Stimulus, take 2: The right way

NEW YORK (CNNMoney.com) -- It's official. The economy shrunk in the third quarter. In terms of earth-shattering surprises, that should rank up there with the news that Madonna and Guy Ritchie were getting a divorce.

We all knew before today that consumers and businesses have been suffering. And many economists expect that the decline in gross domestic product (GDP) for the fourth quarter will be significantly higher than the 0.3% annualized drop for the third quarter.

So with that in mind, is it time for the government to enact another fiscal stimulus plan to get the economy back on track? Congress held a hearing to discuss that very notion on Thursday morning.

In a word, yes. But this stimulus plan has to be a lot different than merely sending out $1,200 checks to households.

Rebate 'sugar high' not enough

Several economists said that the income tax refunds that many Americans received as part of the $168 billion stimulus package earlier this year didn't do much other than provide a temporary boost to the economy in the second quarter.

With that money largely spent, personal consumption expenditures fell 3.1% in the third quarter, the largest drop since the second quarter of 1980. Apparently, when the Phillies win the World Series, it's bad news for the economy. (Philly Phanatics, don't send me hate mail. I'm just joking! And congrats.)

So Congress needs to do more than just give consumers a short-term fix.

Talkback: Should Congress pass another stimulus package?

"It is necessary to stimulate the economy. Congress just has to be very careful," said Oscar Gonzalez, an economist with John Hancock Financial Services in Boston. "We need more than just tax cuts that people may use to go out and buy a television. Spending money and getting a quick sugar high is not enough."

Investing in infrastructure: Gonzalez said that the key to a successful stimulus plan is increased spending on infrastructure.

That would provide a bigger lift to the economy since increased spending on construction should lead to more job growth in an industry that sorely needs it in the wake of the housing downturn.

Aid for state governments: Joe Liro, an economist with Stone & McCarthy Research Associates in Princeton, agreed that more money is needed for projects like highway reapir and mass-transit construction. But he added that the federal government also will need to set aside for many cash-strapped state and local governments.

"Washington can run big deficits but many state and local constitutions tend to have requirements for balanced budgets. The federal government will have to bolster local governments," Liro said.

Address housing: Still, Michael Strauss, chief economist with Commonfund, a money management firm based in Wilton, Conn., said that Congress should not forget the average consumer.

"The nuts and bolts of GDP is personal consumption spending. And if you register that on a 1 to 10 with 10 being bad, we were probably at an 8.5," he said.

Strauss also thinks that tax rebates are not the answer though. Instead, he said that anything Washington can do to more directly address plunging home prices and the rise in foreclosures would be good for the overall economy.

"We need something to help out the consumer side of the equation, something in the form of a mortgage refinancing package," he said.

This doesn't mean that a tax rebate is out of the question. But Liro said that rebates should only go to those who need it the most and would be likely to put the cash to use.

"There should be some modest changes to the tax code to put more money in the hands of the bottom rungs on the income ladder. It should be not going to the upper middle class, who would be more likely to save it than spend it," Liro said.

Overstimulation not a problem...yet

Even though there is a growing belief that more stimulus is needed, the government still needs to be wary of repeating the mistakes from earlier this decade and providing too much of a boost.

After all, the Federal Reserve has already cut interest rates to 1%. The last time the Fed did that, it kept them there for a year. And some economists believe that this prolonged period of easy money set the stage for the housing bubble...which is why we're in this mess in the first place.

In addition, the Fed and Treasury Department have already taken steps to do the same thing with their multi-pronged approach to solving the credit crunch.

That already seems to be helping to bring down bank lending rates and boost the commercial paper market, a key source of short-term funding for businesses.

But it's going to take several months to fully bring the credit markets back to life even though many impatient investors don't want to recognize that fact.

"There appears to be enough liquidity out there. Perhaps we just need a little more time to unclog the arteries in the market," Gonzalez said.

Still, Liro said it's premature to worry about overstimulation given that the economy declined in the third quarter and he expects even steeper drops in the fourth quarter and first two quarters of 2009.

Strauss added that he was confident that current Fed chairman Ben Bernanke has learned from the mistakes of his predecessor Alan Greenspan and that he would quickly move to raise rates again once the economy is showing signs of growth again.

"The party isn't going yet. But when it does, the Fed will take steps to remove the punchbowl," he said.

Finally, the other question about stimulus is perhaps the most important. How much? Liro thinks this second round has to be bigger than the tax rebates.

"You would have to imagine it should be in the $200 billion to $400 billion range. That would be warranted...and I'm a fiscal conservative," he said.

But Gonzalez warned that as serious as the nation's short-term economic problems are, Congress has to spend responsibly.

"Additional stimulus needs to be balanced with other problems. And one issue is the additional increase to the budget deficit and the impact that might have on long-term interest rates," he said. 


Bailout probably will put upward pressure on rates
Stimulus cash still going out
Q&A: Interest rate cuts won’t have immediate impact
Bush ‘open’ to stimulus

U.S. weighing new mortgage plan

NEW YORK (CNNMoney.com) -- The government is expected to announce soon that it will devote up to $50 billion to directly address the source of the financial crisis: bad mortgages and millions of homeowners at risk of foreclosure.

White House spokesman Tony Fratto said on Thursday that "no decisions" have been made on "a number of housing proposals" that the administration has been reviewing "for some time."

But three administration officials indicated to CNN that the new program would be designed to prevent foreclosures by having lenders reduce delinquent borrowers' mortgage payments to affordable levels. In exchange the government would guarantee some percentage of each loan to backstop lenders if borrowers re-default on modified mortgages.

The plan could help up to 3 million homeowners, although that number is not firm, according to the administration sources.

If it comes to fruition, the government's new loan program could trump the efforts of the Hope for Homeowners program put into place on Oct. 1 by the Federal Housing Administration.

Lawmakers spent months fighting over the legislation that created the FHA program before enacting it in July. Lenders may be more likely to participate in the latest government plan if it imposes less stringent requirements.

The Hope for Homeowners program offers full government backing for lenders that agree to write down a mortgage to 90% of a home's appraised value. But the loss to lenders can be greater than 10% because many troubled homeowners are also "under water" because of falling home prices - meaning they owe more on their home than its current market value. So to participate in Hope for Homeowners, lenders in many cases would have to lock in a sizeable loss.

The plan being considered likely would not require such a strict writedown. Instead, it might require that the new payment for the borrower be affordable.

Monthly payments can be made affordable by, among other ways, reducing the interest rate for a period of time or extending the term of the loan. Typically one way to determine affordability is to consider a delinquent borrower's debt-to-income ratio. At IndyMac, which was taken over by the FDIC this summer, loans are being modified so that borrowers' new mortgage payment - including insurance and taxes - does not exceed 38% of their pre-tax income.

The new government plan could offer lenders a way to reduce their losses on troubled loans, according to Jaret Seiberg, a financial services analyst at the Stanford Group, a policy research firm.

"Effectively, this is a cheaper alternative to the FHA rescue program that Congress enacted," Seiberg wrote in a note Thursday. "Lenders would have to modify the loan to make it affordable, but no one has discussed imposing the FHA rescue haircut requirement."

Big pool of bailout funds

Funding for the potential initiative would come from the $700 billion financial rescue package passed by lawmakers in early October. To date, most of the money from that package has been devoted to getting the credit markets going again.

Details of the plan are still being worked out between the Treasury, the White House and the FDIC, which is expected to run the new program under the leadership of FDIC Chairman Sheila Bair.

A year ago, Bair called for lenders to systematically modify troubled loans in order to prevent further deterioration in the housing market and the broader economy.

Howard Glaser, a mortgage consultant for Fannie Mae and Freddie Mac and former counselor to the Department of Housing and Urban Development during the Clinton administration, said the potential government plan may not be adequate.

"The Bush administration's reliance on a 'pretty please' approach to foreclosure relief - asking banks to undertake voluntary efforts to renegotiate troubled loans - has delayed recovery of the housing markets and raised the costs to the next president of addressing the crisis," Glaser said.

Last week, during a Senate Banking Committee hearing, Bair had said that the government and lenders are behind where they should be in terms of preventing avoidable foreclosures. And that while voluntary programs have been helpful, she said going forward "there needs to be a package of carrot-and-stick incentives."

On Thursday, the majority of Senate Democrats on the Banking Committee sent a letter to President Bush urging him to use the powers granted under the financial rescue package "decisively, aggressively, and swiftly to reduce foreclosures."

"The fact remains that the administration has not dedicated the time, attention or resources needed to address the cause of the crisis - the historic levels of foreclosure," the letter states.

- CNN's Kelli Arena and CNNMoney.com's Les Christie contributed to this article. 


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Banks borrow record $112B from Fed

NEW YORK (CNNMoney.com) -- With sources of credit still largely frozen, banks borrowed a record amount from the Federal Reserve in the past week, according to Fed data released Thursday.

