Thursday, February 28, 2008

Playing Games With National Security

Playing Games With National Security

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At midnight on Feb. 16, the hastily-passed Protect America Act (PAA) expired after the Bush administration and its supporters refused to support a 21-day extension of the PAA. House Democrats sought the extension in order to reconcile a Senate intelligence bill that includes retroactive immunity for telecommunications companies who participated in the administration's warrantless wiretapping program after 9/11 with the House-approved RESTORE Act, which contains more civil liberties protections and no retroactive immunity. Angered that House Democrats didn't "blink" in the face of administration claims that "failure to pass" the Senate bill "would jeopardize the security of our citizens," President Bush and his allies in Congress have launched a daily fear-mongering campaign to pressure the House into passing the law. At the same time, congressional Republicans have refused to participate in negotiations between the House and Senate, and Bush has said that he will not compromise on the most contentious issue holding up the bill -- retroactive immunity for telecoms. Instead of negotiating, Bush plans to hammer away at Congress with misleading claims that America has "lost intelligence information" because of the law's lapse and the lack of immunity for telecoms.

'LOST INTELLIGENCE': Last Friday, Director of National Intelligence Michael McConnell and Attorney General Michael Mukasey sent a letter to House Intelligence Committee chair Silvestre Reyes (D-TX), claiming that "we have lost intelligence information this past week as a direct result of the uncertainty created by Congress' failure to act." Mukasey and McConnell claimed that private companies had "delayed or refused compliance" with administration "requests to initiate new surveillances of terrorist and other foreign intelligence targets." Hours after the letter was released, however, "administration officials told lawmakers that the final holdout among the companies had relented and agreed to fully participate in the surveillance program." Even so, in his radio address the next morning, Bush claimed that "the House's refusal to act is undermining our ability to get cooperation from private companies." In a Senate hearing yesterday, McConnell reluctantly admitted that White House officials were informed on "Friday night" about the developments, but Bush went ahead and aired his false attack in the radio address the next day anyway. In reality, "one lawyer in the telecommunications industry" who spoke to the New York Times said that "he had seen little practical effect on the industry's surveillance operations since the law expired."

FEAR-MONGERING ATTACK ADS: Since the expiration of the PAA, conservatives have launched a full-scale public relations battle to paint opponents of the Senate bill as a threat to national security. Last week, House Republicans launched a web ad modeled on the show 24, bellowing that "America is at risk," implying that a terrorist attack is imminent without the PAA. Last Friday, the Foundation for the Defense of Democracies and an affiliated 501(c)(4) group called Defense of Democracies ran ads in 15 congressional districts and 17 media markets that erroneously claim "the law that lets intelligence agencies intercept Al Qaeda communications expire[d]" while showing a picture of Osama Bin Laden. The Foundation for the Defense of Democracies is nominally a nonpartisan think tank, but after the disingenuous ads aired, most of the liberals on the groups board of advisers quit. In a statement explaining her resignation from the group, political consultant Donna Brazile said she joined the organization because it was "committed to defending democratic values," but "due to the influence of their funders, in the last few years, FDD has morphed into a radical right wing organization that is doing the dirty work for the Bush Administration."

IT'S THE IMMUNITY, STUPID: In a fear-mongering op-ed for Investor's Business Daily this week, Senate Minority Leader Mitch McConnell (R-KY) claims that House Democrats don't want necessary "updates" and "improvements" to the Foreign Intelligence Surveillance Act that take "take technological advances" since 1978 into account. This claim is false. In November, the House passed the RESTORE Act, which fixes the gaps in FISA, but doesn't include retroactive immunity for telecoms. As DNI McConnell admitted to NPR recently, "the real issue" is "liability protection for the private sector." But the administration is having difficulty making a compelling argument for immunity. Both the original PAA and the RESTORE Act include prospective immunity for telecommunications companies, which means companies that lawfully cooperate with the surveillance program in the future would be protected from lawsuits. In fact, even in the original FISA law, cooperation by telecoms is not optional, but required, and they have always had immunity if they obey the law. Asked last Friday to explain "the administration's argument that without this retroactive immunity, the telecoms would be reluctant in the future to cooperate" even though they have prospective immunity, White House spokesman Scott Stanzel was unable to give a straight answer. Unable to explain how retroactive immunity is necessary for ensuring future cooperation, President Bush has been reduced to arguing "it's not fair " to allow "class action lawsuits against private phone carriers and other companies that are believed to have helped us protect America."

Obama staffer gave warning of NAFTA rhetoric

Obama staffer gave warning of NAFTA rhetoric

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Barack Obama has ratcheted up his attacks on NAFTA, but a senior member of his campaign team told a Canadian official not to take his criticisms seriously, CTV News has learned.

Both Obama and Hillary Clinton have been critical of the long-standing North American Free Trade Agreement over the course of the Democratic primaries, saying that the deal has cost U.S. workers' jobs.

Within the last month, a top staff member for Obama's campaign telephoned Michael Wilson, Canada's ambassador to the United States, and warned him that Obama would speak out against NAFTA, according to Canadian sources.

The staff member reassured Wilson that the criticisms would only be campaign rhetoric, and should not be taken at face value.

But Tuesday night in Ohio, where NAFTA is blamed for massive job losses, Obama said he would tell Canada and Mexico "that we will opt out unless we renegotiate the core labour and environmental standards."

Late Wednesday, a spokesperson for the Obama campaign said the staff member's warning to Wilson sounded implausible, but did not deny that contact had been made.

"Senator Obama does not make promises he doesn't intend to keep," the spokesperson said.

Low-level sources also suggested the Clinton campaign may have given a similar warning to Ottawa, but a Clinton spokesperson flatly denied the claim.

During Tuesday's debate, she said that as president she would opt out of NAFTA "unless we renegotiate it."

Canadian Finance Minister Jim Flaherty said Wednesday that the candidates' criticisms of NAFTA were misguided.

"(They) should recognize that NAFTA benefits the U.S. tremendously," he said. "Those who speak of it as helpful to (just the) Canadian or Mexican economies are missing the point."

Liberal MP and finance critic John McCallum told Canada AM that the U.S. pulling out of NAFTA "would be a disaster for Canada."

But he added, "I hope and I believe that it's politics, because they're in a high-stakes contest. I believe after this nominee is decided, this issue will go away."

John Fortier, a senior fellow at the American Enterprise institute, said that in an effort to gain votes in the anti-NAFTA state of Ohio, each candidate might find themselves "locked-in" to their pledge to renegotiate NAFTA.

"Last night, both candidates really locked themselves in to at least doing some serious renegotiation," Fortier told Canada AM. "But how serious they are and what the changes (will be) . . . that's another question.

