Finance & Business World

Inside General Motors’ iconic Detroit headquarters, scores of retail tenants are waiting to find out what happens to their own businesses in the wake of their landlord’s bankruptcy.

"When people aren’t sure of the company’s status, it puts you not in the best of moods," said Frank Taylor, president and CEO of Seldom Blues restaurant in the Renaissance Center.

The Ren Cen, which sits on the Detroit River, houses 4,300 General Motors (GM, Fortune 500) employees, the Detroit Marriott hotel, various professional offices and several dozen small businesses that serve the tenants. GM moved its global headquarters into the Renaissance Center in 1996 and spent $500 million to revamp the 5.5-million square foot complex, which began construction in 1973.

Taylor said GM’s troubles have made some people within the Ren Cen skittish about spending money for a meal at his sit-down restaurant, which features American cuisine and jazz music. "I’ve never had to work so hard in my life to fight for customers," said Taylor, who employs 65 workers at Seldom Blues.

Seldom Blues opened in 2004 and had no trouble attracting customers in its early years, Taylor says. Last year, it did $4 million in sales. But business has become more difficult as GM lurched toward bankruptcy.

"It’s not like I saw it when we first moved in," Taylor said of GM’s mounting woes. "We had a lot more people coming in for lunch on a daily basis. The mood has taken a total turnaround here."

To combat the downturn, Seldom Blues began offering "Southern Selections" specials last month to attract diners who are skittish about splurging for a meal. The specials, featuring $10 lunches and $19 dinners, have been popular, Taylor said.

GM’s struggles also have also cut into business at Ashley’s Flowers. Owner Ashley Alexander said sales at her floral shop are down about 30% from last year.

"The nature of our business puts us in proximity to people’s personal lives," said Alexander, who has six employees at her two downtown stores. "People are nervous. They don’t know what’s about to happen to their jobs."

Alexander is waiting to see what GM does next before deciding on the future of Ashley’s Flowers in the Renaissance Center. Everything is up in the air: While GM employees nervous about their jobs clamp down on their consumer spending in the Ren Center, GM CEO Fritz Henderson hasn’t ruled out the possibility that GM could leave its sprawling headquarters payday loan for bad credit.

"I think we have to wait to hear their decisions, and see the fallout from their decisions," Alexander said.

Not all small businesses at the Ren Cen are hurting. Pure Detroit, a clothing store that features Detroit-centric and GM-licensed products, has seen a 50% increase in sales since moving to a new site within the building a year ago.

Pure Detroit’s new location is just down the hall from its previous spot, which opened in 2004. But co-owner Kevin Borsay said the new store has the benefit of being near escalators and the Marriott hotel, which has boosted foot traffic for the retailer.

"I think the move and the revamping of the store overcame the negatives of the economic climate," said Borsay, who has two employees at his Renaissance Center store.

Borsay said he’s noticed that shoppers — about 80% of them are GM workers, GM visitors or Marriott (MAR, Fortune 500) guests — are buying lower-priced items. Still, the Renaissance Center continues to be the best performing store of Pure Detroit’s three shops in the city.

"There’s a lot of good points about doing retail in the Ren Cen," Borsay said.

Tony Bahu, president and owner of BonBons Candy and Godiva Chocolatier, agrees. Though he declined to discuss sales, he said last year was a record year for BonBons, and he expects to sales to grow in 2009 as well.

He attributes the store’s growth to the crowds that come for festivals and outdoor events at GM Plaza & Promenade, a gathering place on Detroit’s riverfront that sits across the street from BonBons’ store. Business has been good enough at the Ren Cen that Bahu said he hopes to extend his lease.

Bahu believes GM will become a stronger company through its restructuring, and said many of his customers are also bullish about GM’s future.

"It seems like there’s still people who believe highly in GM and believe that, no matter what happens, they’re going to pull through," Bahu said.

Each of the businesses said they believe GM is doing the best it can to survive, and so are they — no matter what GM’s fate at the Renaissance Center.

"We’re hopeful," Alexander said. "The world doesn’t revolve around GM." 