The Fed reported that commercial banks borrowed a record $111.9 billion a day, on average, from the Federal Reserve's emergency lending window over the past week. That's up $6.1 billion from the $105.8 billion they borrowed in the previous week.

"Banks literally have an open checkbook to acquire cheap liquidity," said Matt McCormick, portfolio manager at Bahl & Gaynor Investment Council. "Borrowing will continue until morale improves."

Investment banks, meanwhile, borrowed $87.4 billion a day, on average, down $23.9 billion from $111.3 billion a week ago. Some analysts believe that investment banks are borrowing less as the federal government gears up its program to invest up to $250 billion in banks.

Meanwhile, legions of financial institutions have turned to the Federal Reserve for funds, as the traditional source of lending from private banks dried up after the collapse of Lehman Brothers in mid-September.

"The last resort is always the Fed, and that's where they're going to," McCormick noted.

As a result, the federal government has instituted several programs aimed at easing funding concerns for banks and encouraging lending between financial institutions. These include measures such as lowering interest rates, injecting capital into banks and providing insurance on all non-interest bearing accounts.

One such program, the Fed's Commercial Paper Funding Facility, has helped lower borrowing rates and provided critical short-term financing to businesses in desperate need of cash. The Fed said it has bought up $143.9 billion in commercial paper since the program began Monday.

Many of these programs have only recently come online, and analysts say it will take time for the new initiatives to reduce the lending stranglehold currently gripping banks.

"The unprecedented amount of liquidity coming from the Fed and Treasury will find a home eventually, and that will be good for the market," said McCormick. "It's taking a bit longer than the industry wants, but down the road it will make a significant impact across the board." 


Fed pumps out more dollars
White House tells banks to stop hoarding, start lending
Bailout probably will put upward pressure on rates

Congress: Don't use bailout for bonuses

WASHINGTON (AP) -- Leaders from both parties expressed concern Wednesday that a taxpayer-funded bailout of the financial industry will be used to pad the pockets of executives rather than get the economy rolling again.

In an unusual display of like-mindedness, the top Republican in the House and the Democratic leaders of the House and Senate sent letters to Treasury Secretary Henry Paulson about how the $700 billion in bailout funds will be used.

"Funds made available under the economic rescue package should not be used to pay for bank acquisitions, raises and executive bonuses," wrote House Republican Leader John Boehner.

Speaker of the House Nancy Pelosi and Senate Majority Leader Harry Reid wrote a joint letter "to express concern about the level of compensation" for top executives at financial institutions receiving funds through the bailout.

The letters came a day after Rep. Henry Waxman, D-Calif., chairman of the House Oversight Committee, sent letters seeking salary information from nine banks that have been tapped to receive $125 billion.

The "Troubled Assets Relief Program" was created within the bailout legislation to buy devalued mortgage-backed securities from tottering banks to unclog frozen credit markets. But the legislation also gave Treasury the power to make direct stock investments in financial institutions.

While the legislation includes limits on compensation, Pelosi and Reid note in their letter concerns about the direct investment program.

"News reports have suggested that six major financial institutions participating in the program have plans to pay their executives billions of dollars," they wrote.

Several news organizations, including The Associated Press, have published stories saying that banks are planning to use the funding to buy other banks, pay dividends to shareholders and for executive compensation.

Treasury spokeswoman Brookly McLaughlin said Wednesday that using the funds for acquisitions was within its broad goal of spurring more lending.

"It's in no one's interest to have unhealthy banks that are unable to play the role of lenders in the economy, who threaten the financial system," she said. "So it's possible and even appropriate if capital is used to create strong, healthy financial institutions."

In New York, Attorney General Andrew Cuomo said Wednesday that the bailout essentially has made taxpayers shareholders in the nine banks and they have a duty to be upfront with the public about huge bonuses. 


Rework of bailout plan revives hope
Treasury makes first bailout payment
Q&A: Interest rate cuts won’t have immediate impact
Golden parachutes here to stay

Fed cuts rates again

NEW YORK (CNNMoney.com) -- The Federal Reserve cut a key short-term interest rate by a half-percentage point Wednesday and issued a gloomy outlook for the economy due to continued worries about the ongoing crisis in the financial and credit markets.

The rate cut put the central bank's federal funds rate at 1%. That matched the lowest level for this overnight bank lending rate ever -- the last time it was at 1% was from June 2003 to June 2004.

Investors had been expecting a half-point cut and some were betting that the Fed would even cut rates by three-quarters of a point to 0.75%.

Major U.S. stock indexes, which had been higher ahead of the Fed's decision, fell after the announcement and finished mostly lower following a wild afternoon of trading.

The fed funds rate is used to set rates for a wide variety of consumer loans, including home equity lines and credit cards, as well as for many business loans. The lower the rate, the more the Fed hopes to spur economic activity.

The Fed said in a statement that it was concerned about the drop-off in consumer and business spending due disruptions in the credit markets and warned that the economic slowdown is likely to get worse.

"The intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit," the central bank said in its statement.

Economists generally agreed this is the Fed's most grim assessment of the economy since the Fed started issuing statements with interest rate decisions in 1995.

"They go through a litany of all these problems," said Gus Faucher, director of macroeconomics, Moody's Economy.com. He added that he thinks this statement is the Fed's way of indicating that the U.S. is already in a recession and that the economy will remain weak well into 2009.

This is the ninth time that the central bank has lowered rates since September 2007 in an effort to deal with the problems in the U.S. economy and credit markets. The decision to lower rates was unanimous.

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

In its statement, the Fed also appeared to concede that the rate cuts and a number of other actions it has taken to pump hundreds of billions of dollars into the credit markets would not lead to an immediate return of economic growth.

The Fed projected improved credit markets and a return of moderate growth "over time." And it warned that "downside risks to growth remain."

Will Fed go below 1%?

The Fed's grim view of the economy is expected to be reinforced Thursday morning when the Commerce Department issues its first reading on gross domestic product, the broadest measure of the nation's economic activity, for the third quarter.

Economists surveyed by Briefing.com forecast that GDP declined by 0.5% annually after jumping 2.8% in the second quarter. If the GDP number is negative, it would be only the fifth quarter in more than 17 years that has happened.

Faucher said he believes that the risk of further weakening in the economy, coupled by the unanimous vote, is a signal that the Fed is not done lowering rates yet. He's predicting another half-point cut, to 0.5%, at its next scheduled meeting on December 16.

Kurt Karl, chief economist at Swiss Re, is also looking for another half-point cut by the end of the year.

"In aggressively cutting rates, the Fed is signaling its willingness to do what it takes to stabilize financial markets," he said.

But other economists expressed fears that the Fed has already left itself with limited ability to respond to future problems by taking rates this low.

"Now they're running low on ammunition," said Rich Yamarone, director of economic research at Argus Research. "They look like Barney Fife with one bullet left. That's not too encouraging."

Other economists agreed, saying they believe Fed policymakers would prefer to not cut rates below 1%.

"I don't think there's anything to prohibit them from going under 1%, but there also is probably not a great deal of urgency on their part to bring rates lower," said Keith Hembre, chief economist First American Funds.

One economist questioned whether rate cuts really can make much difference since the current credit crunch is limiting the availability of funding. The problem isn't that loans are expensive. Banks are simply unwilling to lend.

"The latest Fed move is not going to hasten the economic recovery by a single day or accelerate the cleansing of bank balance sheets," said Bernard Baumohl, executive director of The Economic Outlook Group. "What is needed more than anything else at this stage is simply patience."

The Fed's previous cut was an emergency half-point reduction on Oct. 8. Six other central banks around the globe also lowered rates that day in a coordinated move.

The European Central Bank and the Bank of England are scheduled to meet next on Nov. 6. Those central banks have significantly higher benchmark rates, with the ECB now at 3.75% and the Bank of England at 4.5%.

While rate cuts are traditionally the key tool the Fed uses to stimulate the U.S. economy, it has had to take other steps to address the current credit crisis.

The Fed has loaned hundreds of billions of dollars to banks through a new lending facility and is starting to loan money directly to major businesses by purchasing commercial paper, which is what some banks and businesses use as their primary method to fund day to day operations. 


Fed to pay higher rates on bank reserves
The Fed’s next move is…
Q&A: Interest rate cuts won’t have immediate impact

Treasury makes first bailout payment

WASHINGTON (AP) -- The Treasury Department has made the first payments from the $700 billion rescue fund, a total of $125 billion in stock purchases from nine major financial institutions.

Treasury officials on Wednesday released a report on the payments, showing that the $125 billion in purchases of bank stock were made on Tuesday. The program is designed to inject fresh capital into the nation's banks as a way to encourage them to resume more normal lending.

The report showed that the payments included $25 billion each to Citigroup Inc. (C, Fortune 500), JPMorgan Chase & Co. (JPM, Fortune 500) and Wells Fargo & Co. (WFC, Fortune 500) Bank of America Corp. (BAC, Fortune 500) received $15 billion andMerrill Lynch & Co. (MER, Fortune 500), which is being acquired by Bank of America, got $10 billion. Bank of New York Mellon (BK, Fortune 500) received $3 billion and State Street Corp. (STT, Fortune 500) of Boston got $2 billion.