"But I don't know how Barack Obama or Hillary Clinton can get out of last night's very clear pledge that they are going to use the opt-out (clause) as a threat to do some serious renegotiation."

Crucial primaries in Ohio and Texas are just one week away.

During Tuesday night's debate, each candidate was quite specific about using the six-month opt-out clause in NAFTA, to pressure Canada and Mexico into renegotiating the deal.

The March 4 primaries are seen as vital for each candidate, but particularly Clinton. It's expected that without a decisive win in both Texas and Ohio, she has no chance of winning the Democratic nomination.

Clinton once had a large lead in each state, but recent polls are showing the candidates as close to even, with Obama surging ahead.

Early polls show that there is a strong possibility of a Democrat in the White House in January 2009.

Obama, in particular, is surging in popularity throughout the U.S. and some polls give the Illinois senator an almost double-digit lead if he were to run head-to-head against the expected Republican candidate, John McCain.

GOP Uses Surveillance Bill to Bash Democrats

GOP Uses Surveillance Bill to Bash Democrats

By Dan Eggen

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Republicans are convinced that highlighting their counterterrorism policies will be a political winner in this presidential election year, and they have focused this week on Democratic opposition to their version of a new surveillance bill as a way to paint Democrats as soft on national security, according to GOP lawmakers and their aides.

Democrats respond that they are unfazed by the attacks, arguing that most Americans doubt the credibility of President Bush and Republicans when it comes to warning about security threats.

Bush and GOP lawmakers have been releasing a blizzard of public statements and organizing multiple news conferences to pressure the House to adopt a Senate bill renewing and expanding a temporary surveillance law called the Protect America Act. The measure would grant legal immunity to telecommunications companies over their cooperation in warrantless wiretapping done after the Sept. 11, 2001, attacks.

House Democratic leaders oppose the immunity provision and maneuvered to allow the temporary statute to expire on Feb. 16. The administration has repeatedly said that telecom firms need protection from lawsuits in order to cooperate with the government.

The House Republican Conference has created an Internet advertisement, available on the committee's Web site and on YouTube, warning that "America is at risk" because of the standoff. An outside nonprofit group headed by a former Republican National Committee official has also launched a national television advertising campaign targeting more than a dozen House Democrats around the country.

The activity reflects the Republicans' view that they are on the winning side of a politically important issue, GOP lawmakers and aides say. During a speech at the RNC in January, former presidential adviser Karl Rove cited the fight over the surveillance bill as one of four key issues that GOP candidates should highlight during the campaign season, according to a transcript of his remarks.

"The House Democrat leaders are on the wrong side of the American people on this," said Brian Schubert, spokesman for the House Republican Conference.

But Rep. Rahm Emanuel (Ill.), chairman of the House Democratic Caucus, accused Republicans of engaging in "fear-mongering." He said the dispute hinges on whether to protect "big phone companies."

"We're willing to stand up to this and bring some balance to this debate," Emanuel said in an interview yesterday.

Bush, who has spoken about the surveillance issue almost daily since the temporary law expired, said yesterday that the House's failure to pass new legislation is "inexcusable" and "indefensible."

One of the most visible attacks in the debate has come from a newly created advocacy group, Defense of Democracies, which has produced a series of television advertisements that began airing last Friday in 15 congressional districts represented by freshman Democrats.

A national version of the ad also aired Tuesday night during the Democratic presidential debate on MSNBC. The spot, which includes footage of al-Qaeda leader Osama bin Laden, alleges that the dispute has "crippled" the nation's surveillance capabilities and urges viewers to "tell the House of Representatives to do its job and pass the terrorist surveillance bill to keep us all safe."

The group is headed by Clifford D. May, a former RNC communications director who also heads the similarly named Foundation for Defense of Democracies. Spokesman Brian Wise said the nonprofit group that sponsored the ad was formed last week because tax rules prohibit the foundation from issuing advocacy ads.

The ads have angered some of the Democrats who are listed as advisers to the foundation, which was formed as a nonpartisan policy group after the Sept. 11 attacks. At least four, including Sen. Charles E. Schumer (N.Y.) and prominent strategist Donna Brazile, have quit the foundation because of the ad campaign. Brazile said in a statement that the group "has morphed into a radical right wing organization that is doing the dirty work for the Bush Administration and Congressional Republicans."

Wise disputed the criticism. He said the ad campaign is "not partisan" because it focuses on supporting a surveillance bill that was passed by the Senate with the backing of many Democrats.

Liberal Democrats Seek Secret FISA Session

Liberal Democrats Seek Secret FISA Session

By Mike Soraghan

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Liberal House Democrats are pushing for a closed session to discuss the legal underpinnings of President Bush's intelligence surveillance program.

They believe that the more members know about it, the less likely they will be to support Bush's wish to make it permanent.

"I haven't heard anything in closed session that makes me think we need the Protect America Act," said Rep. Rush Holt (D-N.J.), an Intelligence Committee member, referring to a White House-backed interim wiretapping bill that lapsed this month. "Or that FISA [the Foreign Intelligence Surveillance Act], with modest modifications, isn't the way to go into the future."

The request for the closed session came in a letter coauthored by Holt and Reps. John Tierney (D-Mass.) and Jan Schakowsky (D-Ill.) to Speaker Nancy Pelosi (D-Calif.). Holt refused to confirm the letter, but other Democrats say it was brought up at Tuesday's Democratic Caucus meeting.

The three want all members allowed to see documents that outline the administration's legal opinions on the program. So far, only Intelligence and Judiciary Committee members have been allowed to see them.

The three believe it is impractical to have all members go to the secure offices of the Intelligence Committee to review the documents. Instead, they want a presentation before the whole House, but in a closed session because the information is classified.

"It's hard to make a decision on something like immunity when you don't even know what it's for," said Schakowsky. "I think everyone should learn the highlights."

Schakowsky presented the idea Tuesday to Pelosi during a discussion on FISA at the caucus meeting. Pelosi said she would review the details, but did not give a decision.

The request comes as Democrats are feeling more confident in their defiance of Bush on his signature issue of national security.

"The pendulum is swinging back on the issue of civil liberties," said House Democratic Caucus Chairman Rahm Emanuel (Ill.) "We may be finding an atmosphere that's much calmer."

Democrats Tuesday voted down 212-198 an attempt by House Republicans to bring up the Senate-passed version of the surveillance bill, which would shield from lawsuits the telephone companies that participated in the Bush administration's warrantless wiretapping program.

Democratic leaders dialed up their rhetoric, accusing the administration of whipping up the public's fear to hide its own questionable conduct.

"They think they did something wrong and they don't want it disclosed," said House Majority Leader Steny Hoyer (D-Md.). "It has nothing to do with our nation's security."