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Federal Reserve Bank of Dallas President Richard Fisher said the U.S. slump will probably persist until next year as consumers restrain spending, while the outlook for inflation remains “meek.”

The economy faces a “very slow slog” to recovery, Fisher said yesterday in a speech in Washington. The recession “will moderate in the current quarter, and then we are likely to bounce along the bottom for a while,” with sustained growth doubtful before the end of this year, he said.

Fisher urged Congress not to “politicize” the central bank by taking a role in selecting Fed district bank presidents. Some lawmakers suggested such a role over concerns that Stephen Friedman, former chairman of the New York Fed’s board of directors, also served as a director of the board of Goldman Sachs Group Inc. Friedman quit the Fed post this month.

The central bank may step up purchases of assets to secure a stronger economic recovery, minutes of the April 28-29 meeting released last week showed. The Fed’s Open Market Committee voted unanimously to keep unchanged its targets for purchases of housing debt and long-term Treasuries amid signs the economic contraction may be easing.

“We’re not done with that program,” Fisher said in response to an audience question after the speech, referring to plans to buy $300 billion in Treasuries.

Fisher repeated his view that the U.S. unemployment rate will reach 10 percent, more than most of his colleagues. Fed officials projected a deeper U.S. contraction with a 9 percent unemployment rate lasting through the end of 2010, according to the minutes.

More Pessimistic

Fisher’s view on the economy is more pessimistic than private forecasters. The U.S. recession will probably end in the third quarter, according to a survey by the National Association for Business Economics.

The economy will shrink at a 1.8 percent annual rate from April to June, and then grow at a 0.7 percent pace in the next three months, the survey showed. Growth will accelerate to a 1.8 percent rate by the final quarter.

“Given the vast amount of slack worldwide, the near-term outlook for inflation is meek,” Fisher said to the Washington Association of Money Managers. “Indeed, the recent pressures have been to the deflationary side. It is doubtful that inflation will raise its ugly head until employment and capacity utilization tighten easy payday loans no credit check.”

Fisher dissented five times against easing of monetary policy in 2008 because of concern over higher prices, giving him the reputation as one of the most “hawkish” of U.S. policy makers.

‘Aware of Doubts’

The Fed official said he was “well aware of doubts” that some analysts have expressed about the Fed’s ability to withdraw its monetary stimulus to keep prices from rising too much, saying the central bank is now “studying ways to unwind our balance sheet in a timely way.”

“There are concerns in some quarters that the Federal Reserve will be politicized,” Fisher said. “For example, there have been suggestions that Congress should be involved in the selection of Federal Reserve Bank presidents.”

“I trust that Congress will resist this initiative and not upset the careful federation that has for so long balanced the interests of Main Street with those of Washington,” he said.

Stable Relations

Fisher, answering an audience question, said China has become dependent on stable relations with the U.S. in finance and other areas.

“They have no desire to inflict harm on the United States because they would inflict harm on themselves,” he said. The interests of China and the U.S. are “interconnected and intertwined.”

The Fed official cited some “green shoots,” Fed Chairman Ben S. Bernanke’s term for signs of recovery, while adding the sprouts are not “spreading like kudzu.”

In the past few weeks, reports have pointed to a thawing in credit markets and an easing of the pace of the recession that began in December 2007.

Home resales in the U.S. rose for the second time in three months in April as foreclosure auctions and cheaper prices spurred bargain hunters, the National Association of Realtors reported May 27.

Confidence among U.S. consumers jumped in May by the most in six years, according to the Conference Board’s sentiment index. Manufacturing in the Philadelphia region contracted in May at the slowest pace in eight months as shipments and employment improved, the Philadelphia Fed reported.

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Asia’s export-driven growth model is “broken” and nations in the region need to do more to boost domestic demand, said Nouriel Roubini, the New York University economics professor who predicted the financial crisis.

“The old model of export-led growth is broken,” Roubini said in an interview with Bloomberg News yesterday. “Unless policy makers find ways of stimulating consumption and private domestic demand, then the growth recovery is going to be, even over the medium term, weaker than otherwise.”