Two large investment banks, which converted to bank holding companies during the upheavals on Wall Street last month, also got support. Goldman Sachs Group Inc. (GS, Fortune 500) and Morgan Stanley (MS, Fortune 500) also received $10 billion each.

The nine major banks were called to a meeting with Treasury Secretary Henry Paulson on Oct. 13 where he convinced them to participate in the program even though some of the institutions argued that they did not need the money being supplied by the government.

Paulson wanted major banks to be unified in participation as a way to remove any stigma from the program. The government has begun striking deals with major regional banks, and the goal is to have another $125 billion distributed to potentially thousands of banks by the end of this year, all in an effort to bolster the banks' reserves so they will increase their lending.

On Tuesday, Treasury officials informed representatives of non-publicly traded banks, a group that covers about 6,000 of the nation's 8,500 banks, that they will also be able to participate in the program. Officials said they were moving to modify the contracts so that institutions without publicly traded stock would be able to submit applications.

The government also is being petitioned by a number of other industries, from auto companies to insurance firms, in a bid to get a part of the $700 billion bailout package.

The announcement Wednesday represented the government's first acknowledgment of the names of the banks and the amounts of money they were receiving, although the institutions had separately disclosed that information after their meeting with Paulson. 


Congress: Don’t use bailout for bonuses
Lots of banks interested in bailout
Fed urges U.S. to pay more for bad assets
Regional banks to sell maximum stock amount

Dollar rallies against the yen

NEW YORK (CNNMoney.com) -- The dollar bounced back against the yen Tuesday after global stock markets took a rest from their recent steep declines.

The dollar rose more than 5.2% against the Japanese currency to ¥97.654 from ¥92.772 late Monday. At one point during the session, the dollar traded as high as ¥97.78.

The euro fell to $1.2616 from Monday's close of $1.249. Earlier Tuesday, the euro fell as low as $1.2329, which was the lowest level for the 15-nation currency since April 2006.

The British pound, however, rose 1.8% to $1.5823 from $1.5552 late Monday. The pound fell Monday to its lowest level against the dollar since November 2002.

Volatile yen and sinking global markets

The Nikkei, the Japanese stock index, roared back from a 26-year low with a 6.4% gain Tuesday, breaking the six-day cycle of sharp rises in the yen and drops in the stock market.

European stocks followed Asia's lead with Germany's DAX index gaining 11.3%. The FTSE 100 in London rose 1.92% and France's CAC-40 gained 1.5%.

Stock prices in the United States were up 6% with about 40 minutes left in the session as investors overlooked dour economic reports to focus on a potential interest rate cut by the Federal Reserve.

But Tuesday's global stock market rebound may not be enough to stop the yen's rapid ascent, according to some analysts.

"We're looking at an inevitable piece of volatility," said Neil Mellor, currency strategist at the Bank of New York Mellon. "Within any trend you get a period of movement in the opposite direction."

Furthermore, investors speculated that the Bank of Japan could begin selling yen in order to stabilize the currency markets. On Monday, the Group of Seven major industrial countries said they were concerned about the yen's recent volatility, saying it could pose a threat to the stability of the global economy.

"It's safe to say we've moved a step closer towards Japanese intervention," said Mellor. "If the momentum of the last few days continues, it will lead to lots more volatility in the yen."

The yen has skyrocketed in the past week, as recent turmoil in the world's financial markets and concerns about a global recession have driven investors away from high-yielding currencies such as the euro and the pound. As a result, lower-yielding currencies like the dollar and the yen have surged in value because they are considered by many investors to be a safe-haven.

Even with Tuesday's large rebound, the dollar has still declined 10.6% against the yen since the beginning of the month, when it traded at about ¥106.

The yen has also been supported recently by the so-called carry trade. Investors often borrow yen to fund investments in higher-yielding currencies. But when those currencies weaken, and investors reverse their positions, they are forced to buy back the yen, raising its value.

Since Japan is such a big exporter of goods, a more robust yen hurts profits for Japanese firms as sales from abroad get translated back into yen. The more that the yen has climbed, the worse Japan's stock market has performed, which has resulted in a ripple effect on European and U.S. exchanges. 


Volatile dollar takes a breather
Stocks dive, oil soars on wobbly Wall Street

Oil rises with global markets

LONDON (AP) -- Oil prices jumped beyond $64 a barrel Tuesday as a rebound in world stock markets bolstered investor confidence that had been weakened by fears of a world economic slowdown.

Light, sweet crude for December delivery rose $1.68 to $64.90 a barrel in electronic trading on the New York Mercantile Exchange by noon in Europe. The contract fell 93 cents to close at $63.22 overnight, the lowest settlement since May 29, 2007.

Key Asian stock markets rebounded sharply Tuesday, including Japan's Nikkei 225 index, up 6.4% and Hong Kong's Hang Seng index, jumping 14.4% -- its biggest gain in 11 years.

"It was crude reacting to the Nikkei," said Jonathan Kornafel, Asia director for market maker Hudson Capital Energy in Singapore. "It began with a turnaround in Asian markets."

European stock markets also opened higher, with Germany's DAX up 7.34% and Britain's FTSE 100 rising 2.28%.

Oil investors have been taking a cue from a plunge in global stock markets that suggests major economies are headed for a significant recession over the next 12 months. Oil prices have fallen 58% since reaching a record $147.27 on July 11.

The Dow Jones industrial average fell 2.4% Monday after credit ratings agency Moody's Investors Service downgraded General Motors Corp.'s (GM, Fortune 500) credit rating further into "junk" status, citing a sharp contraction of the U.S. auto market. The Standard & Poor's 500 index fell 3.2%.

"It's quite a severe slowdown that's been priced in already," Kornafel said. "If the credit market remains tight and the recession worsens, we could certainly go into the $50s and even below $50, but that would be an overshoot to the downside."

"Further support for the bears" is likely to come from Wednesday's U.S. inventory data which is expected to show a fifth consecutive increase in crude oil stocks, by 1.2 million barrels a day, according to analysts at JBC Energy in Vienna, Austria.

Prices have fallen despite a production quota cut of 1.5 million barrels a day by the Organization of Petroleum Exporting Countries last week. OPEC officials have said the group, which controls about 40% of global crude oil production, may cut output again at a meeting in December.

"It doesn't matter what OPEC does or other supply news, people are just so focused on demand and getting their money out of trades that no longer make money," Kornafel said. "There's no real attention being paid to fundamentals in the short-term. It's still the panic."

In other Nymex trading, gasoline futures rose 0.91 cent to $1.49 a gallon and heating oil gained 2.25 cents to $1.94 a gallon. Natural gas for November delivery fell 1.6 cents to $6.11 per 1,000 cubic feet.

In London, December Brent crude rose 48 cents to $61.89 a barrel on the ICE Futures exchange. 


Stocks dive, oil soars on wobbly Wall Street
Tenn. gas prices exceed national average
Dollar rallies against the yen
Gas prices: Down 11% from July high

Personal bankruptcies on the rise

NEW YORK (CNNMoney.com) -- In 2005, Congress passed a bill aimed at reducing the number of personal bankruptcy filings. But that was before a housing meltdown, a credit crunch and a global economic downturn.

In the midst of the financial crisis, more and more Americans are filing for bankruptcy. And experts say the numbers are likely to get worse.

The Bankruptcy Abuse Prevention and Consumer Protection Act, which took effect three years ago this month, increased restrictions for Chapter 7 bankruptcy filings by applying a "means test" which would disqualify many consumers with higher incomes from discharging their debts.

Its supporters claimed the new rules would reign in abuses of bankruptcy laws, decongest the courts and educate consumers on money management. But after a steep dropoff immediately after the law took effect, bankruptcy filings are now on the rise again.

"The 2005 amendment was designed to make it more complex, more expensive and more difficult," said Professor Jack Williams, the American Banking Institute's resident scholar. But, "the people who thought they could reduce the number of filings have failed."

And the bill had other unintended results. Satisfying the means test became a difficult process, plus filers were also required to seek mandatory credit counseling and provide proof. All the additional paperwork further complicated the filing process, causing bankruptcy attorneys to raise their rates significantly.

"Bankruptcy became potentially more complex," said Stephen Elias, a bankruptcy attorney and author of "How To File For Chapter 7 Bankruptcy." "And with more paperwork and due diligence required, lawyers doubled their fees.

Personal bankruptcies filed in the federal courts totaled 934,009 from June 2007 to June 2008, up more than 28 percent from the 727,167 petitions filed in the same period a year earlier, according to the latest figures from the Administrative Office of the U.S. Courts.

The reasons for the sharp uptick? Rising consumer debt coupled with the mortgage meltdown left many consumers saddled with too much debt, Williams explained, and an increasing number turned to bankruptcy protection.