Republicans said it has everything to do with the nation's security.

"Every day that the House Democratic leadership delays, we are losing valuable information about terrorists' plans. That is wrong and dangerous, and I welcome any Democratic member who agrees to vote with us," said House Minority Leader John Boehner (R-Ohio).

The House-passed surveillance bill, written by Democrats, does not grant immunity to the carriers and grants more power to the FISA court, which has traditionally overseen foreign intelligence surveillance. The Senate passed a bill earlier this month, with strong GOP support, that includes immunity. The White House has threatened to veto any bill that does not shield carriers from lawsuits.

House and Senate Democrats have been meeting to resolve their differences on the surveillance legislation.

Republicans have declined to attend the meetings, saying Congress should pass the Senate version of the bill with no changes.

Boehner's spokesman, Kevin Smith, derided the secret session proposal as a stalling tactic.

"There are clear rules and procedures for how Congress handles classified information," Smith said. "This nonsense is nothing more than another stalling tactic from a bunch of liberals who don't want to give our intelligence officials all the tools they need to keep America safe."

Secret sessions are fairly rare, according to the House Historian's Office. Since 1830, the House has met behind doors only three times; 1979, 1980 and 1983.

There are other ways the House can meet behind closed doors, but that, too, is rare. In July 1998, the House held a secret "briefing" from law enforcement officials in the chamber about the shooting of two Capitol police officers earlier that month. In March 1999, the House had a secret "meeting" on classified emerging ballistic missile threats.

But this was not considered a "secret session," according to the historian's office, because it was held by a former defense secretary chairing a commission on missile threats.

In May 2007, Rep. Jeff Flake (R-Ariz.) tried to get the House to go into closed session to discuss earmarks in the Intelligence authorization bill. His motion failed 207-217.

House Votes to End Big Oil's Tax Breaks

House Votes to End Big Oil's Tax Breaks

By Steven Mufson

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Despite veto threat, bill to boost renewable energy is sent to Senate.

The House of Representatives brushed aside threats of a White House veto yesterday and voted 236 to 182 in favor of an $18 billion tax package that would rescind a tax break for the five biggest oil companies and use the revenue to boost incentives for wind and solar energy and energy efficiency.

The measure now heads to the Senate, where Democrats face a challenge in getting enough support to bring the bill to a vote. This is the fourth time in the past year that Democrats have tried to get the package adopted.

The Bush administration, Republican lawmakers and big oil companies condemned the bill, which they said would raise fuel prices for consumers, discourage oil and gas exploration in the United States and unfairly discriminate against a single industry while other manufacturers continue to enjoy tax breaks.

But hours after crude oil hit a new high of $102 a barrel on the New York Mercantile Exchange, most lawmakers said they saw no reason why the oil industry couldn't pay an additional $1.8 billion a year in taxes over the next 10 years.

"We don't think it's asking too much to ask them to assist in a partnership to help find out whether there's a better way to meet our energy needs," said Charles B. Rangel (D-N.Y.), chairman of the House Ways and Means Committee. He called the money raised from the oil giants "grains of sand on the beach."

Supporters of the measure noted that rescinded tax breaks would amount to less than 2 percent of the profits of the five biggest oil companies. Even if the companies were to pass along that entire cost to gasoline consumers, it would amount to about a penny a gallon.

Rep. Rahm Emmanuel (D-Ill.) said "Americans are being asked to pay twice" - once at the gasoline pump and then through tax subsidies to the oil companies.

However, Rep. Kevin Brady (R-Tex.) said that "politicians are shooting at Big Oil but hitting Americans" in their wallets.

Supporters of the measure also said that by extending tax breaks for wind and solar energy, the bill would prevent the loss of jobs linked to those fast-growing industries. Solar and wind energy companies have been arguing that investment would slow sharply without an extension of investment and production tax breaks for their industries, which are set to expire at the end of the year. House Speaker Nancy Pelosi (D-Calif.) issued a statement saying that 116,000 jobs were at risk.

Republicans mostly supported the bill's renewable energy provisions, worth about $8 billion.

But at the heart of the floor debate was a provision to exclude oil and gas companies from a tax break given to U.S. manufacturers in 2004. Two years earlier, Congress had given a subsidy to manufacturers - not including the oil industry. When the World Trade Organization ruled that the subsidy was a violation of trade accords, Congress instead came up with a provision that effectively lowered the corporate tax rate from 35 percent to 32 percent over a number of years. In addition to the traditional manufacturers that would have received the earlier subsidy, the new tax break was extended to Hollywood studios, architectural and engineering firms, and oil and gas companies.

The current bill raises $13 billion by eliminating that manufacturers' tax break for the five biggest oil companies: Exxon Mobil, Chevron, ConocoPhillips, BP and Royal Dutch Shell.

"The administration must strongly oppose" the legislation, the Office of Management and Budget said Tuesday, "because the bill would use the tax code to target tax increases on a specific industry in a way that will lead to higher energy costs to U.S. consumers and businesses." The OMB said that if the bill were sent to the president in its current form, "his senior advisors would recommend that he veto the bill."

If adopted and signed into law, the legislation would also raise about $3 billion by altering the treatment of foreign tax credits for oil companies. It would close the so-called Hummer loophole that gives tax breaks on sports-utility vehicles bought for business purposes.

To spur renewable energy, the bill would extend the production tax credit, now 2 cents a kilowatt hour, for wind for three years; after 2009, tax credits would not be able to exceed 35 percent of the value of a wind project.

The 30 percent investment tax credit for solar projects would be extended eight years for commercial customers and six years for residential customers. The current maximum credit for homeowners would be doubled to $4,000.

The legislation would also channel $2 billion into clean renewable energy bonds, which would help finance renewable energy investments by the country's politically powerful rural electric cooperatives. The bill would also expand tax credits for the installation of pumps for motor fuel with 85 percent ethanol and for purchases of plug-in hybrid vehicles.

The Bush administration called the clean energy bonds "highly inefficient" and said they could cost the federal government money outside the 10-year budget window.

Dollar Falls to Record; Jobless Claims Rise, GDP Lags Forecast

Dollar Falls to Record; Jobless Claims Rise, GDP Lags Forecast

By Ye Xie

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The dollar fell to a record low against the euro for a third straight day as a weakening U.S. labor market and slower-than-forecast economic growth bolstered bets the Federal Reserve will cut interest rates through June.

The dollar also declined to the weakest in almost a month versus the yen and to a record low against the Swiss franc. Japan's currency climbed against all its major counterparts as declines in stocks prompted investors to reduce holdings of higher-yielding assets funded with carry trades in Japan.

``We are on the way to recession,'' said Robert Fullem, a vice president of U.S. corporate currency sales at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. ``The trend is for a weaker dollar.''

