, such as oil, less expensive for buyers holding other currencies. Those buyers are likely to bid up prices.

Inventories expectations

Crude fell modestly early Tuesday on expectations that U.S. crude inventories have risen for a seventh week, and as economic concerns intensified after data showed house values in the U.S. dropped by the largest margin in at least 20 years.

The U.S. Energy Information Administration is expected to report Wednesday that crude inventories rose by 2.6 million barrels last week, according to analysts surveyed by Dow Jones Newswires. In the previous week, the EIA reported crude stockpiles gained for a sixth week, up 4.2 million barrels.

Standard & Poor's reported Tuesday that U.S. home values fell 8.9% in 2007, the largest decline in at least two decades. Home prices fell 5.4% in the fourth quarter alone, S&P said. See Economic Report.

Continuing its downward slide, U.S. consumer confidence plummeted in February, the Conference Board reported Tuesday, as worries about jobs and the economy pushed expectations to a 17-year low. See Economic Report.

Also on the Nymex, March reformulated gasoline rose 0.81 cent to $2.55 a gallon.

The Economic Costs Of War

The Economic Costs Of War

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With record oil prices, rising family debt, and a slowing housing market, Americans are now worried about the economy more than ever. Even 45 percent of economists expect a recession this year. With the Bush administration spending $10 billion a month on the war in Iraq, it is therefore not surprising that Americans increasingly view withdrawal from Iraq as a way out of this economic slump. In fact, 68 percent of the public rank pulling out of Iraq first on a list of proposed economic remedies, beating out tax cuts. Yesterday, a coalition of progressive groups -- including MoveOn, the Center for American Progress Action Fund, USAction, SEIU, VoteVets, and Americans United for Change -- announced a new "Iraq/Recession" campaign. This $15 million nationwide effort will aim to end the war by raising awareness of the domestic costs that have been neglected because of President Bush's singular focus on Iraq. "There is great concern, anxiety, and angst about economic security," former senator John Edwards told reporters yesterday. "All of these things are made worse by the war in Iraq. ... People don't understand why we're spending $500 billion and counting at the same time we have 47 million without healthcare, 37 million living in poverty."

PRE-WAR MISCALCULATIONS: The Bush administration was anxious to go to war, but not anxious to pay for it. In April 2003, then-administrator of the Agency for International Development Andrew Natsios pledged that American taxpayers would pay no more than $1.7 billion to reconstruct Iraq. In March 2003, Paul Wolfowitz infamously predicted that Iraq would be able to "finance its own reconstruction." In reality, total Iraq war requests and authorizations have amounted to $624 billion. Yet just two months after announcing the invasion of Iraq, Bush ordered the first major wartime taxcut in history. The debt was $5.7 trillion when Bush took office; it will be $10.3 trillion by the time he leaves. Economists predicted this fall-out. In 2002, Gerd Hausler, director of international capital markets at the IMF, said that "a serious conflict with Iraq would not be a very healthy development" for the financial markets. Robert Shapiro, undersecretary of commerce in the Clinton administration stated, "If the [Iraq] conflict wears on or, worse, spreads, the economic consequences become very serious." More recently, Nobel laureate Joseph Stiglitz wrote in Vanity Fair, "The soaring price of oil is clearly related to the Iraq war. The issue is not whether to blame the war for this but simply how much to blame it."

EMPLOYMENT FOR DEFENSE CONTRACTORS: Last week, President Bush stated that the Iraq war has nothing to do with the faltering economy. "I think actually the spending in the war might help with jobs...because we're buying equipment, and people are working," he said. The Iraq war has created jobs -- for the administration's defense contractor allies. Bush's most recent budget is a windfall for contractors. Between 2000 and 2005, procurement was the "fastest growing component of federal discretionary spending." Five years after the U.S. invasion of Iraq, however, national unemployment is going up. Between December 2006 and December 2007, the national unemployment rate increased by 13.6 percent in seasonally adjusted terms, from 4.4 to 5.0 percent.

NEGLECTING DOMESTIC PRIORITIES: "At a time of mounting deficits, when we are spending about $10 billion a month in Iraq, issues such as reforming the health-care system and repairing the national infrastructure are likely to remain neglected," write John Podesta and Lawrence J. Korb of the Center for American Progress and Ray Takeyh of the Council on Foreign Relations in today's Washington Post. "The United States has too many national priorities that cannot be realized if yet another beleaguered administration prolongs this costly and unpopular war." Indeed, Bush seems to deem domestic priorities as "excessive spending." He recently vetoed a bill to provide expanded health insurance for 10 million children, and then requested $172 billion more for the war. When the Senate passed a broad stimulus package that offered an extension of unemployment benefits and help for borrowers caught in subprime loans, the White House again called it unaffordable government spending.

RISING COST OF VETERANS CARE: While the Bush administration is devoting considerable resources to the conflict in Iraq, it is paying less attention to what happens when U.S. troops return home. A recent American Journal of Public Health study estimated that in 2004, "nearly 1.8 million veterans were uninsured and unable to get care in veterans' facilities." This number has jumped dramatically since 2000, when there were 290,000 uninsured veterans. Recently discharged veterans are also "having a harder time finding civilian jobs and are more likely to earn lower wages for years." These costs will only continue to grow the longer the United States remains in Iraq. VoteVets has released a new ad on conservatives' misplaced priorities here.