And with rising interest rates and a slowing economy, the number of filings will likely get even worse. "I expect bankruptcies in 2008 to exceed 1.2 million filings," Williams said. Next year, bankruptcy filings could increase by another 15% to 20%, he said, as personal income is outpaced by inflation.

New laws, same old problems

In the weeks before the law went into effect, many cash-strapped consumers rushed to file, causing a record number of bankruptcies in 2005. But just after the law passed, the number of filings dropped off dramatically.

That's because, under the new law, it became harder for individuals to file for bankruptcy under Chapter 7, which would let them discharge their debts and get what's known as a "fresh start."

In a Chapter 7 bankruptcy, your assets, minus those exempted by your state, are liquidated and given to creditors, and many of your remaining debts are cancelled. Since many Chapter 7 filers don't have assets that qualify for liquidation, credit card companies and other creditors can get nothing.

The Bankruptcy Act aimed to push more debtors toward Chapter 13 filings, which require them to repay at least some of their debts within five years. This law was a boon for the credit card industry, which could recoup more losses from defaulting credit card customers under Chapter 13 filings.

But only those debtors with income above their state's median, who could also afford to pay 25 percent of their unsecured debt, were forced to file Chapter 13, Elias said. And few people actually fell into that category.

Chapter 7 filings still far outnumber Chapter 13. Chapter 7 filings totaled 615,748 through June, up nearly 37 percent from the year before. Meanwhile, Chapter 13 filings totaled 344,421, up 17 percent from the year-earlier period.

Experts agree that Chapter 7 is often the best option for consumers saddled with insurmountable debt. "The whole value of doing a personal bankruptcy is to discharge the debt," said Eric Tyson, author of "Personal Finance for Dummies." "The bottom line is that if you file for bankruptcy, your credit is trashed, it doesn't make any sense to do that if you're not going to get the relief."

The only benefit to filing Chapter 13, according to Williams, is the opportunity to hold onto your home. That's if your mortgage company is willing to work with you on a repayment plan.

For those considering it, experts warn that filing for bankruptcy should always be a last resort, since it can damage your credit for many years. And before seeking advice, be wary of any potential conflicts of interest from credit counseling agencies or bankruptcy lawyers that could potentially profit from your position, Tyson said. "I encourage people to get educated before they seek counseling or get an attorney." 


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Playing the blame game

(Fortune Magazine) -- Mark to market is a business rarity - an accounting term that draws reactions from people who don't know spreadsheets from bedsheets. Mark to market, which we'll call MTM, evokes images of Enron's made-up profits and the other corporate scandals that marred the first years of this decade. Not pretty.

Now MTM - which means valuing marketable securities at market prices - is a hot item again, but for the opposite reason. This time financial companies and their allies are claiming it's too strict. They argue that marking the value of complex, illiquid securities to artificially low market prices has unnecessarily crippled the U.S. and world financial systems by creating billions of illusory losses on perfectly fine (albeit illiquid) securities, such as collateralized debt obligations linked to mortgages. Markets for these things, the argument goes, are depressed way below true economic value.

Accountants argue that MTM - known formally as Financial Accounting Standard 157 - is fine, although the Financial Accounting Standards Board has agreed to tweak it some. (Don't ask me for details - the written arguments on this are so sleep-inducing they could be marketed as an Ambien alternative.)

This week, the Securities and Exchange Commission is scheduled to hold a high-profile public meeting about MTM. The SEC, which has the power to overrule FASB, is holding the meeting because Section 133 of the $700 billion bailout bill requires that it study MTM and report to Congress by late December.

The guy who got 133 into the bill, Representative Spencer Bachus (R-Alabama), the ranking minority member of the House Banking Committee, told me he wasn't trying to politicize accounting. "It just says, 'Study it,'" he told me. "It doesn't say [to do] a study to repeal it. It doesn't say [to do] a study to suspend it."

But given that it's finger-pointing time both in Washington and on Wall Street, it's not going to be easy for the SEC to leave mark to market strictly alone. In this environment what regulator dares run the risk of being held responsible for not doing something that would supposedly mitigate the world's credit crunch? Would you want to find yourself accused of failing to act if the financial world totally melted down, as it has occasionally seemed about to do?

Normal accounting is being overridden to help banks in various ways. In early October, for instance, federal financial regulators jointly ruled that the $125 billion of preferred stock the Treasury is buying from nine big banks will be treated as tier-one capital (the best kind), even though it normally wouldn't qualify.

Second, in a little-noted move, regulators allowed banks with losses on some Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) securities to treat the resulting tax savings as tier one in their regulatory statements for the third quarter. That's strange, given that the third quarter ended Sept. 30, as usual, but legislation making this tax break usable didn't become law until Oct. 3. How often has my source for this nugget - accounting guru Robert Willens of Robert Willens LLC - seen such grandfathering in his 40-year career? "Never," he says.

Of course, this is more about optics than economics. As is mark to market, in my humble opinion. Credit markets have been frozen much of the past 15 months largely because banks haven't trusted the balance sheets of other banks and have thus been afraid to lend to them. I can't imagine that confidence problem being resolved by changing MTM.

There are problems with MTM: It's relatively new, and parts of it seem arbitrary. But its problems have been exaggerated. It's easier to blame accountants for your problems than to admit you made your institution vulnerable by overleveraging its balance sheet and buying securities you didn't understand. Ironically, many of today's whiners adopted MTM a year before they had to, partly because of an arcane provision that let them count as profit the decline in the market value of their publicly traded debt.

The bottom line: Despite MTM's flaws, blaming it for the world's financial problems isn't the answer. Neither is shooting the messenger - or, in this case, the accountant. 


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Bank of Korea slashes interest rate

SEOUL, South Korea (AP) -- South Korea's central bank slashed its key interest rate Monday by three-quarters of a percentage point -- its biggest cut ever -- to prevent Asia's fourth-largest economy from lurching into recession.

The country's president also said the government would cut taxes and boost public spending. The stock market rose for the first time in a week after a volatile session.

The Korea Composite Stock Price Index, which rose as much as 2.9% and dropped as much as 5%, closed 0.8% higher at 946.45. It had lost one-fifth of its value last week amid a global market sell-off.

The won continued to slide against the U.S. dollar, falling 1.4% to close at 1,442.50. The South Korean currency has declined more than 35% this year against the greenback.

The Bank of Korea lowered its benchmark seven-day repurchase rate from 5% to 4.25% at a rare interim meeting. The bank also announced it would broaden purchases of bonds from South Korean banks to boost liquidity in the financial system.

The bank said in a statement that a big cut was needed "to guard securely against the possibility of a sharp contraction of real economic activity" as the global financial crisis pounds the country's financial markets and threatens to tip other major economies into recession.

Lee Sung-il, senior deputy governor and a member of the bank's rate-setting monetary policy committee, told reporters that the moves would likely trigger improved expectations for more liquidity and help stabilize market rates, which have risen despite the rate cut earlier this month.

"These types of positive expectations were, I think, reflected in the stock market," Lee said, referring to the Kospi's modest rise. Lee said that Monday's rate cut was the bank's largest ever.

Separately, South Korean President Lee Myung-bak told the National Assembly that his government would increase public spending and reduce taxes to boost the economy.

But South Korea's difficulties are not comparable to what the country suffered a decade ago during the 1997-98 financial crisis, he said, citing $240 billion of foreign currency reserves and declining global oil and raw material prices.

"What matters is rather the psychological aspect," he said. "The most dreadful foe we have to guard against is overreacting and being engulfed in fear that exceeds reality."

Lee, who held an emergency meeting Sunday of his top officials, returned home Saturday from China, where he discussed ways to deal with the global financial meltdown with Asian and European leaders.

Goldman Sachs economist Kwon Goohoon wrote in a report that the rate cut was "decisive and proactive" and is likely to be followed by at least one more cut of a quarter percentage point early next year.

Monday's cut was only the second time the bank has lowered the benchmark interest rate at an unscheduled meeting under the current policy framework.

The first time was in the aftermath of the Sept. 11, 2001, terror attacks in the United States when the bank cut its key rate by half a percentage point.

The central bank announced Friday that South Korean economic growth slowed in the third quarter to 3.9%, as construction contracted and the global slowdown hit manufacturing and exports. It was the worst performance by South Korea's economy since the second quarter of 2005, when it expanded 3.4%.  


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Carmakers may be next up for bailout

NEW YORK (CNNMoney.com) -- Bush administration officials have had talks with the nation's automakers about providing possible federal help for the cash-starved companies, a White House spokeswoman said Monday.

Spokeswoman Dana Perino, responding to questions at her daily press briefing, said a decision had not yet been made about whether federal help will be offered to General Motors (GM, Fortune 500), Ford Motor (F, Fortune 500) and Chrysler LLC.

A number of experts have expressed concern that the automakers, which have suffered a sharp plunge in sales, could run through their cash reserves by next year.

The automakers could get help through the $700 billion Wall Street bailout passed by Congress earlier this month. The bailout was designed to prompt banks and securities firms to loan money to businesses and consumers, but automakers might qualify for help through their finance arms, Perino said.