Asia’s developing economies are almost twice as reliant on exports as the rest of the world, with 60 percent of their overseas sales ultimately destined for the U.S., Europe and Japan. The International Monetary Fund yesterday said it expects recessions this year in South Korea, Singapore, Taiwan, Malaysia and Thailand.

“Asia has to find a new model of growth,” Roubini said in Singapore, where he is attending a conference organized by Bank of America-Merrill Lynch. “This is happening too slowly and this will make Asia’s recovery lag.”

Asian nations must implement more policies to boost domestic consumption as advanced nations are unlikely to absorb the region’s excess production, Asian Development Bank President Haruhiko Kuroda said May 4. To boost local demand, Asian governments need to spend more on health and education and boost social safety nets to encourage consumer spending and reduce precautionary savings, he said.

‘Weak Outlook’

Exports by developing Asian economies may shrink 10.3 percent this year, after growing 14.7 percent in 2008, the Manila-based ADB predicts. Global trade may contract for the first time since World War II this year, according to the World Trade Organization, as U.S. and European demand slumps.

“A good chunk of Asia is going to be in recession this year, with the exception of China and India,” Roubini said. “Recovery is going to occur next year, but even then I see a weak outlook for the U.S., Europe and Japan, and unless there is a recovery in these economies, the recovery in Asia is going to be less than otherwise.”

Asian policy makers have been responding to the global recession by slashing interest rates and implementing fiscal stimulus packages free credit score online. Governments in the region have pledged to pump more than $950 billion into their economies through increased expenditure, tax cuts and cash handouts to kick-start local consumer and business spending.

‘Sharp Deterioration’

“The economies of Asia, like the rest of the world, have slowed significantly,” Monetary Authority of Singapore Managing Director Heng Swee Keat said in a speech today. “While actions taken by governments and financial authorities have helped to stem the sharp deterioration, the road to full economic recovery is likely to be bumpy.”

Further fiscal stimulus may be required in Asia given the likely weakness of the recovery in the U.S., Europe and Japan, Roubini said.

“Greater fiscal stimulus might be necessary,” he said. “One way to stimulate domestic demand in the short run is domestic public demand.”

Economies in Asia face a “long recovery ahead” from the global slowdown and “forceful” fiscal measures are still needed to lift the region out of the recession quickly, the IMF said in a report yesterday.

External Demand

“Asia’s strong reliance on external demand weigh against the prospects of a speedy turnaround,” the IMF said. “Despite governments’ efforts to invigorate domestic demand, the prospects of a recovery at this stage hinge critically on a rebound in global activity.”

The IMF last month lowered its world economic growth forecasts and said the global recession will be deeper and the recovery slower than previously thought as financial markets take longer to stabilize. The world economy will contract 1.3 percent, it predicts.

The U.S. remains weak and the consensus among analysts that the world’s largest economy may expand in the third and fourth quarter is “too optimistic,” Roubini said.

“Certainly the rate of economic contraction is slowing down from the freefall of the last two quarters,” he said. “We are going to have negative growth to the end of the year and next year the recovery is going to be weak.”

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Banks that want to exit from the U.S. government’s capital injections must demonstrate they can issue debt to private investors without a Federal Deposit Insurance Corp. guarantee, according to people familiar with the matter.

The Treasury will unveil conditions for repaying the Troubled Asset Relief Program money as soon as tomorrow, the people said on condition of anonymity. Banks generally must apply to the Treasury and secure permission from their bank supervisor in order to pay back the government; so far only a handful of small banks have done so.

The new guidance would come before the Federal Reserve’s May 7 publication of results of stress tests on U.S. banks. People familiar with the matter said yesterday that about 10 of the firms will be deemed to need additional capital.

Firms that don’t need stronger buffers may seek to quickly retire existing government stakes. Banks including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Northern Trust Corp. have said they want to repay the money. Both New York-based companies sold debt without FDIC guarantees in the past month, as has Chicago-based Northern Trust.

“My hope is this helps with clarity on who are the winners and who are the losers,” said Joel Conn, president of Lakeshore Capital Inc., which invests $90 million.