The U.S. currency touched $1.5151 per euro, the weakest since the common currency's 1999 inception, before trading at $1.5137 at 10:20 a.m. in New York, from $1.5120 yesterday. The dollar fell to 105.86 yen from 106.49, touching the lowest since Feb. 1 and coming within about 1 percent of a 2 1/2-year low reached in January. The dollar fell as low as 1.0565 francs.

The U.S. Dollar Index, which tracks the currency against six major counterparts, touched the lowest since its start in 1973. The index, traded on ICE Futures in New York, fell to 74.03, as the Labor Department said initial jobless claims climbed by 19,000 to 373,000 in the week ended Feb. 23. The U.S. economy grew at an annual rate of 0.6 percent last quarter, the government said separately, less than the 0.8 percent median forecast in a Bloomberg survey.

Rand Falls

The U.S. currency has dropped 12.5 percent versus the euro in the past year as subprime-mortgage losses, the worst housing market in 25 years and soaring credit costs spurred the Fed to cut rates five times since September.

South Africa's rand was the worst performer among the 16 major currencies, falling 1.4 percent against the dollar today as mounting concern that the U.S. will fall into a recession led traders to pare bets on currencies tied to global growth and demand for commodities.

The yen advanced 2 percent to 14.01 per rand and gained 1 percent versus the New Zealand dollar as investors reduced carry trades, where they get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between them.

Japan's benchmark rate of 0.5 percent, the industrialized world's lowest, compares with 11 percent in South Africa, 8.25 percent in New Zealand and 7 percent in Australia.

The Standard & Poor's 500 Index fell 0.6 percent.

`Downside Risks'

The dollar's decline gained momentum this week after Fed Vice Chairman Donald Kohn said on Feb. 26 that turmoil in credit markets and the possibility of a slower economy pose a ``greater threat'' than inflation.

The dollar weakened past $1.51 per euro for the first time yesterday after Fed Chairman Ben S. Bernanke said the bank ``will act in a timely manner'' to insure against ``downside risks'' to the economy. His remarks came in testimony to the House Financial Services Committee, which he repeated before a Senate panel today.

Futures on the Chicago Board of Trade show a majority of traders expect the Fed to cut rates to at least 2 percent by mid-year, from 3 percent now. The bank has slashed its benchmark from 5.25 percent in September, and is scheduled to meet next on March 18.

European Central Bank President Jean-Claude Trichet today said ``price stability is a necessary condition'' for ongoing economic expansion and employment. The ECB next meets on March 6 to decide the main rate, which is at 4 percent.

``The ECB is taking a more hawkish stance than the Fed, which is undermining the dollar,'' said Larry Kantor, co-head of research at Barclays Capital Inc. in New York, and a former Fed economist.

At 1.9 percent, the two-year U.S. Treasury note yielded 1.38 percentage points less than similar-maturity German government bunds. The yield difference touched 1.39 percentage points on Jan. 22, the most since 2002.

Bernanke Readiness to Cut Rates Stokes Price Concerns

Bernanke Readiness to Cut Rates Stokes Price Concerns

By Scott Lanman and Steve Matthews

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Federal Reserve Chairman Ben S. Bernanke's readiness to cut interest rates to avert a recession is stoking concerns that prices will get out of hand.

``Bernanke has really overweighted the economic risks relative to inflation,'' said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, following the Fed chief's testimony to Congress yesterday. ``He may get some disagreement'' among colleagues on the Federal Open Market Committee, Silvia said.

Investors' expectations for inflation over the next 10 years jumped to the highest since June after Bernanke pledged to the House Financial Services Committee to act in a ``timely manner'' to combat ``downside risks'' to growth. A day after government figures showed wholesale costs rose 7.4 percent in January from a year ago, Bernanke said the price outlook has deteriorated ``slightly.''

``They will keep cutting,'' said Kurt Karl, chief U.S. economist at Swiss Reinsurance Co. in New York. ``If inflation looks like it is taking off quite rapidly, or inflation expectations take off, they will have to backtrack.''

The FOMC last month lowered the benchmark rate by 1.25 percentage points in nine days, the steepest reduction in two decades, to 3 percent. The two decisions each saw one dissenting vote on the Fed panel.

`Prime Risk'

Rising consumer prices, the ``classic bond worry,'' may start exceeding concerns about the stresses in credit markets, Lehman Brothers Holdings Inc.'s fixed-income strategy team said in a note to clients yesterday. ``We'd nominate the unmooring'' of inflation expectations ``as a prime risk for 2009-2010,'' they wrote.

Representative Gary Miller, a California Republican, told Bernanke that with continued high oil prices, ``it may be more difficult for the Fed to cut interest rates,'' and he asked the Fed chief about his other options besides lowering rates.

``We do face a difficult situation,'' Bernanke acknowledged. Oil and food prices have been climbing ``rapidly,'' and there are ``slightly greater upside risks to the projections'' for inflation now than a month ago.

Bernanke goes to the Senate Banking Committee today in the second day of semiannual testimony on the economy. The hearing is scheduled for 10 a.m. in Washington.

Consumer prices last year surged 4.1 percent, the most in 17 years, spurred by higher fuel and food costs. Labor Department figures this week showed the biggest 12-month increase in wholesale costs since 1981 in January.

Yields Climb

Ten-year Treasury yields climbed to 3.85 percent yesterday from their January low of 3.29 percent. The notes rallied today as stocks slumped, with yields at 3.79 percent at 7:57 a.m. in New York.

Inflation expectations as measured by the difference in yield between regular 10-year notes and 10-year Treasuries linked to consumer prices reached 2.56 percent after Bernanke spoke, the highest since June. The gauge is now at 2.43 percent.

Barclays Capital Inc. is advising its clients to buy Treasury Inflation Protected Securities, or TIPS.

``We don't expect slower growth in the U.S. is going to slow down inflation pressure,'' Michael Pond, an interest-rate strategist at Barclays in New York, said in an interview with Bloomberg Television yesterday.

Consumers' forecasts are also heading up. Households' estimate of price increases one year ahead reached 3.7 percent this month, the highest since August 2006, according to a gauge published by the University of Michigan.

Fed Forecasts

Bernanke told lawmakers the Fed anticipates inflation will slow, in part because of ``sluggish'' economic growth and rising unemployment. In their quarterly forecasts published this month, central bankers projected prices, excluding food and energy, will rise 2 percent to 2.2 percent this year, slowing to a 1.7 percent to 2 percent pace in 2009.

Traders see a 100 percent chance that the FOMC will lower the target rate for overnight loans between banks by at least a half-point, to 2.5 percent. Officials have cut the rate by 2.25 percentage points since September.