"It's possible that some of those financing arms could be a part of the rescue package, the TARP, as they call it, at the Treasury Department," Perino said. "That's one of the reasons Treasury has been in contact with them."

Earlier this year, Congress approved a separate $25 billion loan program to help the automakers finance a switch in production from larger vehicles, such as pickups and full-size SUVs, to more fuel efficient vehicles.

The government has not started dispersing money under that program. The Department of Energy is working on regulations to govern the loans.

"I think that it's clear that the automakers are dealing with a very serious situation," Perino said. "They have been for some time."

GM spokesman Greg Martin acknowledged Monday that automakers are interested in getting help from the federal government.

"We have been in contact with a variety of federal officials for some time during this extraordinary and difficult economic period," said Martin, who is the automaker's Washington-based spokesman.

Martin declined to elaborate on the discussions. "We have said publicly that we believe the federal government should consider all of the tools available to it - some recently enacted - to support industries that are in distress and that are essential to the U.S. economy."

A Chrysler spokesperson said the company "worked hard" after the bailout was proposed last month "to be sure it was broad enough to offer the tools to address the automotive credit liquidity problem."

Ford declined to comment. Industry officials suggested that Ford was the least likely to be pushing for bailout funds because it had the strongest cash position of the three U.S. automakers.

Last week, Michigan's 17-member congressional delegation signed a letter to Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke asking that the federal government help the U.S. automakers. The delegation is made up of nine Republican members of the House and seven Democrats, along with the two Democratic senators.

"There is no single segment of America's economy that is more critical to the financial well-being of millions of Americans than the automotive industry," the letter stated. "One in ten American jobs is related to auto manufacturing.

"In this current economic environment it is imperative that the government ensures that liquidity is restored so that the U.S. auto industry is able to function until normalcy is restored to credit markets," the letter continued.

What the candidates say

Officials with the presidential campaigns of Democratic candidate Barack Obama and Republican John McCain have said they want the original $25 billion loan money made available to automakers more quickly. The loan money was originally authorized last year and finally enacted this year as part of an energy bill.

"It should not take 18 months to issue loans that were authorized in 2007," said Douglas Holtz-Eakin, McCain's senior economic policy adviser.

The Wall Street Journal reported Monday evening that the Department of Energy may release to GM $5 billion from the $25 billion loan program.

Both presidential campaigns said they are open to using the Wall Street bailout program to help automakers, but they didn't make firm commitments.

Jason Furman, Obama's top economic policy adviser, said his candidate wants Treasury and the Federal Reserve to explore the subject.

"At the end of the day, Senator Obama has pledged that all options will be on the table to help our nation's auto industry succeed," Furman said.

Holtz-Eakin said that McCain supports using the Wall Street bailout to help any industry that qualifies.

"It seems pretty clear that GMAC does, although Treasury will have to decide for others," he said. General Motors owns 49% of GMAC, a finance company that has an extensive home loan portfolio in addition to auto loans.

Tough time for Detroit

All of the automakers have announced plant closings and payroll reductions in recent years to stem losses from their core North American auto operations. Their combined U.S. sales in the first nine months of this year are down nearly 20% from year-ago levels.

Just last week, privately-held Chrysler LLC announced it would eliminate one in four salaried jobs at the company. It also said it would cut a shift at an Ohio plant and accelerate the planned closure of a Delaware assembly line.

Also last week, GM said that it is on track to meet its goal of a 20% reduction in salaried staff costs, and added that further cuts could be needed because of the weak sales environment.

GM and Chrysler are reported to be in talks about a possible merger that could eliminate tens of thousands of additional jobs in an effort to save billions of dollars. But finding financing for such a deal in the current environment has proved difficult.

Investors have also been scared away from the sector. Last week financier Kirk Kerkorian, the largest individual investor at Ford outside of the Ford family, announced that he had sold 7.3 million shares of Ford and was looking to sell his remaining 133 million shares. The sale means he'll take a big loss on the Ford stake he purchased earlier this year. 


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Tough transition for new president

NEW YORK (CNNMoney.com) -- The next United States president won't have long to savor victory after Election Day.

Facing the worst economic storm since Franklin Delano Roosevelt won the 1932 election, this president-elect will have to quickly announce his key staffers and policy priorities to reassure both the nation and the world.

"The incoming president will be facing many bigger challenges than any president since Roosevelt," said John Kamensky, senior researcher at the IBM Center for The Business of Government, which focuses on public management. "The president will have to have a very organized transition to be able to address it."

Spokesmen for Senator Barack Obama's and Senator John McCain's campaigns declined to comment on the transition, which lasts 77 days. It is widely reported that former Clinton Chief of Staff John Podesta is working with Obama, while former Reagan Navy Secretary John Lehman Jr. is guiding McCain's team.

Presidential transitions are often tumultuous, but this incoming president is facing a host of pressing matters, not the least of which is the global financial crisis. Don't forget, he also must be prepared to address the wars in Iraq and Afghanistan, as well as national security, on Day One of his administration on Jan. 20.

Lining up the cabinet. Traditionally, the president-elect first assembles his key White House appointees, particularly the chief of staff, budget and personnel directors and counsel. The secretaries of State, Treasury and Defense, along with the attorney general, are next in line. The rest of the cabinet is usually in place by Christmas.

This year, however, the Treasury secretary pick is more important than ever. Henry Paulson, the current office holder, is leading the largest federal intervention into the financial sector since the Great Depression. His successor will inherit the effort, which is less than six weeks old and still very much under construction.

Also on the schedule is a global economic summit on Nov. 15 in Washington, D.C. World leaders will look to the incoming president and his economic team -- including the White House Council of Economic Advisers and the National Economic Council -- for guidance on his policy initiatives.

So will the American public, who are waiting to see how the next president addresses critical issues such as the tidal wave of foreclosures and the bailout of the financial system.

Some 71% of people surveyed in a recent USA Today/Gallup poll feel the next president faces more serious or much more serious challenges than any new president in the past 50 years. More than two-thirds feel that stabilizing the economy should be the next president's top priority, compared to 12% who say managing the wars overseas comes first, the poll found.

Experts agree.

"I would expect the Treasury secretary and other economic appointees to be the first priority," said John Burke, professor of political science at the University of Vermont. "The sooner they can announce the key appointments, the better."

Handling the transition. Both campaigns are already working on transition plans. This is the first time nominees can submit names for national security clearance before Election Day. Each camp has already given up to 100 names to the FBI, Kamensky said.

Paulson is briefing the candidates, and the White House has already started working on its transition plans to smooth the way for the next president, experts said.

Past presidents have moved swiftly during their transition periods. Ronald Reagan, for instance, named James Baker his chief of staff shortly after Election Day. Bill Clinton held an economic summit in Little Rock, Ark., and George W. Bush's White House staff met daily before taking office.

Still, the incoming commander-in-chief must remember that he is not yet in office, experts said. While he can name his appointees and discuss his priorities, he can't actually act.

"What can you really do as a president-elect?" asked Martha Joynt Kumar, director of the White House Transition Project, a research group made up of scholars and policy institutions. "It's a really fine line you have to walk because you have to do something but you aren't president." 


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Oil hits 17-month low

NEW YORK (CNNMoney.com) -- Oil prices fell Friday to their lowest point since May 2007 as investors were unimpressed by a decision from the world's largest oil cartel to slash production targets.

The Organization of Petroleum Exporting Countries, whose member nations control about 40% of the world's oil, said it would cut production by 1.5 million barrels a day starting in November in order to keep oil prices from falling further. But many investors had been looking for something much larger.

U.S. crude for December delivery settled down $3.69 to $64.15 a barrel in New York. It was the lowest close for oil in more than 17 months. Prices hit an intraday low of $62.65 after news of the cut.

"(OPEC) had a chance here to either help the world economy, or help themselves, and they did neither," said Peter Beutel, oil analyst with Cameron Hanover.

OPEC cut: OPEC said the cut was necessary because the global financial crisis has caused oil demand and prices to plummet.

"The financial crisis is ... dampening the demand for energy, in general, and oil in particular," said OPEC in a statement released after the meeting concluded. "Oil prices have witnessed a dramatic collapse - unprecedented in speed and magnitude."

The decision was made in an emergency meeting held in Vienna, Austria, on Friday. The meeting was originally scheduled for Nov. 18, but it was pushed up a month as slowing demand sent crude oil prices down 56% since they rose to a record high of $147.27 a barrel in mid-July. Free-falling prices have alarmed many of the nations whose economies depend on oil exports.

Cut not enough to reverse falling prices

OPEC and demand: Many investors anticipated a larger production cut from OPEC to deal with falling demand in the slowing economy.

"Demand destruction is at over 2 million barrels a day," said Robert Laughlin, senior broker at MF Global. "What OPEC did today was a good gesture, but it wasn't enough."