Goldman, Lehman May Not Have Dodged Credit Crisis

Goldman, Lehman May Not Have Dodged Credit Crisis

By Mark Pittman

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Even Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. may find they haven't dodged the credit crisis.

The new source of potential losses: so-called variable interest entities that allow financial firms to keep assets such as subprime-mortgage securities off their balance sheets. VIEs may contribute to another $88 billion in losses for banks roiled by the collapse of the housing market, according to bond research firm CreditSights Inc. Goldman, which hasn't had any of the industry's $163 billion in writedowns, said last month it may incur as much as $11.1 billion of losses from the instruments.

The potential for a fire-sale of the assets that would bring another round of charges has ``always been our greatest fear,'' said Gregory Peters, head of credit strategy at New York-based Morgan Stanley, the second-biggest securities firm behind Goldman in terms of market value.

VIEs, known as special purpose vehicles before Enron Corp.'s collapse in 2001, finance themselves by selling short- term debt backed by securities, some of which are insured against default.

Now that Ambac Financial Group Inc. and other guarantors have started to lose their AAA financial-strength ratings, Wall Street firms may be forced to return those assets to their books, recording the declining value as losses. MBIA Inc., the biggest insurer, said yesterday it plans to separate its municipal and asset-backed businesses, a move Peters said would likely result in a lower credit rating for the types of assets owned by VIEs.

`Significant Consequences'

Wall Street's writedowns stem from a surge in mortgage delinquencies among homeowners with the riskiest subprime-credit histories. The industry's VIEs, also known as conduits, had $784 billion in commercial paper outstanding as of last week, according to Moody's Investors Service and the Federal Reserve.

``There's a big number at work here and it will have significant consequences,'' said J. Paul Forrester, the Chicago- based head of the CDO practice at law firm Mayer Brown. ``The great fear is that a combination of subprime CDOs, SIVs and conduits result in a flood of assets into an already-stressed market and there's a price collapse.''

CreditSights has one of the highest projections for additional losses. Moody's says the fallout from VIEs, collateralized debt obligations, and other deteriorating assets may run to $30 billion. CDOS are packages of debt sliced into pieces with varying ratings.

`Lightning Rod'

One type of VIE that's already been forced to unwind or seek bank financing is the structured investment vehicle, or SIV. Like SIVs, VIEs often issue commercial paper to finance themselves and may have multiple outside owners that share in the profits and losses. Because banks agree to back VIEs with lines of credit, they have to buy commercial paper or notes when no one else will.

Ambac, the world's second-biggest bond insurer, and two smaller competitors lost a AAA rating from at least one of the three major ratings companies in recent months. Standard & Poor's yesterday affirmed the AAA ranking of MBIA, the largest ``monoline,'' though it said the outlook is ``negative.'' MBIA yesterday eliminated its quarterly dividend and said it won't write new guarantees on asset-backed securities for six months.

The more widespread the downgrades, the more likely the assets in the VIEs will be cut. Some buyers of the debt demand the highest ratings, giving banks a vested interest in helping the insurers salvage their ratings.

Ambac Financing

New York-based Ambac may get $3 billion in new capital with the help of Citigroup Inc. and Dresdner Bank AG as early as this week, the Wall Street Journal reported yesterday. MBIA raised money by selling common shares and warrants to private-equity firm Warburg Pincus LLC and issuing $1 billion of surplus notes.

``The lightning rod of the monoline fix is so important to so many banks,'' said Thomas Priore, chief executive officer of New York-based Institutional Credit Partners LLC, which manages $12 billion in CDOs.

Accounting rules allow financial firms to keep VIEs off their balance sheets as long as they're not the ones that stand to gain or lose the most from the entity's activities. A bank would also have to account for its portion of a VIE if prices for the debt owned by the fund fall too far or if the bank is forced to provide financing.

Goldman, Lehman

Goldman, the most profitable Wall Street firm, and Lehman, the biggest commercial-paper dealer, have avoided much of the pain so far.

Goldman, which earned a record $11.6 billion in the year ended in November 2007, said it avoided writedowns by setting up trades that would profit from a weaker housing market. Now the threat is $18.9 billion of CDOs in VIEs, the firm said in a regulatory filing on Jan. 29. Goldman spokesman Michael DuVally declined to comment.

Merrill Lynch & Co. analyst Guy Moszkowski today cut his estimate for Goldman's first-quarter earnings for the second time this month, citing growing losses from assets outside residential mortgages.

Lehman, which wrote down the net value of subprime securities by $1.5 billion, guaranteed $7.5 billion of VIE assets as of Nov. 30, according to a filing also made on Jan. 29.

``We believe our actual risk to be limited because our obligations are collateralized by the VIE's assets and contain significant constraints,'' Lehman said in the filing. Spokeswoman Kerrie Cohen wouldn't elaborate.

Citigroup Losses

Citigroup, which has incurred $22.1 billion in losses from the subprime crisis, has $320 billion in ``significant unconsolidated VIEs,'' according to a Feb. 22 filing by the New York-based bank. New York-based Merrill Lynch, which recorded $24.5 billion in subprime writedowns, has $22.6 billion in VIEs, according to CreditSights.

Merrill spokeswoman Jessica Oppenheim declined to comment, as did Citigroup's Danielle Romero-Apsilos.