``If you move aggressively to cut interest rates and stimulate the economy, then you risk fueling inflation,'' Democratic Representative Greg Meeks of New York said at yesterday's hearing.

Bernanke's testimony came a day after Vice Chairman Donald Kohn said turmoil in credit markets and the possibility of even slower growth pose a ``greater threat'' than inflation.

Unlike recent remarks by other Fed officials and minutes of the last policy meeting, Bernanke made no mention of needing to raise rates once the economy stabilizes.

`Rapid Reversal'

At the Jan. 29-30 FOMC meeting, some policy makers ``noted that, when prospects for growth had improved, a reversal of a portion of the recent easing actions, possibly even a rapid reversal, might be appropriate.''

Fed Governor Frederic Mishkin, who has collaborated with Bernanke on research, said Feb. 15 the Fed ``should be prepared to take back the insurance'' from rate cuts ``once the recovery becomes clearly established.''

Yesterday, Bernanke reiterated that the Fed's stance ``must be determined in light of the medium-term forecast for real activity and inflation as well as the risks to that forecast.''

``He's really telling you that he's going to do what it takes,'' James Caron, global head of interest rate strategy at Morgan Stanley, said in an interview on Bloomberg Television. ``The Fed believes it's a fluent situation, and Bernanke will cut rates as he deems fit.''

Freddie Mac Posts Record Loss, Remains `Cautious'

Freddie Mac Posts Record Loss, Remains `Cautious'

By James Tyson

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Freddie Mac, the second-largest mortgage-finance company, posted a record $2.45 billion fourth- quarter loss as rising defaults sent credit costs soaring.

Freddie Mac, which buys and guarantees home loans, had predicted the results would be similar to the third quarter's $2 billion loss. The McLean, Virginia-based company rose as much as 8.8 percent in New York Stock Exchange trading after saying guarantee income will rise 10 percent this year.

While the deepening housing slump is causing losses at Freddie Mac and Fannie Mae, the slide is also enabling them to increase their share of mortgage guarantees. Fannie Mae and Freddie Mac account for 45 percent of the $11.5 trillion home loan market. Freddie Mac Chief Executive Officer Richard Syron said today he remains ``extremely cautious'' about house prices and credit losses in 2008.

``Right now I see no relief'' for the housing sector, said Michael Mullaney, who helps oversee $10 billion in assets at Fiduciary Trust Co. in Boston. Mullaney has said Fiduciary is avoiding Freddie Mac and Fannie Mae shares and only holds the stocks in some of its index portfolios.

The net loss was $3.97 a share and widened from $401 million, or 73 cents, a year earlier, Freddie Mac said in a statement today.

Derivatives, Losses

The fourth-quarter results included writedowns and other non-interest expenses of $2.1 billion primarily related to derivatives contracts, and $912 million of credit expenses. Credit losses will rise to $2.2 billion in 2008 and $2.9 billion in 2009, Freddie Mac said.

Regulators tried to provide a boost yesterday, removing limits on the combined $1.5 trillion mortgage portfolios of Fannie Mae and Freddie Mac, enabling the companies to increase financing for the slumping housing market.

Freddie Mac's guarantee income will rise 10 percent this year, Chief Financial Officer Anthony Piszel said in an interview.

Freddie Mac, which has lost about 60 percent of its market value in the past year, rose 90 cents to $25.99 at 9:47 a.m. in New York Stock Exchange composite trading. Fannie Mae climbed $1.37 to $28.64.

Freddie Mac, which has lost about 60 percent of its market value in the past year, rose 81 cents to $25.90 at 9:40 a.m. in New York Stock Exchange composite trading. Fannie Mae climbed $1.04 to $28.31.

``Today's economy represents one of the most severe housing downturns in American history and our results reflect that difficult environment,'' Syron, 64, said in the statement.

Fannie Mae

Fannie Mae yesterday posted a record net loss of $3.55 billion for the fourth quarter and increased its forecast for credit losses. Moody's Investors Service said it may cut Fannie Mae's financial strength rating because the losses are eroding the company's capital. Moody's is also reviewing Freddie Mac.

Credit-default swaps tied to the senior bonds of Freddie Mac and Fannie Mae rose after the reported loss today. Contracts on the companies rose 3 basis points to 78, according to broker Phoenix Partners Group in New York.

Rising mortgage defaults forced Syron to shore up Freddie Mac's finances by selling $6 billion of preferred stock in November, slicing the dividend 50 percent and reducing mortgage assets by 4 percent to $701.4 billion in the three months ended Nov. 30.

``We believe we raised sufficient capital to get through 2008, assuming no further severe market downturns,'' Freddie Mac's Piszel said. The company began 2008 with $4.5 billion above the 30 percent excess capital requirement set by its regulator, he said.

Sell Recommendations

Goldman, Sachs & Co. and Merrill Lynch & Co. this month recommended investors sell Freddie Mac and Fannie Mae shares, citing their vulnerability to a surge in foreclosures.

Created by Congress to boost homeownership, Fannie Mae and Freddie Mac profit by holding mortgages and mortgage bonds as investments and by charging a fee to guarantee and package loans as securities. They record losses when defaults rise.

Freddie Mac warned investors in December that fourth- quarter losses would resemble the record, third-quarter net loss of $2.02 billion as the company's default rate rose to as high as 3.5 percent, or the worst since 1991.

Bank seizures of U.S. homes almost rose 90 percent to 45,327 last month from the same period a year ago, according to RealtyTrac Inc., a seller of foreclosure statistics that has a database of more than 1 million properties. Total foreclosure filings, which include default and auction notices as well as bank seizures, increased 57 percent. More than 233,000 properties were in some stage of default last month, RealtyTrac said in a statement yesterday.

Moody's Review

Moody's said today it is continuing to review Freddie Mac's financial strength rating of A-, the second-highest grade, because of ``significant deterioration of surplus regulatory capital.'' All other ratings were affirmed with a stable outlook.

The New York-based rating company's financial strength rating measures the likelihood a company will need assistance from a third party, such as the government or shareholders.

U.S. Economy Grew Less Than Forecast Last Quarter

U.S. Economy Grew Less Than Forecast Last Quarter

By Courtney Schlisserman

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The U.S. economy grew less than forecast in the fourth quarter, relying on exports as consumer spending slowed and the slump in homebuilding deepened.

Gross domestic product rose at a 0.6 percent annualized rate, unchanged from the initial estimate last month, after a 4.9 percent gain in the third quarter, the Commerce Department said today in Washington. The median estimate in a Bloomberg News survey of economists was for a 0.8 percent increase.

Excluding exports and imports, domestic spending contracted, a change from the first estimate, the department said. Combined with figures today showing claims for unemployment insurance jumped last week, the report reinforced traders' expectations for the Federal Reserve to cut interest rates again next month.