OPEC president Chakib Khelil told reporters last weekend that any production cut could be "substantial," adding that the organization would try to stabilize prices between $70 and $90 a barrel.

Iran's oil minister, Gholamhossein Nozari, told reporters Thursday that OPEC needed to cut production by about 2 million barrels a day.

Iran ended up cutting its production by nearly 200,000 barrels a day. Saudi Arabia, the cartel's largest supplier of oil, cut by nearly a half a million barrels.

Though OPEC said it will revisit the cuts in its next meeting on Dec. 17, analysts believe it will be hard to convince the oil producing nations to further slash production.

"The Saudis took a third of the cut off the books," Laughlin said. "But the Saudi minister made pretty clear that this is the cut, and they're not going to get another one in December."

Second cut?: But if the cut wasn't enough to restore the market to equilibrium, Laughlin said we're headed towards oil at $50 a barrel. If oil sinks below $50, he said OPEC will be forced to act and cut production again.

In its statement, the cartel seemed to anticipate continued demand destruction and falling prices through the winter months.

"This slowdown in oil demand is serving to exacerbate the situation in a market which has been over-supplied with crude for some time," the statement said. "Moreover, forecasts indicate that the fall in demand will deepen, despite the approach of winter in the northern hemisphere."

"They'll probably have to cut (production) in December," said Beutel of Cameron Hanover. "It doesn't look like they've cut enough to bolster prices."

Gasoline: The fall in world oil prices since July has pushed gasoline in the United States, the world's largest oil consumer, from a high of $4.114 a gallon on average to $2.781 a gallon Friday, according to motorist group AAA.

A report from the Department of Transportation also showed that Americans reduced the number of miles they drive by 5.6%, or 15 billion miles, during the month of August compared to the same month last year. That was the largest monthly drop in miles traveled since the department began reporting data in 1942.

According to the U.S. Department of Energy, gasoline consumption for the past four weeks averaged 8.8 million barrels a day, or 4.3% lower than the same period last year.

Oil prices settled up $1.09 to $67.84 a barrel Thursday in anticipation of OPEC's production cuts. 


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Traders nervous ... very nervous

NEW YORK (CNNMoney.com) -- The severe drop in the stock market on Friday was inevitable, traders say, but that doesn't make it any easier to stomach.

"Panic is a strong word," said Anthony Conroy, head trader at BNY ConvergEx, before the market open. "There's a tremendous amount of nervousness, and nervousness feeds volatility."

The Dow Jones industrial average plunged more than 500 points just after the opening bell. The losses pulled back a bit, but were still down about 400 points, or about 4.7%. The Nasdaq and S&P 500 also fell more than 4%.

As Conroy talked about investor nervousness, stock futures - which measure current index values against perceived future performance - dropped so low that they hit their lower limits before 7 a.m. ET. This prevents traders from initiating a sale below that level. Once buyers emerge, normal trading typically resumes.

"I think we've seen this coming for a while," said Conroy. Traders have "become accustomed to the volatility [in the stock markets]over the last few months," he noted.

The signs were there. The S&P 500 has dropped 38% year-to-date, with declines getting steeper over the last month. Since mid-September, the S&P 500 has plunged nearly 25%.

"In the back of everyone's mind - in the market's mind - this was bound to happen," said Ryan Larson, head of equity trading at Voyager Asset Management, who also spoke before the start of trading. "Eventually, this became a self-fulfilling prophesy. There's real fear out there."

Recession fears have gone global, with steep declines in European and Asian markets. In the latest bit of bad news, the United Kingdom said that its annual GDP rate fell 0.5% in the third quarter.

On Friday, analysts said that "everything" was selling off, including oil and gold, and there didn't appear to be any safe haven.

Larson projected that Friday trading would be "very violent." Though he added that the "major sell-off" of the morning would be alleviated somewhat when the "bottom pickers" move in. 


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Who pays for federal spending cuts

NEW YORK (CNNMoney.com) -- Slashing government spending is certainly a phrase that plays well on the campaign trail.

But real spending cuts won't mean fewer school administrators or less environmental red tape. Real cuts mean that you'll have to live with a smaller military, put off your retirement and pay more for your health care - and that's something neither presidential candidate seems willing to admit.

The government spends about $3 trillion a year, which is equivalent to about 23% of the nation's total economic output. Over half that $3 trillion is spent on three things: defense, Social Security and Medicare.

If the nation is going to seriously deal with its long-term budget problems - that could create a $52 trillion shortfall over the next few decades, 70 times larger than the current Wall Street bailout - it's going to have to cut spending in these three areas.

Experts say both presidential candidates have only offered vague promises that merely nibble at the problem.

"It's easy to go after the small things that don't have the big lobbying behind them," said Robert Bixby, executive director of the Concord Coalition, a non-partisan group advocating fiscal responsibility. "But that's not where the problem is. They both know where the money is, they just don't want to talk about it."

The elusive dollar

Except for paying interest on the national debt, nothing is inherently off the table when it comes to slashing spending, said Bixby.

But while both Barack Obama and John McCain have promised hundreds of billions in savings through cuts in government spending, neither has been particularly clear where that money will come from.

"Neither of them has put a lot of specifics on the table," said Bixby.

Bixby said the plans are so vague his group won't even attempt to forecast what effect the candidates' plans would have on the budget over the next few years.

Other groups have attempted to model the candidates' proposals, and the results are not heartening.

In the short run, both McCain's and Obama's budget have a similar effect on the deficit - they make it larger.

McCain's plan, which generally promises more spending cuts but also more tax cuts than Obama's plan, will increase the budget deficit by nearly 50%, or $217 billion dollars each year over the next four years, according to a recent report from the Committee for a Responsible Federal Budget, a non-partisan watchdog group.

Obama's plan, which basically promises more spending offset by targeted cuts and higher taxes on the rich, would increase the deficit by even more - $281 billion.

'It's pretty stunning," said Maya MacGuineas, the group's president. "We have to borrow that money, and there's a real risk the people who loan it to us will say we don't look like such a good deal anymore."

MacGuineas said these deficit estimates are even conservative, as the group took the candidates vague plans to cut spending at their word.

McCain's biggest spending cut, $114 billion, is characterized as "unspecified," according to the report. The next largest is achieved by reducing troops in Iraq.

Obama's biggest cut, $156 billion, comes from reducing troops in Iraq, followed by reductions in health-care costs.

But even these savings are questionable.

"None of these things are very realistic given the new economic environment," said MacGuineas.

Getting at the big money

So what is realistic, and is there any hope the next president can cut spending?

In the short run, probably not. The government will likely have to borrow more as it attempts to stimulate a sagging economy through spending plans and simultaneously deal with decreased revenues caused by a likely recession.

But long term, experts say getting a handle on spending is possible. Both George H.W. Bush and Bill Clinton get credit for reducing the deficit through a combination of mandatory spending caps and a growing economy.

Mandatory spending caps - like rules that require all new bills to be fully funded before they can be passed - are essential to getting a handle on spending, said Dave Walker, President of the Peter G. Peterson Foundation, an advocacy group, and a former U.S. comptroller general.

Walker also said Social Security must be reformed, with the reforms including an increase in the retirement age and a reduction in benefits for middle- and high-income people.

Health-care costs must be addressed, he said, through a combination of more competitive bidding, less litigation and a change in an incentive structure that encourages extensive testing, as well as Medicare reform that includes higher premiums for upper-income people.

"Both candidates have touched on the health-care issue, but not as comprehensively as they need to," said Walker. "Does either candidate have a plan for dealing with the large and growing budget hole? No."

The McCain campaign did not return a call and e-mail seeking comment.

The Obama campaign said they do have a plan.

"Obama has proposed a program that is paid for, in that it cuts the deficit from where it is under current policy," said Austan Goolsbee, Obama's senior economic advisor.

Goolsbee noted plans to cut spending by reducing payments to health-care companies working with Medicare recipients, eliminating the subsidies for private banks in the student loan program and cutting subsidies to high-income farms.

On the farm subsidy point, the Obama camp finds itself in agreement with an unlikely ally - the conservative Heritage Foundation.

Brian Riedl, senior budget analyst at Heritage, said the $25-$30 billion currently doled out in the form of agriculture subsidies is one area he'd cut.

Anti-poverty and education programs are funded at all time highs, said Riedl, and their growth should be slowed, along with growth in other areas of the budget.

But like the other experts, he said most of the savings are going to have to come from Social Security, Medicare and defense. He also sees little in the current campaign rhetoric that offer signs of hope.

"Neither candidate's budget has shown a blueprint for getting the budget under control," said Riedl. "If we don't reform the current spending trends, we will bankrupt the country. There is no way around it."  


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Recession hits the country club

NEW YORK (Fortune) -- Three weeks ago, several hundred residents of Bonita Springs, Fla., received letters containing a word that no homeowner wants to see: foreclosure. But the property in danger didn't belong to them.

Florida developer Ronto Group informed the residents that Palmira Golf Club - the gated community's crown jewel - was shuttering due to the company's inability to pay its lenders.