Bank of New York

Earlier today, Bank of New York Mellon, another bank taking part in the stress tests, raised $1.5 billion of debt, without FDIC backing. The bank said proceeds from the sale will be used to help repay the $3 billion capital injection it got from the TARP last year.

FDIC Chairman Sheila Bair has said banks need to wean themselves off the debt guarantees as financial markets heal from last year’s crisis. In March, the FDIC extended the time in which banks could issue government-guaranteed debt, while also announcing plans to raise fees on the program. FDIC spokesman Andrew Gray declined to comment today on the Treasury’s repayment policy.

The Treasury’s requirement is that banks must demonstrate an ability to borrow without the government guarantee and does not affect outstanding debt, the people familiar with the matter said approved cash advance. On April 14, a Goldman Sachs executive said the bank did not see a direct link between the debt guarantees and the Treasury’s capital injections.

Debt Sales

“We still have some capacity under the FDIC-guaranteed at pretty attractive spreads,” said David Viniar, the company’s chief financial officer, in an April 14 conference call with investors. “We’ll continue to use that when it’s available, but we expect to continue to raise unguaranteed debt when it’s available as well.”

For banks that need to deepen their reliance on government capital after the stress tests, officials may set limits on their dividends and political lobbying. While it’s unlikely to influence day-to-day operations at the firms, the government won’t be a “hands-off” investor and will take steps to ensure that management is “effective,” Fed Chairman Ben S. Bernanke told lawmakers today.

“It’s obviously not our intention or desire to have long- term government ownership of banks,” Bernanke said at the congressional Joint Economic Committee. Still, he added that it would likely be a “few years” before banks can end their dependence on government capital.

Officials’ “top priority” will be working with the banks to get them on a path toward repaying the taxpayer, including sales of assets or raising private capital, the Fed chief said.

The Obama administration has yet to detail how it intends to implement executive compensation guidelines enacted by Congress, another restriction faced by banks that keep taxpayer funds. The rules limit incentive pay for top executives at banks receiving at least $500 million in rescue funds from the Treasury.

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Treasurys advanced Thursday as investors responded to another strong auction of U.S. debt.

The Treasury Department offered $11 billion in 30-year notes Thursday in the last of three auctions this week. The auction drew more than $26 billion worth of bids for the $11 billion of debt offered, for a bid-to-cover ratio of 2.4 - a signal that the sale was well received.

Thursday’s auction came after the government offered $34 billion in 3-year notes Tuesday and $18 billion in 10-year notes Wednesday.

While this week’s auctions have done relatively well, many analysts worry that the record amounts of government debt coming to the market will eventually overwhelm demand and push prices lower.

The auctions are part of the government’s plan to issue between $2.7 trillion and $4.2 trillion of debt over the next two years to finance its economic and financial rescue plans. The government is set to pay $787 billion for stimulus, $700 billion for the bank bailout and trillions more in various liquidity programs.

"It’s a question of supply," said Peter Cardillo, chief market strategist at Avalon Partners in New York. The market is also responding to an upbeat report on retail sales, he said.

A smaller-than-expected drop in retail sales helped send stock prices higher in afternoon trade. The rally came despite a downgrade of General Electric’s (GE, Fortune 500) pristine credit rating. Wall Street ended the day higher Thursday, marking a rare three-day streak of gains for the stock market.

Prices for Treasury bonds, which are considered one of the most secure assets available, often climb when stock prices fall as demand for safety outweighs investors’ tolerance for risk bad credit payday advance.

"Market psychology is finally beginning to change," Cardillo said about the stock market. "I’m not sure this signals a long-term climb, but I don’t think the market is headed to new lows."

Treasury prices: The benchmark 10-year note was up 15/32 to 99 3/32 and its yield fell to 2.86% from 2.91% Wednesday. Bond prices and yields move in opposite directions.

The 30-year bond rallied 29/32 to 97 30/32 with a yield of 3.62%.

The 2-year note edged up 1/32 to 99 24/32 and yielded 1.02%.

The 3 month bill yielded 0.20%.

Lending rates: The 3-month Libor rate eased to 1.32% from 1.33% Wednesday, according to data on Bloomberg.com. The overnight Libor rate held steady at 0.33%.