``We have absolutely no momentum going into the first quarter,'' said Josh Shapiro, chief U.S. economist in New York at Maria Fiorini Ramirez Inc. ``Things are looking pretty grim for the economy. If we're not in a recession already, we're very close.''

Fed Chairman Ben S. Bernanke yesterday signaled he's ready to lower interest rates again to sustain the expansion. Traders see a 100 percent chance of a half-point reduction to 2.5 percent by the end of the next meeting on March 18. Odds of a three-quarter point cut rose to 36 percent, from 10 percent.

Jobless Claims

The Labor Department said initial claims for unemployment insurance climbed 19,000 last week to 373,000, higher than forecast.

The dollar, which had risen as much as 0.3 percent earlier today, erased its gains after the reports and reached a record low against the euro. It traded at $1.5127 at 8:39 a.m. in New York, after touching $1.5147 earlier.

The median GDP estimate was based on 74 economists surveyed. Projections ranged from gains of 0.5 percent to 1.3 percent.

An improvement in trade prevented the economy from contracting last quarter. The gap narrowed to an annual pace of $506.8 billion, adding 0.9 percentage point to GDP.

Excluding the improvement in trade, the economy would have shrunk at a 0.3 percent annual pace, the first decline since the last recession in 2001.

``One could argue that the domestic recession began'' last quarter, Neal Soss, chief economist at Credit Suisse, said in a Feb. 21 note to clients. ``But there would be no debating that the rest of the world kept U.S. GDP growth above water at the end of last year.''

Consumer Spending

Consumer spending, which accounts for more than two-thirds of the economy, rose at a 1.9 percent annual rate in the fourth quarter, down from the 2 percent increase estimated last month, according to today's report.

Declining sentiment is likely to continue to restrain spending in coming months. Purchases may grow at a 1 percent pace this quarter, according the median estimate in a Bloomberg News survey taken from Jan. 30 to Feb. 7. The survey also projected a 0.5 percent pace of expansion from January through March.

Consumer confidence fell this month to the lowest level since the start of the Iraq war as the job market deteriorated, according to a report this week from the Conference Board, a New York-based research group. Americans' expectations for the next six months dropped to the lowest level since January 1991.

Adding to concerns about spending, revisions for the third and fourth quarters also showed smaller gains in incomes, according to today's report. Personal income increased at a 4.1 percent annual pace from October through December, compared with an initial projection of 4.5 percent.

Job Market

Income growth may slow further in coming months as the labor market softens. The U.S. lost jobs for the first time in four years in January and weekly initial jobless for jobless benefits have risen.

Fourth-quarter estimates for commercial construction, business investment on new equipment, government spending and inventories were also revised down.

Residential construction decreased at a 25 percent pace, more than previously estimated and the most since 1981. Declines are likely to continue through much of 2008.

Lowe's Cos., the world's second-largest home-improvement retailer, said this week that fourth-quarter profit fell and several ``challenging'' quarters remain as the worst housing slump in more than 25 years deepened.

`Tough' Market

``It will still be a tough housing market through the balance of 2008,'' Lowe's Chief Executive Officer Robert Niblock said in a Feb. 25 interview. ``It'll probably be into 2009 before you're seeing a recovery.''

Fed Chairman Bernanke, in testimony to Congress yesterday, referred to ``downside'' risks for the economy four times and noted that data since the last Fed meeting in January pointed to ``sluggish'' growth.

The central bank ``will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks,'' Bernanke said. Policy makers are scheduled to next vote on interest rates on March 18.

The Fed and the administration are trying to head off a recession. President George W. Bush, on Feb. 13, signed a $168 billion stimulus package, including tax rebates to more than 130 million households.

Today's report is the second of three estimates released by the Commerce Department. The data will be revised again next month as more information becomes available.

FDIC to add staff as bank failures loom

FDIC to add staff as bank failures loom

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The Federal Deposit Insurance Corp. is taking steps to brace for an increase in failed financial institutions as the nation's housing and credit markets continue to worsen.The FDIC is looking to bring back 25 retirees from its division of resolutions and receiverships. Many of these agency veterans likely worked for the FDIC during the late 1980s and early 1990s, when more than 1,000 financial institutions failed amid the savings-and-loan crisis.

FDIC spokesman Andrew Gray said the agency was looking to bulk up "for preparedness purposes." The division now has 223 employees, mostly based in Dallas.

The agency, which insures accounts at more than 8,000 financial institutions, is also seeking to hire an outside firm that would help manage mortgages and other assets at insolvent banks, according to a newspaper advertisement.

In public, policy makers are debating what role the government should play in trying to stabilize the housing market and minimize foreclosures. Meanwhile, regulators have worked discreetly behind the scenes to closely monitor the growing number of troubled banks and thrifts considered at risk.

"Regulators are bracing for well over 100 bank failures in the next 12 to 24 months, with concentrations in Rust Belt states like Michigan and Ohio, and the states that are suffering severe housing-market problems like California, Florida, and Georgia," said Jaret Seiberg, Washington policy analyst for financial-services firm Stanford Group.

In job postings on its Web site, the FDIC said it is looking for people with "skill in performing duties associated with a financial-institution closing, such as receivership management, resolutions and/or asset disposition; knowledge of the resolutions process as it relates to complex financial institutions." Such positions would require "very frequent overnight travel," the posting said, and would pay up to $180,770.

"The notion of bringing back some people who have been through it before is very smart," said William Isaac, who was FDIC chairman from 1981 until 1985. All told, the FDIC has roughly 4,600 employees, far fewer than the about 15,000 it had as recently as 1992.

On Sunday the FDIC ran a newspaper ad seeking companies that could service commercial loans, mortgages and student loans in the event of a bank failure. It didn't say how much a company could earn in this area.

The FDIC rated 65 banks and thrifts as "problem" institutions at the end of the third quarter of 2007, up from 47 institutions a year earlier. Both figures are low by historical standards. At the end of 1993, there were 572 "problem" banks and thrifts. The FDIC is expected to update its data on "problem" institutions today.

Before the housing market soured, the banking industry was enjoying one of its most profitable stretches in U.S. history. There wasn't a single bank failure from July 2005 through January 2007, an unprecedented span.

There have only been four bank failures in the past 12 months, a rate the FDIC has easily been able to handle.

In many parts of the country, the housing-market decline has hamstrung banks, and regulators have reported weakening performance of commercial real estate, small business and credit-card loans. Exacerbating the situation is a cash-flow crunch, which makes it harder for banks to obtain funding to originate new loans.