"We were blindsided," said Ron Saul, a Palmira member and local realtor. Residents watched as the club's employees walk out with boxes. Gone were the club's services, membership fees worth tens of thousands of dollars, and, in the eyes of some residents, the value of their multi-million dollar homes.

"You have to think about how you might feel if you just watched $95,000 (the cost of a golf membership at Palmira) go into a black financial hole," wroteone resident, who asked to remain anonymous, in an e-mail to Fortune. "This may be the land of titanium drivers and $20,000 barbecue grills, but there's a limit."

Palmira's downfall came as a surprise to its members, but it was preceded by similar incidents around the country. According to Jeff Woolson, the head of commercial real estate company CB Richard Ellis's golf division, foreclosures of golf clubs and their surrounding communities are on the rise.

"We started hearing from lenders about six months ago," he said. "The next thing you know, there's a master community with a fence around it."

Buying time

Commercial real estate, a sector that's lagged behind the rest of the industry in experiencing the credit crunch, is about to get hit hard, according to a recent PricewaterhouseCoopers survey. One finding: investors believe that sales of homes in golf club communities will be near abysmal next year which, in turn, will hurt club memberships.

"The courses are owned by people who leveraged them up, and they're going to feel the pain," said Susan Smith, the director of real estate at PwC.

Woolson predicts that the number of golf community foreclosures will continue to rise next year - and developers too will feel the pain. "I've made a lot of money over the past eight years selling golf courses that weren't making money," he said. "The developers see profits when they sell the last 25% of the development - if the market comes to a halt before then, they're in trouble."

One of Woolson's properties, Winchester Country Club in Auburn, Calif., was repossessed by Wachovia (WB, Fortune 500) in May. Other prominent golf properties are also battling credit issues: the owners of Park City, Utah's ritzy Promontory golf community filed for bankruptcy earlier this year, and the Tamarack Resort near McCall, Idaho owes $273 million to Credit Suisse (CS) and faces possible foreclosure.

Another debtor to Credit Suisse is Quail West, a golf club community that's just down the road from Palmira. While owner Ginn Resorts owes $675 million to the Swiss bank, Ryan Julison, a Ginn spokesperson, says the developer hopes to keep its club open. "The homes themselves are not in danger," he said.

Maybe so, but living in a foreclosed development isn't good for property values. The houses in Winchester, says Woolson, are worth $1 million to $5 million each, and as much as 25% of their worth comes from being adjacent to the green.

Saul insists, however, that Palmira's residents are worried less about their property values - which are already taking hits in the slowing market - and more about "restoring our world," he said. "The golfers are used to golfing every day, the neighbors are used to using the social center - and it just stopped."

Rather than wait for the lender to act, 400 of Palmira's members gathered for a meeting after they received the foreclosure letter. They created an equity club, Palmira Golf and Country Club Inc., to raise money to keep the club running. Members were asked to contribute upwards of $500.

Woolson says that equity clubs are risky because they depend so heavily on ongoing participation. But the equity club's leadership committee, which did not return phone calls seeking comment, announced this week that neighbors had unified around the issue, collectively producing enough cash to reopen the course by Nov. 3.

The organization is still waiting to see if the lender accepts their offer to purchase the club. For now, they've bought another few rounds for the community, which has invested enough to keep Palmira running through the end of Florida's golf season in the spring. After that, the club could belong to them - or the tin can will have to go around again. 


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Gas prices fall again

NEW YORK (CNNMoney.com) -- Gasoline prices fell again, tumbling to the lowest price in a year, according to a daily survey of credit card swipes released Saturday.

The average price of unleaded regular fell to $2.735 a gallon, down four and six-tenths of a cent, according to the Daily Fuel Gauge Report issued by motorist group AAA. Prices have fallen $1.12, or 29%, in the last 38 days.

The current national average is $1.37, or 33.5%, off the record high price of $4.11 that AAA reported July 17.

The decline comes as hurricane season winds down and oil prices drop over concerns that a prolonged economic slump would curb demand for energy.

The last time the average price for a gallon of regular unleaded gasoline was close to this price was October 18, 2007, when the price averaged $2.795.

Alaska has the most expensive gas with prices averaging $3.78. The cheapest gas is found in Oklahoma with prices averaging $2.33. 


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Blame the yen for Wii, LCD prices

NEW YORK (CNNMoney.com) -- The dollar's freefall against the yen could hurt your chances of scoring a hot Christmas deal on a Sony LCD TV or the Nintendo Wii Fit.

On Friday, the yen hit a 13-year high against the greenback. Year-to-date, the dollar has slumped more than 20% against the Japanese currency.

Economists say the dollar's weakness against the yen is a mixed blessing.

While it makes U.S. exports cheaper, more importantly for consumers, it also makes it more expensive for America to buy products from other countries.

This means retailers who sell Japanese products have to pay more to buy them.

Typically, in a competitive marketplace, merchants will try to absorb any import price increases rather than pass them on to the consumer.

At the same time, a weak economy in the U.S. has already forced retailers to discount heavily this year to offset eroding sales.

Industry watchers say this hasn't left merchants which much more wiggle room to discount further without seriously damaging their bottom line.

"Over the last three to four months, the rate of [retail] price declines has lessened more noticeable," Michael Niemira, chief economist with the International Council of Shopping Centers (ICSC).

This means consumers may not get the juicy holiday deals that they've come to expect, especially on Japanese-made electronics such as TVs and gaming systems.

"If consumers don't get the deals, they won't spend," said Niemira, "If retailers keep discounting, their business will be in serious trouble."

It's a Catch-22 situation that's already hit Sony's business.

Sony Inc (SNE)., the bellwether of Japan's electronics industry, on Thursday blamed the stronger yen and a global economic slowdown for hurting sales of its LCD televisions, compact digital cameras and video cameras.

And Sony's won't be the only company feeling the impact, said Dan Ryan, research director with Global Insight Inc. "Japanese automakers, ship builders, steel producers are struggling too," he said.

But for fans of Nintendo's Wii Fit, which retail analysts expect to be one of the must-have holiday gifts, the dollar weakness offers a silver lining, said Wedbush Morgan Securities Michael Pachter.

The dollar, until recently, was weak against the euro. "So Nintendo was shipping more units of the Wii Fit to Europe than to the U.S. in order to maximize profits," Pachter said.

Now, with the greenback gaining strength versus the euro, he expects Nintendo to up shipments to the U.S. in time for the holidays.

How about deals on Wii Fit?

"No chance," said Pachter. "The profit margin is so slim that retailers just don't make money [on Wii]. There's just no reason to discount." 


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Investors terrified but also optimistic

NEW  YORK (CNNMoney.com) -- As the markets plunged again on Friday, the reactions from working people, business owners and investors ranged from optimism to despair.

In Times Square, pedestrians paused to peer through the display window of the Nasdaq office to watch the falling stock prices.

"I'm shocked that it's that bad this morning," said Marc Hasrouny, the owner of a machine tool business in Montreal.

He said the U.S. dollar, which plunged against the yen but climbed versus most other currencies -- including the Canadian dollar -- was one of the few safe havens in recent trading.

"Your dollar is strong," said Hasrouny. "Everybody wants your dollar."

But not everybody is that confident about the American financial market.

The Dow Jones industrial average plummeted more than 500 points at the start of trading but backed off its lows later on during the day. The Nasdaq was down about 3.5% in midday trading, while the S&P 500 fell more than 4%.

Some investors said the latest selloff was particularly disturbing given how far the markets have already dropped. The S&P 500 has plunged 27% since mid-September as the economic crisis has spread across the globe.

"I don't know where the bottom is," said Marawan El-Asfahani, an investor who owns a graphic design business in Toronto with his wife Alex. "I thought we were sitting on it, but it just keeps on dropping."

Hassim Illyas, a Manhattan diamond trader, worried over the stock performance of General Electric (GE, Fortune 500), Moody's Corp (MCO). and Yahoo!, (YHOO, Fortune 500) because he bought shares in those companies earlier this week.

Illyas said the market situation was "scary" and that he was particularly concerned by comments made by former Federal Reserve chairman Alan Greenspan Thursday about the "credit tsunami" that had hit the markets.

"[Greenspan] said that only once in a century this happens," said Illyas. "We are into something really grave."

Market malaise doesn't just affect the pros on Wall Street. Stock declines have taken large bites out of 401(k) retirement plans and made waves through most sectors and are one of many reasons why unemployment is on the rise: 760,000 jobs have been lost so far this year, according to the Labor Department.

Rosa Perez, from Austin, Texas, said people are scaling back on luxuries as a result of the market slow-down.

"People are canceling dinner dates because the market is down," said Perez, who was getting her picture taken in front the Nasdaq window.

Dan Silverman, a management consultant based in Washington, D.C., said that people are "terrified" about losing their money, but he's optimistic that investors will "calm down" after the presidential election is resolved in November.

He said he's continuing to invest in his 401K because he's "buying at bargain rates," on the assumption that the markets will recover.