The securities in the VIEs may be worth as little as 27 cents on the dollar once they're put back on balance sheets, according to David Hendler, an analyst at New York-based CreditSights. Hendler based his estimate on the recent sale of $800 million of bonds by E*Trade Financial Corp.

Predictions for losses vary widely because banks aren't required to specify the type of assets being held in the VIEs or how much they are worth, said Tanya Azarchs, managing director for financial institutions at S&P.

``The disclosure on VIEs is hopeless,'' Azarchs said. ``You have no idea of the structure or how that structure works. Until you know that you don't know anything. It's like every day you come into the office and another alphabet soup has run off the rails.''

Bernanke Fails to Cut Rates for Most Americans With Easy Credit

Bernanke Fails to Cut Rates for Most Americans With Easy Credit

By Kathleen M. Howley

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Ben S. Bernanke, who has reduced interest rates faster than any Federal Reserve chairman since 1982, is failing to bring down the cost of credit for most American homeowners.

The average fixed rate for a 30-year home loan rose more than half a percentage point during the past four weeks to 6.04 percent, according to Freddie Mac, the world's second-largest mortgage buyer after Fannie Mae. The increase occurred after the Fed lowered its benchmark rate by 0.75 percent on Jan. 22 and cut the rate by a further half-point eight days later.

When Bernanke faces Congress tomorrow and Feb. 28, he will be questioned about why long-term bond yields are moving in the opposite direction to the Fed funds rate, said Credit Suisse Group Chief Economist Neal Soss. Lower fixed mortgage rates would avert foreclosures and give consumers more money to spend, said Diane Swonk, chief economist of Mesirow Financial Inc. in Chicago.

``Chairman Bernanke is caught in a tug-of-war between growth and inflation,'' said Swonk, who is a member of the Congressional Budget Office's panel of economic advisers. ``Inflation is still a threat and that influences the mortgage-bond investors who ultimately set the fixed rates.''

More than two-thirds of Americans own their own home, with total mortgage debt of $11 trillion, data compiled by the Fed show. About a third of the loans are adjustable-rate mortgages, according to the Federal Housing Finance Board. Nine out of 10 people with so-called ARMs who refinanced in the fourth quarter moved to a fixed-rate loan, Freddie Mac said in a Feb. 19 report.

Greenspan's `Conundrum'

Three years ago, when former Fed Chairman Alan Greenspan testified in Congress, he faced a situation that was the complete opposite of what confronts Bernanke: long-term yields were declining as the Fed's benchmark interest rate was rising.

``The broadly unanticipated behavior of world bond markets remains a conundrum,'' Greenspan said in his Feb. 16, 2005, testimony to Congress.

This year, the Fed is lowering rates in an attempt to avert the first recession since 2001. The January cuts of 1.25 percentage points were the largest since August 1982 when the Open Market Committee slashed rates by 2 percentage points.

Bernanke and his colleagues have no direct control over mortgage rates. Fixed rates historically decline in tandem with Fed rate cuts that signal slower economic growth and a reduced threat of inflation, said Keith Shaughnessy, president of Foundation Mortgage Corp. in Littleton, Massachusetts.

Yield Spreads

Right now, bond investors aren't convinced that inflation isn't a problem, he said. The yield of 10-year Treasury notes climbed to 3.88 percent from 3.43 percent on Jan. 22.

Investors in mortgage-backed securities guaranteed by government-linked entities such as Fannie Mae also are demanding higher yields over Treasuries and other benchmarks as competing investments offer greater returns. Spreads on so-called current- coupon agency mortgage securities, whose yields determine interest rates for prime loans below $417,000, have reached the highest since the 1980s, according to UBS AG.

The extra yield that investors demand to own agency mortgage-backed securities over 10-year U.S. Treasuries rose to an eight-year high of 1.94 percentage points this week, up 0.59 percentage points from Jan. 15.

``Lowering fixed rates and making it easier to get a mortgage is the best thing Bernanke could do for housing, but it's the one thing he has no direct control over,'' Shaughnessy said. ``The only thing he can do is try to reassure the market.''

Economic Outlook

Fed officials cut their 2008 forecasts for economic growth by half a percentage point at the January meeting and said inflation picked up in the closing months of 2007, according to minutes of Fed meetings released last week.

A combination of slowing growth and higher inflation, so- called stagflation, will be in the spotlight as Bernanke testifies, said Credit Suisse's Soss, who worked as an aide to former Fed Chairman Paul Volcker.

``It's an election year, with all of the House and a third of the Senate up for grabs,'' Soss said. ``The temptation to second-guess policy makers will be visible.''

The average U.S. rate for a 30-year fixed mortgage climbed above 6 percent last week from a four-year low of 5.48 percent four weeks earlier, according to Freddie Mac in McLean, Virginia. The increase added $107 to monthly payments for a $300,000 mortgage, data compiled by Bloomberg show. Over the course of a 30-year loan, it added $38,000.

Mortgage applications in the U.S. fell by the most in four years during the week ended Feb. 15 as higher rates sapped demand, the Mortgage Bankers Association in Washington reported last week.

`Reject the Loan'

The group's index of applications to buy a home and refinance a loan fell 23 percent to 822.8 in the week ended Feb. 15, the biggest drop since July 2003 when it fell 24 percent when rates climbed more than a percentage point.