FDIC Chairman Sheila Bair, Comptroller of the Currency John Dugan, and Office of Thrift Supervision Director John Reich have warned of a pickup in bank failures. Last week Mr. Reich reported that the thrift industry lost a record $5.2 billion in the fourth quarter.

The FDIC was created by Congress in the 1930s after a series of bank runs during the Great Depression. At the end of 2007, it had $52.4 billion in its fund that backstops the nation's insured deposits.

Bernanke: Growth, inflation (Stagflation) concerns

Bernanke: Growth, inflation (Stagflation) concerns

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The economy still faces slower growth prospects but increasing inflation concerns could "complicate" the Federal Reserve's efforts to stimulate the economy, Fed Chairman Ben Bernanke told lawmakers Wednesday.

The central bank chief, in testimony before the House Financial Services Committee, said that the housing and labor market could deteriorate further and warned of tighter credit conditions.

But he added that the recent increases in energy prices and key commodities, as well as a weaker dollar, remain an inflationary risk and could further erode consumer spending.

"Should high rates of overall inflation persist, the possibility also exists that inflation expectations could become less well anchored," Bernanke said.

He warned the Fed may have to pull back on its efforts to stimulate the economy. "In the months ahead, the Federal Reserve will continue to monitor closely inflation and inflation expectations," Bernanke said.

While issuing a warning about inflation, Bernanke also said that the "housing market is expected to continue to weigh on economic activity" in coming months.

To help keep the economy from tipping into a recession, the Fed has steadily cut the federal funds rate, which affects a variety of consumer loans, since September. It slashed interest rates twice by 1.25 percentage points in just under a week last month.

Bernanke's remarks come amid recent warning signs about the economy.

A survey on residential real estate released Tuesday revealed that the decline in home prices picked up at the end of 2007. And consumer confidence fell to its lowest level in five years, the New York-based Conference Board reported, on fears about the job market and slowing business activity.

Right now, the growing consensus is that the Fed will cut interest rates by another half a percentage point when policymakers meet again on March 18.

Less than two weeks ago, Bernanke and Treasury Secretary Henry Paulson warned lawmakers of slower economic growth in the coming year but said they believed the U.S. economy would avoid tipping into a recession, helped in part by the $170 billion economic stimulus package signed by President Bush on Feb. 13 and the most recent interest rate cuts by the Federal Reserve.

US mortgage finance firm Fannie Mae posts 2.1 bln loss

US mortgage finance firm Fannie Mae posts 2.1 bln loss

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Fannie Mae, a leading US financing provider for mortgages, said Wednesday it swung into a loss of 2.1 billion dollars in 2007 amid a deepening housing downturn and warned of "another tough year."

Fannie Mae said the net loss of 2.05 billion dollars, or 2.63 dollars a share, was mainly due to the weakness in the housing market and the disruption in the mortgage and credit markets in the second half of the year.

For the full-year 2006, the government-chartered company earned 4.06 billion dollars, or 3.65 dollars a share.

The company said that the housing and credit problems had affected earnings in a number of ways, including an increase of 2.8 billion dollars in its provision for credit losses, an increase of 5.1 billion dollars in market-based valuation losses and a decrease of 2.2 billion dollars in net interest income for the year.

It said its loss for the second half of the year totaled five billion dollars, reflecting "significant increases in serious delinquency rates and foreclosures, home price declines, widening credit spreads, shifts in interest rates and illiquidity in the capital markets."

"We are working through the toughest housing and mortgage markets in a generation," said Fannie Mae president and chief executive Daniel Mudd.

"Our strategy for moving through another tough year is to protect and conserve our capital base, and control credit losses," he said.

Revenue fell in the 12 months ended December 31 to 10.99 billion dollars from 11.79 billion dollars in 2006. The pre-tax impact on earnings of market-based valuation adjustments was a loss of 7.27 billion dollars for 2007.

Fannie Mae added that the disruption in the housing, mortgage and credit markets is continuing in 2008.

"We expect housing market weakness to continue in 2008, leading to increased delinquencies, defaults and foreclosures on mortgage loans, and slower growth in US residential mortgage debt outstanding," the company said.

It anticipated the fair value of its net assets would decline in 2008 from 35.8 billion dollars as of December 31.

Fannie Mae sharply hiked its 2008 forecasts for nationwide declines in home prices, to between five and seven percent, from a prior four to five percent.

It predicted the total peak-to-tough price decline, measuring the price of homes at the peak of the housing boom that collapsed two years ago to the low hit before the market recovers, at between 13 and 17 percent, from the previously forecast 10 to 12 percent.

Created by Congress, Fannie Mae is a shareholder-owned company with a public mission to expand affordable housing and bring in global capital to serve the US housing market.

It operates in America's secondary mortgage market to ensure that mortgage bankers and other lenders have enough funds to lend to home buyers at low rates.

U.S. Home Foreclosures Jump 90% as Mortgages Reset

U.S. Home Foreclosures Jump 90% as Mortgages Reset

By Sharon L. Lynch

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Bank seizures of U.S. homes almost doubled in January as property owners failed to make higher payments on adjustable-rate mortgages.

Repossessions rose 90 percent to 45,327 last month from the same period a year ago, according to RealtyTrac Inc., a seller of foreclosure statistics that has a database of more than 1 million properties. Total foreclosure filings, which include default and auction notices as well as bank seizures, increased 57 percent.

``The most troubling thing is that we are seeing more and more of these properties actually going all the way through the process and going back to the banks,'' Rick Sharga, executive vice president of Irvine, California-based RealtyTrac, said.

Defaults among subprime borrowers and those unable to meet rising payments on adjustable-rate loans drove foreclosure filings to the highest since August and the second-highest since RealtyTrac started keeping records three years ago. About $460 billion of adjustable mortgages are scheduled to reset this year, raising minimum payments for borrowers, according to New York- based analysts at Citigroup Inc.

About $190 billion in subprime adjustable mortgages are slated to reset this year, according Mark Zandi, chief economist of Moody's

More than 233,000 properties were in some stage of default last month. Total filings increased 8 percent in January from December, RealtyTrac said today in a statement.

Bush Plan

President George W. Bush's proposal to help 1 million subprime borrowers avoid foreclosure with tax-exempt bonds is doing little to slow the increase in defaults.

State housing agencies are turning away many applicants because their homes have lost too much value or they've accumulated too much debt, according to estimates from Geoffrey Cooper, emerging markets director at a unit of MGIC Investment Co., the country's biggest mortgage insurer.

Home prices in 20 U.S. metropolitan areas fell in December by the most on record, according to the S&P/Case-Shiller home-price index released today. The measure dropped 9.1 percent from a year earlier. Nationwide, home prices fell 8.9 percent in the fourth quarter from a year earlier, the biggest decline in 20 years of Case-Shiller records.