Silverman gestured at the hustle and bustle of Times Square, where tourists with shopping bags filed in and out of crowded stores, and insisted that the economy is still active.

"You heard all these horror stories about the Great Depression," said Silverman. "Look around. Does this look like the Great Depression?" 


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Britain on the brink of recession

LONDON (AP) -- Britain's economy shrank between July and September, official figures showed Friday - confirming that the country is on the brink of recession and sending the pound into a dive against the U.S. dollar.

Britain's economic output declined by 0.5% last quarter, according to the Office for National Statistics.

It was the first time since 1992 that Britain's economy has contracted, and the fall was greater than analysts' prediction of a 0.2% drop.

The figures put Britain halfway into a technical recession - defined as two or more consecutive quarters of negative economic growth.

"We'll support the economy through this difficult time," British treasury chief Alistair Darling told the BBC.

The economic contraction was led by steep declines in the hotel and restaurant and manufacturing industries, the statistics office said.

The manufacturing sector, which has been hit hard by a decline in consumer spending, is already in its own recession according to the figures. Industry growth shrank by 1% in the third quarter following a decline of 0.9% in the second quarter.

Earlier this week, British Prime Minister Gordon Brown and Bank of England Governor Mervyn King said they believed the country was heading for a recession, causing both the pound and the stock market to fall. Word that Britain is officially on the brink of a recession significantly widened those drops.

The pound fell 4.5% against the dollar to $1.5497 as investors bracing for interest rate cuts in the wake of the economic data took their money elsewhere in search of higher yields.

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Meanwhile, the FTSE 100 index of leading British stocks plunged nearly 8% to 3,766 as traders bet that the country's economic contraction will make it more difficult for companies to pocket profits.

"Today's figures will make grim reading for Gordon Brown, whose legacy for economic management has been seriously damaged by the current downturn," said Richard Snook, economist with the Center for Economics and Business Research. 


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Mich. lawmakers want federal auto help

WASHINGTON (AP) -- Michigan lawmakers intend to urge Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson to use their regulatory powers to loosen up credit to help finance car loans.

The members of Congress said in a letter obtained by The Associated Press that the disappearance of liquidity in credit markets "threatens to cripple these industries and the communities in which they operate."

"In this current economic environment it is imperative that the government ensures that liquidity is restored so that the U.S. auto industry is able to function until normalcy is restored to credit markets," said the lawmakers in a draft letter circulated among the Michigan delegation.

The letter, expected to be sent to the Bush administration on Thursday, asks Bernanke and Paulson to use their "broad regulatory authority" and the powers they received in the $700 billion bailout of the financial sector to restore liquidity in the U.S. auto industry.

New vehicle sales are expected to fall by 30 percent in October, the lawmakers wrote, which could drive car sales down to an annualized rate of 11 million vehicles, the lowest figure since 1983.

"Domestic automobile manufacturers face the most difficult conditions they have faced in decades," said Rep. John Dingell, D-Mich., in a statement. "We need to do something to help unfreeze the credit markets for that industry, as well as others."

Treasury spokeswoman Brookly McLaughlin declined comment because the department had not yet received the letter, which was first reported by the Wall Street Journal on its Web site.

Lawmakers from Michigan, home to General Motors (GM, Fortune 500), Ford (F, Fortune 500), Chrysler and several auto suppliers, last month helped arrange up to $25 billion in low-interest loans from the government to help the industry retool plants and build fuel-efficient vehicles. Sen. Carl Levin, D-Mich., has said he may seek another $25 billion in loans in a lame-duck session after the election.

Many banks and auto finance companies have tightened credit standards because they can't borrow money to lend, or they have been reluctant to lend and risk defaults. Some dealers have reported losing 20 percent of their sales as buyers get turned down for loans after agreeing to purchase vehicles.

GMAC Financial Services said earlier this month it would only make auto loans to customers with prime credit scores of 700 or above. General Motors Corp. sold 51 percent of GMAC to Cerberus Capital Management LP in 2006 but still owns the rest.

In July, Chrysler LLC's finance company stopped underwriting leases, citing uncertainty over resale values of cars and trucks returned to the company after leases end.

Automakers, including GM, have responded to the conditions with campaigns touting that credit is still available for many buyers. Ford Motor Co. said its credit arm is still making loans.

Toyota Motor Corp. (TM) also began offering zero percent financing for most of its models.

The letter outlines the broad reach of the U.S. auto industry, which the lawmakers said directly employs about 355,000 American workers and provides health care for nearly 2 million Americans.

"There is no single segment of America's economy that is more critical to the financial well-being of millions of Americans than the automotive industry," the lawmakers said. 


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Laid-off banker? Where to job hunt

(Fortune) -- Now that Goldman Sachs says it will lay off 10% of its employees, there will be 3,260 more bankers pounding the pavement. Thursday's news comes after nine months during which the financial-services industry has already shed about 110,000 jobs.

"It's a huge game of musical chairs - with more and more players, and fewer and fewer chairs," observes John Challenger, CEO of Chicago-based outplacement and career counseling firm Challenger, Gray & Christmas (www.challengergray.com). And experts agree the industry will undergo huge changes in the months and years ahead, and nobody quite knows what form those changes will take.

But if you've lost, or are about to lose, a Wall Street job, resist the temptation to go sit on a beach somewhere for a while. "Don't sit on the sidelines and wait for things to get clearer," Challenger says. "Get a fast start on your job hunt and grab the best seat you can find. You can always move later."

Where to look

Where might those available seats be? "Wealth management and retirement services - businesses with long time horizons - are strong possibilities, as are private equity firms," says Burke St. John, head of the financial services practice at executive-search firm CT Partners (www.ctnet.com). "Five years ago, you'd have been hard-pressed to find a private equity firm with any interest in financial services businesses, but that's all changed now. They're getting into things like mortgage servicing, regional banks, and insurance, and they need people who understand those businesses. They'd also be receptive to any unique investment ideas you might have."

Don't overlook small firms. "Back in the '80s, Wall Street had a lot of smallish specialist firms like boutique broker-traders," notes Paul Heller, president of search firm Cromwell Partners (www.cromwell-partners.com). "I think we are headed back to that, and smaller firms now will be taking advantage of all the newly available talent out there to expand their businesses."

Uncle Sam may be hiring, too. "After the savings and loan debacle in the '80s, the U.S. government had to hire a lot of bankers to track and value the bad assets," explains Clark Beecher, a principal with headhunters Magellan International (www.milp.com). "Again, with the current bailout plan, the Treasury Department will have to go after bankers and hire them." Bankers who made that move "became some of the most successful hedge fund managers of the '90s and '00s," Beecher adds.

The consulting business is eager to take on investment bankers, Beecher says. "This crisis hit so fast that many companies really need to call in knowledgeable advisors - and, since they're trying to run as lean as possible, those companies would rather outsource financial expertise to consultants than take on permanent high-priced talent," he says.

Your best bet, though, might be to look beyond U.S. borders. "We're seeing tremendous demand for banking and finance expertise in Dubai, and also in every Asian country except Japan," says John Rogan, a managing director at recruiters Russell Reynolds Associates.

Brazil is a hot market for banking talent now, too, says Burke St. John at CT Partners. "For those who want to take the plunge and go abroad, it could be a great opportunity, and there's little or no career risk," he says. International experience is a plus on any resume these days.

To get a foot in the door, headhunters agree you'll have to network like crazy.

"You need a multi-pronged approach," says John Rogan. "Even if you have relationships with recruiters, don't just rely on them. Talk to everyone you know and meet as many people as you can. Stay current with what's happening and who's going where."

"It's vital to have references," says Burke St. John. "You have to know someone who knows someone."

And don't be shy: Get in touch directly with senior executives at firms where you might want to work and ask for a chance to discuss what you have to offer.

"Treat your search like a full-time job," advises Peter Felix, president of the Association of Executive Search Consultants (www.aesc.org). "Be prepared to put in as much time and effort as you did when you were working" - and in investment banking, where round-the-clock workdays are the norm, that's saying something. Job hunting is tough in this environment, and networking is by nature a slow process, so don't get discouraged if your search takes at least three or four months despite your best efforts.

Brace for a pay cut

Be prepared for a pay cut, too - even if you manage to get a new job that's just like your last one. "There's always a market for top talent, so companies will always take care of their best people," says Rogan. "But I really think we'll see Wall Street pay decline sharply, maybe by as much as 20% across the board, with a sliding scale where the least effective performers will get no bonuses at all."

Wall Street's cherished annual bonus system may well go the way of, well, Bear Stearns and Lehman Brothers. "We're going to see a big shift toward bonuses that take long-term performance into account, not just immediate rewards for that one year's results," says Heller at Cromwell Partners.

Rogan adds: "On the Street these days, the saying is that 'flat is up.' "

Readers, what do you think? Have you been laid off from a Wall Street job? Any advice for laid-off bankers? Post your thoughts on the Ask Annie blog.  


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