About 55 percent of U.S. banks tightened underwriting standards on prime mortgages in 2007's fourth quarter, according to the Federal Reserve Senior Loan Officer Survey, published in January. That's up from 40 percent in the October survey.

The report showed 85 percent of banks raised qualifications for so-called non-traditional loans, such as interest-only mortgages, compared with 60 percent in the October survey.

``Everyone is afraid,'' said Shaughnessy of Foundation Mortgage. ``The mentality is: when in doubt, reject the loan.''

Bank seizures of U.S. homes almost doubled in January as property owners failed to make higher payments on adjustable-rate mortgages, data compiled by Irvine, California-based research firm RealtyTrac Inc. show. Repossessions rose 90 percent to 45,327 last month from a year earlier, RealtyTrac said today in a statement. Total foreclosure filings, which include default and auction notices as well as bank seizures, increased 57 percent.

Home Sales

Sales of existing U.S. homes declined in January to the lowest since records of combined condominium and single-family transactions began nine years ago, and prices slid for the sixth time in seven months, the Chicago-based National Association of Realtors reported this week.

January sales of new houses, reported tomorrow by the Commerce Department, probably fell to an annualized rate of 600,000 from 604,000 in December, according to the average estimate from 69 economists surveyed by Bloomberg.

``Unless we see a containment of inflation and more demand for mortgage bonds we won't see lower fixed rates, no matter what Bernanke does,'' Shaughnessy said.

U.S. Consumer Confidence Declines to Five-Year Low

U.S. Consumer Confidence Declines to Five-Year Low

By Courtney Schlisserman

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Consumer confidence in the U.S. fell more than forecast in February to the lowest level since the start of the Iraq war as the labor market cooled and the economy faltered.

The Conference Board's index of confidence decreased to 75, the lowest since March 2003, from a revised 87.3 in January, the New York-based group said today. The employment outlook weakened and expectations for the next six months dropped to the lowest level since January 1991, the start of the Gulf War.

Americans are worrying more about the economy because the housing market is in its third year of a slump, employment has dropped, and gasoline and food prices are elevated. That may threaten consumer spending, which already has slowed, and further push down economic growth.

``With so few consumers expecting conditions to turn around in the months ahead, the outlook for the economy continues to worsen and the risk of a recession continues to increase,'' said Lynn Franco, director of the Conference Board's consumer research center, in a statement.

Treasury notes extended gains after the report, while the dollar remained weaker against the euro.

Economists forecast the Conference Board's measure would fall to 82 from a previously reported 87.9, according to the median of 66 forecasts in a Bloomberg News survey. Estimates ranged from 76.3 to 87.

Jobs Outlook

The Conference Board's measure of present conditions dropped to 100.6 in February from 114.3 the prior month. The gauge of expectations for the next six months decreased to 57.9 from 69.3, the report showed.

The share of consumers who said jobs are plentiful declined to 20.6 percent, from 23.8 percent last month. Those saying jobs are hard to get increased to 23.8 percent from 20.6 percent a month ago.

The proportion of people who expect their incomes to rise over the next six months decreased to 17.0 percent from 18.1 percent. The share expecting more jobs dropped to 9 percent from 10.5 percent.

``The consumer's been in a tough spot for a while now,'' said Ryan Reed, an economist at National City Corp. in Cleveland, who forecast consumer confidence would fall to 76.3, the lowest projection in the Bloomberg News survey. ``The years of elevated oil prices and weakening housing market are starting to catch up in the sentiment numbers.''

Separate reports today raised concerns about inflation and a weakening housing market.

Inflation Signals

Prices paid to U.S. producers rose 1 percent in January, more than twice as much as forecast, the Labor Department said. Home prices in 20 U.S. metropolitan areas fell 9.1 percent in December, the most on record, the S&P/Case-Shiller home-price index showed.

The U.S. lost jobs for the first time in four years last month. The Labor Department is scheduled to release February's employment report on March 7.

This month weekly initial jobless claims have remained elevated and the number of Americans continuing to stay on benefit rolls reached the highest level in more than two years, signaling that weakness in the labor market continues.

Outside of the labor reports, other releases are showing weakness in the housing market is spreading to other parts of the economy. The Institute for Supply Management's non- manufacturing index fell to 41.9 in January, the lowest level in more than six years, and the Federal Reserve Bank of Philadelphia's general economic index contracted the most in seven years this month.

Fed's Response

Federal Reserve officials last month cut their forecast for U.S. growth this year to a range of 1.3 percent to 2 percent, from 1.8 percent to 2.5 percent predicted in October. Two members of the National Bureau of Economic Research's business cycle dating committee, the panel charged with dating U.S. economic cycles said last week that it's too early to decide whether the U.S. is in recession.

Fed policy makers last month lowered their benchmark rate by 1.25 percentage point to 3 percent, including a three- quarters-of-a-point cut in an emergency meeting on Jan. 22. Central bankers are scheduled to next vote on the direction of interest rates March 18.

Higher energy and food bills also are hurting consumers' outlooks and their ability to spend on non-essential items. The amount of Americans must spend each month on debt service, housing, medical care, food and energy rose to 66.9 percent of their total spending in December, the highest since record- keeping began in 1980, according to Bloomberg figures.

Spending Curtailed

Consumers are scaling back spending. Retail sales excluding automobiles and gasoline were unchanged in January, the Commerce Department reported on Feb. 13.