``With the collapse in housing values, many of these homeowners realize there's no chance they will ever be a true owner of the home,'' Zandi said. ``They are just handing the keys back to the bank.''

Nevada, California and Florida recorded the highest foreclosure rates among the 50 states, RealtyTrac said.

Nevada, California

The rate of foreclosure filings in Nevada continued to lead the nation, with 6,087 properties in default or having been repossessed. That's 95 percent more than in January 2007 and 45 percent less than in December.

California had the highest total number of default and foreclosures with 57,158 properties facing possible seizure last month. That was more than double the year-earlier figure and was up 7 percent from December.

Florida had the second-highest number of homes in default or foreclosure with 30,178 in January, more than double the figure for the prior year and 3 percent less than in December.

Arizona, Colorado, Massachusetts, Georgia, Connecticut, Ohio and Michigan rounded out the top 10 states worst off in terms of missed payments and property seizures, RealtyTrac said.

Cape Coral-Fort Myers, Florida, had the highest January foreclosure rate among 229 metropolitan areas. Stockton, California, had the second highest, followed by the Riverside-San Bernardino area.

New Jersey ranked 18th in terms of the proportion of households at some stage of default or seizure, with 0.15 percent. New York was 30th with 0.06 percent of households facing possible foreclosure.

More Foreclosures

Banks may be forced to resell as many as 1 million foreclosed properties this year, adding to a glut of inventory and forcing prices down even further, Sharga said.

January was the sixth straight month with more than 200,000 foreclosure filings, RealtyTrac said. The fourth-quarter total of 642,150 filings was the most since the company began records in January 2005. More than 1 percent of U.S. households were in some stage of foreclosure during 2007.

U.S. home prices fell last year for the first time since the Great Depression. That made it more difficult for homeowners to sell or refinance properties encumbered by mortgages higher than the value of the houses themselves. Sales of existing homes fell last month to the lowest in at least nine years, the National Association of Realtors said yesterday.

Prices Fall

The median price of an existing home fell 4.6 percent to $201,100 from January 2007. The median for a single-family home dropped 5.1 percent to $198,700, and condominium and co-op prices fell 1 percent to $220,400.

Mortgage companies including Fannie Mae and HSBC Finance have joined a U.S. Treasury Department-led effort to offer 30-day foreclosure freezes to give delinquent borrowers more time to arrange payment plans.

Citigroup Inc., JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co., Washington Mutual Inc. and Countrywide Financial Corp. have initially agreed to participate in the effort.

Manufacturing data fuel US recession fears

Manufacturing data fuel US recession fears

By Chris Bryant

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US manufacturing orders on Wednesday recorded their biggest decline in five months and new home sales slumped to a 13-year low, compounding fears that the US economy may be sliding into recession.

Orders for big-ticket manufactured items fell 5.3 per cent in January, exceeding economists’ expectations of only a 3.5 per cent decline. The disappointing headline result wiped out a revised 4.4 per cent increase in December, when buoyant aircraft sales had provided a boost to the figures.

New home sales declined 2.8 per cent to a 588,000 annual rate after December’s figures were revised fractionally higher. Consensus estimates for January were for a 600,000 annual rate. Meanwhile, inventories of unsold homes rose to the highest level since 1981.

The slew of data was discomforting for economists, some of whom have pinned hopes that the US economy can avoid a recession this year, in part, on expectations that business spending would hold up. The housing report also confounded nascent hopes that new home sales might show signs of stabilising.

John Ryding, chief US economist at Bear Stearns, said the “weak” durable goods orders helped erase “the more constructive picture painted by the December data”.

The durable goods figures followed a dire reading last week on the Philadelphia Federal Reserve manufacturing index, which also deteriorated unexpectedly.

Excluding transportation, durable orders fell a comparatively modest 1.6 per cent this month. However, this was still more than twice the expected decline.

There was mixed news concerning core capital goods orders, a key measure of business spending on machinery and equipment, which fell a modest 1.4 per cent, paring an upwardly revised 5.2 per cent gain in December. Core capital goods shipments rose 0.1 per cent.

“Business spending seems to be holding up in the wake of the credit crunch,” Paul Ashworth at Capital Economics, said. “All things considered, aside from the headline figure this isn’t actually a bad report.”

The housing data gave little cause for optimism as builders’ efforts to slash prices failed to attract more new buyers into the market. Apart from a small improvement in the west of the country, sales of new single-family homes fell across the United States. Inventories of unsold homes rose to 482,000, a 9.9 months supply, lengthening the road to recovery for US homebuilders.

A 4.3 per cent decline in the median sale price of new homes echoed Tuesday’s Standard & Poor’s/Case-Shiller home price index, which dropped 8.9 per cent in the final quarter of last year, the steepest decline in the 20-year history of the index.

On Monday, The National Association of Realtors said existing home sales in January fell for a sixth consecutive month to their lowest level in almost a decade.

In spite of the negative data, the S&P homebuilder index rose 1.4 per cent on Wednesday after regulators announced plans to lift caps on the investment portfolios of government sponsored mortgage agencies Fannie Mae and Freddie Mac.

“There can be no doubt at all that the housing market is suffering a catastrophic collapse. There is no sign yet that the bottom is near,” said Ian Shepherdson, chief US economist at High Frequency Economics.

New day, new low for dollar

New day, new low for dollar

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The dollar dipped to another record low Thursday as the Commerce Department reported that the economy braked to a near halt in the final quarter of 2007.

Gross domestic product increased at a scant 0.6 percent pace in the October-to-December quarter, according to the report.

The reading on gross domestic product underscored just how much momentum the economy lost in the final quarter, dragged down by a scarcity of credit and a plunging housing market.

Gross domestic product (GDP) measures the value of all goods and services produced in the United States.

The 15-nation euro bought $1.5150 in early European trading -- up from $1.5120 in New York the previous night and above a record $1.5143 reached earlier Wednesday. The euro gave up a little ground and was trading at $1.5122, still above Wednesday's close.

The British pound rose to $1.9846 from $1.9842. The dollar dipped to 106.01 Japanese yen from 106.45 yen.

"With sentiment becoming increasingly pessimistic as to the outlook for the U.S. economy, it seems as if it will take a notable shift in sentiment if we're to see any real recovery," said Gary Thomson, head of sales trading at CMC Markets.

The euro topped $1.50 for the first time since its 1999 introduction early Wednesday, then surged above $1.51 after markets took comments from the Federal Reserve chairman as a sign that yet more U.S. rate cuts are on the way.

Fed Chairman Ben Bernanke said that "the economic situation has become distinctly less favorable" since last summer.

Lower interest rates can jump-start a nation's economy, but can weigh on its currency as traders transfer funds to countries where they can earn higher returns.