In December, consumer spending, which makes up about 70 percent of gross domestic product, grew at the slowest pace in six months. The government is scheduled to release its January report on spending on Feb. 29.

U.S. Stocks Fall as Producer Prices Top Forecast

U.S. Stocks Fall as Producer Prices Top Forecast; Google Slumps

By Elizabeth Stanton

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U.S. stocks fell for the first time in three days after producer prices increased more than forecast, spurring concern inflation may accelerate even as the economy slows.

General Motors Corp., General Electric Co. and Alcoa Inc. led declines in New York trading after the Labor Department said wholesale prices climbed more than twice the rate forecast by economists. Office Depot Inc., the world's second-largest office-supplies retailer, tumbled the most since December after saying small businesses and consumers curbed spending. Google Inc. dropped to the lowest since May after UBS AG slashed its earnings estimates for the most-popular search engine.

The Standard & Poor's 500 Index dropped 6.01 points, or 0.4 percent, to 1,365.79 at 10:32 a.m. in New York. The Dow Jones Industrial Average lost 38.51, or 0.3 percent, to 12,531.71. The Nasdaq Composite Index slid 6.63, or 0.3 percent, to 2,320.85. About eight stocks dropped for every seven that rose on the New York Stock Exchange.

``High inflation creates a difficult environment for equity investors,'' said Steven Neimeth, a Jersey City, New Jersey- based mutual-fund manager at AIG SunAmerica Asset Management Corp., which manages $56 billion. ``Slower economic growth in the U.S. and globally will likely result in inflation declining, but it may take a few quarters before we see it.''

The 1 percent increase in prices paid to U.S. producers spurred concern that profits at S&P 500 companies will extend the worst slump since 2001. A separate report showed consumer confidence fell more than forecast in February to the lowest level in five years as the labor market cooled and the economy faltered.

GM, Google

GM, the biggest automaker, dropped 37 cents to $23.83. GE, the world's largest maker of power-plant turbines, locomotives and jet engines, lost 36 cents to $33.85. Alcoa, the third- largest aluminum producer, fell 39 cents to $38.46.

Google fell $21.62 to $464.82. Paid advertisements viewed dropped 12 percent from the previous quarter and were almost unchanged from a year earlier, UBS analyst Benjamin Schachter wrote, citing a report by researcher ComScore Inc. Viewings declined even as Google's total searches jumped 39 percent from a year earlier.

Office Depot slumped 85 cents to $13.42. Fourth-quarter profit fell 85 percent to $18.8 million, or 7 cents a share, as small businesses and consumers in the U.S. and Canada curbed spending. Excluding one-time items, profit trailed analysts' estimates by 7 cents a share.

Economy Watch

The Conference Board's index of consumer confidence decreased to 75 from a revised 87.3 in January that was lower than previously reported. The employment outlook weakened and expectations for the next six months dropped to the lowest level since January 1991, at the beginning of the Gulf War.

The worst housing slump in a quarter century deepened in December, a report showed. Home prices in 20 U.S. metropolitan areas fell 9.1 percent in December from a year earlier, the most on record, as measured by the S&P/Case-Shiller home-price index. Home prices dropped 8.9 percent in the fourth quarter from a year earlier, the biggest decline in 20 years of record-keeping.

The U.S. has moved closer to a recession in recent weeks, with payrolls shrinking, manufacturing stalling and the housing market showing no sign of recovery. At the same time, some Fed officials also considered that a reversal of recent rate cuts may be needed once the economy stabilizes, minutes of the Fed's two January meetings showed last week.

Shares in Asia and Europe gained today. Germany's Ifo institute said its business climate index unexpectedly climbed for a second month in February, indicating Europe's largest economy may cope with slowing U.S. growth and higher oil prices.

Macy's, RadioShack

Macy's Inc. added 3 percent to $25.49. The owner of its namesake chain and Bloomingdale's reported 2.6 percent more fourth-quarter profit than analysts estimated, according to Bloomberg data, because of a drop in costs to integrate former May Department Stores Co. locations.

RadioShack Corp. rose $1.89 to $17.63. The third-largest U.S. electronics chain said fourth-quarter profit rose more than analysts estimated after it lowered expenses and closed unprofitable stores.

Tenet Healthcare Corp. climbed 55 cents to $4.83. The second-biggest publicly held U.S. hospital chain reported a narrower loss as it added patients and increased revenue per visit.

Nordstrom Inc. rose $1.59 to $38.57. The department-store operator posted fourth-quarter profit 2.8 percent higher than analysts estimated.

Rite Aid Corp. added 24 cents to $2.85. The third-largest U.S. drugstore chain was raised to ``overweight'' from ``neutral'' at JPMorgan Chase & Co., which said shares are undervalued and an ``uptick in flu trends'' may drive pharmacy and over-the-counter sales.

Producer Prices in U.S. Increase More Than Forecast

Producer Prices in U.S. Increase More Than Forecast

By Bob Willis

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Prices paid to U.S. producers rose more than twice as much as forecast in January, pushed up by higher fuel, food and drug costs, signaling inflation may keep accelerating even as growth slows.

The 1 percent increase followed a 0.3 percent drop in December, the Labor Department said in Washington. The median forecast in a Bloomberg News survey of economists was for a 0.4 percent gain. Excluding food and energy, so-called core wholesale prices climbed 0.4 percent, the most in almost a year.

Combined with figures showing consumer prices also rose more than forecast, today's report may prompt the Federal Reserve to consider raising interest rates as soon as the economy stabilizes. Fed officials, including Governor Frederic Mishkin yesterday, have warned that higher prices may stoke inflation expectations.

``What you've got is a lot of inflationary pressures building,'' said Roger Kubarych, chief U.S. economist at Unicredit Global Research in New York, who correctly forecast the rise in core prices. For now, ``the Fed will put them in second position in terms of priority until this financial strife settles down,'' he said.

As consumer and wholesale prices climb, home values continue to slump. House prices in 20 U.S. metropolitan areas fell in December by 9.1 percent from a year before, the most in the 20-year history of the S&P/Case-Shiller index, a private report showed today.

Financial Markets

Treasury securities slid after the report, before recouping most of the losses later. Ten-year note yields rose as high as 3.93 percent, from 3.90 percent late yesterday. Stock futures dropped, with contracts on the Standard & Poor's 500 index losing 0.2 percent at 9:02 a.m. to 1,368.50.

Over the past 12 months, producer prices rose 7.4 percent, the most since October 1981. Wholesale prices excluding food and energy advanced 2.3 percent in the year through January.

The median forecast was based on 70 estimates. Projections ranged from a 0.3 percent decline to a 1.2 percent increase.

Core prices were expected to advance 0.2 percent, according to the survey median. Estimates ranged from no change to an increase of 0.5 percent.

Energy costs increased 1.5 percent after falling 3 percent in December. The price of gasoline rose 2.9 percent.

Food Costs

Food prices climbed 1.7 percent, the most since October 2004. Crude food prices, which cover costs of corn and wheat, increased 2.7 percent.

Kellogg Co., the largest U.S. cereal maker, last week affirmed its 2008 profit forecast after boosting prices to counter rising wheat and energy costs.

``Unprecedented commodity and energy inflation'' forced Battle Creek, Michigan-based Kellogg to raise prices, Chief Executive Officer David Mackay said at conference in Boca Raton, Florida. The increases were ``across our global portfolio and across almost all segments.''

The cost of prescription and over-the-counter medicines rose 1.5 percent, the most since May 2006. A study by economists for the government's Medicare program showed today that health- care costs will probably outpace economic growth by about 2 percentage points a year in the coming decade.

Inflation Reports

The producer price index is the last of three Labor reports on inflation for January. Consumer prices last month rose a greater-than-forecast 0.4 percent for a second month, figures showed on Feb. 20. Prices of goods imported into the U.S. rose 1.7 percent, pushing the 12-month gain to a record on higher fuel costs, the department said Feb. 15.

Recession concerns are prompting Fed policy makers to look beyond the increases in inflation and lower rates to spur lending and growth. Investors are betting policy makers will cut rates half a point to 2.5 percent at their March 18 meeting.

The Fed will ``act in a timely manner as needed to support growth,'' Fed Chairman Ben S. Bernanke told Congress on Feb. 14. ``The outlook for the economy has worsened in recent months, and the downside risks to growth have increased.''

Mishkin, who has collaborated with Bernanke on research, said in Greenville, North Carolina, yesterday that stable public expectations for inflation are ``critical'' in giving the Fed the flexibility to lower interest rates.

The U.S. has moved closer to a recession in recent weeks, with payrolls shrinking, manufacturing stalling and the housing market showing no sign of recovery. At the same time, some Fed officials also considered that a reversal of recent rate cuts may be needed once the economy stabilizes, minutes of the Fed's two January meetings showed last week.

Growth Forecasts

Economists surveyed by Bloomberg in the first week of February forecast growth would slow to a 0.5 percent annual pace this quarter and said odds of a recession this year were even.

Still, commodity price pressures are mounting. Producer prices for all crude goods increased 2.5 percent in January. The cost of intermediate goods, such as steel used in earlier stages of production, rose 1.4 percent last month.

Producer prices and consumer prices have some differences in timing that may cause discrepancies. In calculating wholesale prices, the government asks survey participants to report costs as of the Tuesday of the week that includes the 13th. Consumer prices are based on average costs over the entire month.

US Federal Reserve downgrades economic growth forecast for 2008

US Federal Reserve downgrades economic growth forecast for 2008

By Andre Damon

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The US Federal Reserve Board last week cut its US economic growth forecast for 2008 and upped its estimate of inflation.

The Fed revised its projection for growth to between 1.3 and 2 percent, down half a percentage point from its October forecast. It also raised its core inflation forecast to between 2 and 2.2 percent, up 0.3 percent from its earlier estimate.

The Fed’s growth estimate was widely seen as optimistic. The International Monetary Fund estimates that the US economy will grow by only 0.8 percent over the same period.

Inflation statistics for January also painted a grim picture, with consumer prices up 4.3 percent over a year earlier. Prices rose 3.7 percent for the whole of 2007.

The core inflation rate, which excludes food and energy prices, crept up to 2.5 percent, significantly higher than the Fed’s target of about 1.7 percent. The US central bank does not expect the US economy to normalize until 2011, according to the projections it released last Wednesday.

The European Commission also cut its 2008 Eurozone growth forecast, from 2.2 to 1.8 percent, and revised its 2008 inflation estimate up by half a percentage point, to 2.6 percent. The Commission’s projection for Eurozone core inflation was revised upwards drastically from 2.1 percent to 2.8 percent.

“Given the evolution of leading indicators, this still looks very optimistic,” Ken Wattret, economist at BNP Paribas bank, told the Financial Times. Eurozone inflation reached a 14-year high of 3.2 percent in January.

The parallel movement of economic variables in the US and the Eurozone refutes claims that Europe had been “decoupled” from US economic problems. It is becoming increasingly clear that no part of the world is immune from a deepening financial crisis that first erupted in the US last August.

The US is the world’s largest importer, and a collapse in US demand would create an overcapacity crisis in the rest of the world. Moreover, by some estimates, over half of US subprime-backed debt was exported.

Germany is showing trends similar to the US. The country’s gross domestic product (GDP) growth slowed from 2.5 percent in the third quarter to 1.8 percent in the fourth. Fears of a significant growth slowdown were strengthened by lower-than-expected retail sales and consumer spending in December.

Despite steadily rising inflation, the Fed has been reducing interest rates aggressively, slashing .75 percentage points on January 21 and .50 points a week later. Fed Chairman Ben Bernanke has continued to stress that the Federal Reserve Board is primarily focused on preventing a recession.

The US central bank is pumping liquidity into financial markets, despite the dangerous implications for inflation and the position of the US dollar on world currency markets, in an attempt to prevent a potentially catastrophic banking crisis. In a recent article, NYU economist Nouriel Roubini wrote: “Why did the Fed ease the Fed Funds rate by a whopping 125 bps [1.25 percent] in eight days this past January? It is true that most macro indicators are heading south and suggesting a deep and severe recession that has already started. But the flow of bad macro news in mid-January did not justify, by itself, such a radical inter-meeting emergency Fed action followed by another cut at the formal FOMC [Federal Open Market Committee] meeting.

“To understand the Fed actions one has to realize that there is now a rising probability of a ‘catastrophic’ financial and economic outcome, i.e., a vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe. The Fed is seriously worried about this vicious circle and about the risks of a systemic financial meltdown.”

Meanwhile, US housing and credit markets and consumer spending show no signs of improvement. Higher inflation risks are pushing up the price of long-term credit, making it difficult for home owners to take out loans or refinance their homes. Mortgages are generally based on the interest rates on long-term bonds. The higher costs of credit will tend to further depreciate housing prices while driving more households into foreclosure.

Last week saw another bout of turbulence in the credit markets as the cost of insuring US and European corporate credit hit a new high. The cost of debt insurance for companies listed on the benchmark iTraxx Europe index skyrocketed by 20 percent last Wednesday to 1.37 percent, up from .5 percent at the start of the year. In the US, debt insurance costs hit double their level at the start of the year.

The decreased availability of credit has made it difficult for many companies to finance their daily operations. Last week, Sharper Image, an upscale consumer goods retailer, filed for Chapter 11 bankruptcy, citing decreasing consumer demand and difficulty obtaining credit.

There have been 13 bankruptcies of publicly traded companies this year, with combined assets of over $7.7 billion. By way of comparison, there were only 11 such bankruptcies for the whole of last year, and the combined assets of the bankrupt companies amounted to $700 million.

Foreclosures up 57 percent in the past year

Foreclosures up 57 percent in the past year

Cape Coral-Fort Myers, Fla., leads U.S. with highest rate of any metro area

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The number of homes facing foreclosure jumped 57 percent in January compared to a year ago, with lenders increasingly forced to take possession of homes they couldn’t unload at auctions, a mortgage research firm said Monday.

Nationwide, some 233,001 homes received at least one notice from lenders last month related to overdue payments, compared with 148,425 a year earlier, according to Irvine, Calif.-based RealtyTrac Inc. Nearly half of the total involved first-time default notices.

The worsening situation came despite ongoing efforts by lenders to help borrowers manage their payments by modifying loan terms, working out long-term repayment plans and other actions

“You have more people going into default and a higher percentage of the properties going back to the banks,” said Rick Sharga, RealtyTrac’s vice president of marketing.

The U.S. foreclosure rate last month was one filing for every 534 homes.

The Cape Coral-Fort Myers area in Florida posted the highest foreclosure rate of any metro area in the nation, with one of every 86 homes in some stage of foreclosure, said RealtyTrac Inc.

Stockton, Calif., was ranked second, with one of every 97 homes involved in a foreclosure filing, while the Riverside-San Bernardino metro area in Southern California had the third-highest foreclosure rate with filings for one of every 101 properties.

January’s tally represented an 8 percent hike from December.

RealtyTrac follows default notices, auction sale notices and bank repossessions. Lenders typically consider borrowers delinquent after they fall three months behind on mortgage payments.

Attempts to help struggling home owners have fallen short.

“The loan workout modification programs aren’t having a significant material effect on keeping properties from going back to the banks,” Sharga said.

One dramatic trend last month was a 90 percent spike in the number of properties that were repossessed by banks, compared to January 2007.

“It suggests that there’s little or no equity in a lot of these homes, because they’re not even being sold to investors at auctions, and it suggests a continuing weakness in a lot of markets in terms of real estate sales,” Sharga said.

Falling home values and tighter lending standards have extended the housing slump, making it tougher for homeowners unable sell their homes or refinance when they face mortgage payments they can’t afford.

A wave of adjustable rate mortgage resets expected in May and June threatens to push many other homeowners into default.

During the past year, 30 states saw an increase in the number of homes that had received at least one filing.

Nevada led the nation, with 6,087 properties receiving at least one filing, up 95 percent from a year earlier but down 45 percent from December, the firm said.

That translates to a rate of about one foreclosure for every 167 households.

Rounding out the top 10 states with the highest foreclosure rates were California, Florida, Arizona, Colorado, Massachusetts, Georgia, Connecticut, Ohio and Michigan.

California had 57,158 properties reporting at least one filing, the most of any state. The total increased 120 percent from a year ago and 7 percent from December.

Florida had 30,178 homes on the foreclosure track, up about 158 percent from a year earlier and down 3 percent versus December, RealtyTrac said.

Greenspan tells Gulf States to drop dollar

Greenspan tells Gulf States to drop dollar

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Alan Greenspan, the former chairman of the US central bank, or Fed, has said that inflation rates in Gulf states, which are reaching near record levels, would fall "significantly" if oil producers dropped their US dollar pegs.
Speaking at an investment conference on Monday in Jedda, Saudi Arabia, he said the pegs restrict the region's ability to control inflation by forcing them to duplicate US monetary policy at a time when the Fed is cutting rates to ward off an economic downturn.
Debate is rife in the Gulf on how to tackle inflation.

Levels have hit seven per cent in Saudi Arabia, the highest in 27 years and a 19-year peak of 9.3 per cent in the United Arab Emirates in 2006.

Free float?
"In the short term free floating ... will not fully dissipate inflationary pressure, although it would significantly do so," Greenspan said.

Saudi and UAE central bank chiefs are in favour of retaining dollar pegs, but Sheikh Hamad bin Jassim bin Jabr al-Thani, the prime minister of Qatar, is pushing for regional currency reform to avert possible unilateral revaluations designed to curb inflation.

According to Hamad Saud al-Sayyari, governor of the Saudi central bank, floating the Saudi riyal would not be appropriate for an economy that relies on oil exports.

"Floating is beneficial when the economy and exports are diverse ... as for the kingdom it remains reliant on the export of a single commodity," he said.

Investor attraction
The dollar peg was also defended by Sultan Nasser al-Suweidi, the UAE central bank governor, at a conference in Abu Dhabi on Monday.
He said the policy was helping Gulf states attract foreign investments.
"They did very well for our economies because it has led to more capital flows," al-Suweidi said.

Qatar, has the region's highest inflation, and is considering the revaluing of the Qatari riyal to combat inflation currently at 13.74 per cent.

The exchange rate contributes to about 40 per cent of inflation in Qatar, where the riyal is believed to be 30 per cent undervalued.

Qatar's stand
"We prefer always to act with all the GCC countries," Sheikh Hamad said.
Qatar currently chairs the six-nation Gulf Cooperation Council.

"It's now time for the Gulf to have its own currency," he said.
Sheikh Hamad said such a currency should be "like the Japanese yen or other currencies".

Deutsche Bank said last month that both Qatar and the UAE will probably cut ties to the US dollar this year and track currency baskets as Kuwait did last May.
Alan Greenspan, the former chairman of the US central bank, or Fed, has said that inflation rates in Gulf states, which are reaching near record levels, would fall "significantly" if oil producers dropped their US dollar pegs.
Speaking at an investment conference on Monday in Jedda, Saudi Arabia, he said the pegs restrict the region's ability to control inflation by forcing them to duplicate US monetary policy at a time when the Fed is cutting rates
to ward off an economic downturn.
Debate is rife in the Gulf on how to tackle inflation.

Levels have hit seven per cent in Saudi Arabia, the highest in 27 years and a 19-year peak of 9.3 per cent in the United Arab Emirates in 2006.

Free float?
"In the short term free floating ... will not fully dissipate inflationary pressure, although it would significantly do so," Greenspan said.

Saudi and UAE central bank chiefs are in favour of retaining dollar pegs, but Sheikh Hamad bin Jassim bin Jabr al-Thani, the prime minister of Qatar, is pushing for regional currency reform to avert possible unilateral revaluations designed to curb inflation.

According to Hamad Saud al-Sayyari, governor of the Saudi central bank, floating the Saudi riyal would not be appropriate for an economy that relies on oil exports.

"Floating is beneficial when the economy and exports are diverse ... as for the kingdom it remains reliant on the export of a single commodity," he said.

Investor attraction
The dollar peg was also defended by Sultan Nasser al-Suweidi, the UAE central bank governor, at a conference in Abu Dhabi on Monday.
He said the policy was helping Gulf states attract foreign investments.
"They did very well for our economies because it has led to more capital flows," al-Suweidi said.

Qatar, has the region's highest inflation, and is considering the revaluing of the Qatari riyal to combat inflation currently at 13.74 per cent.

The exchange rate contributes to about 40 per cent of inflation in Qatar, where the riyal is believed to be 30 per cent undervalued.

Qatar's stand
"We prefer always to act with all the GCC countries," Sheikh Hamad said.
Qatar currently chairs the six-nation Gulf Cooperation Council.

"It's now time for the Gulf to have its own currency," he said.
Sheikh Hamad said such a currency should be "like the Japanese yen or other currencies".

Deutsche Bank said last month that both Qatar and the UAE will probably cut ties to the US dollar this year and track currency baskets as Kuwait did last May.