Libor, the London Interbank Offered Rate, is a daily average of rates that 16 different banks charge each other to lend money in London.

One credit market gauge was unchanged and another reflected slightly tighter credit markets. The "TED" spread widened to 1.12 percentage points from 1.10 percentage points Wednesday. The more wide the TED spread, the less willing investors are to take risks.

The Libor-OIS spread was unchanged at 1.07 percentage points, even with the prior day. A narrower spread indicates that more cash is available for lending. 

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Regions Financial Corp. CEO Dowd Ritter volunteered not to receive a cash bonus for 2008.

Ritter, who leads the Birmingham-based regional banking giant, was eligible to rake in more than $1.1 million in bonuses based on his performance amid the difficult economic climate, according to public documents filed Tuesday with the Securities and Exchange Commission.

Instead of a cash bonus, the bank’s Compensation Committee awarded Ritter about the same amount in restricted stocks, which is a part of his 2009 long-term incentive process. He received 323,676 shares at Feb. 24’s closing price of $3.29, which amounts to $1.06 million.

The committee’s decision would comply with new executive compensation rules outlined in the latest federal stimulus bill, which only allows executives at companies that received federal bailout funds to receive restricted stock bonuses instead of cash car loans for people with bad credit. Regions accepted $3.5 billion in federal TARP funds last year.

Despite declining a cash bonus, Ritter’s overall compensation climbed to $9.2 million in 2008, compared to $7.7 million in 2007. A stock award increase and changes to his pension plan helped contribute to the more than $2 million extra in pay for the year, according to the filing.

Within the past year, Regions Financial Corp. (NYSE:RF) encountered hefty real estate losses within its loan portfolios and it recorded its first net loss during the economic crisis in the fourth quarter. The company posted a $6.2 billion loss during the three-month period ended Dec. 31.

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Ameren’s 840,000 natural gas customers in Illinois will see heating prices decline further next month because of a continued weakening in energy demand.

Retail prices for natural gas, which makes up about two-thirds of customers’ bills, will go down 17 percent or 19 percent depending on the utility, St. Louis-based Ameren said. The price for Cilco and CIPS customers will drop to 64 cents a therm from 77 cents. AmerenIP prices will fall to 68 cents from 84 cents.

Natural gas demand has eroded, especially among industrial customers, as the recession lingers. Retail gas prices charged by Ameren’s Illinois utilities have fallen as much as 55 percent since their peak last fall bad credit personal loan lenders.

"We also recognize that the extremely cold temperatures that occurred in December and January meant that our customers used more natural gas this year than a year ago," said Scott Glaeser, Ameren’s vice president of gas supply.

Ameren utilities buy gas from producers across the country. Retail prices are adjusted monthly depending on changes in the wholesale market.

jtomich@post-dispatch.com | 314-340-8320

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Europe’s trade gap narrowed for a third month in October as the slumping economy damped imports.

The 15-nation euro area had a seasonally adjusted deficit of 1.3 billion euros ($1.9 billion), down from 4.4 billion euros in September, the European Union’s statistics office in Luxembourg said today. The deficit reached a record 6.1 billion euros in July.

Domestic demand is flagging across Europe as the economy falls deeper into a recession. Business confidence in Germany , the region’s largest economy, dropped to the lowest since 1982 in December, while euro-area unemployment rose to the highest level in 21 months in October and retail sales fell.

The euro region faces its worst slump since the Second World War next year, Julian Callow, chief European economist at Barclays Capital in London, said in an e-mailed note today. The global slowdown is curtailing orders for Europe’s exports just as the credit shortage curbs spending by companies and consumers.

Daimler AG, the world’s biggest maker of heavy trucks, said the recession may be “deep” and the European Central Bank this month delivered the biggest interest-rate cut in its 10-year history easy pay day loans.

Euro-area imports declined to 132.1 billion euros in October, down 4.6 percent from the previous month, outpacing the 2.5 percent drop in exports. Shipments abroad from Germany grew 0.8 percent on the month, while its imports fell 0.6 percent.

Detailed Figures

The statistics office publishes detailed figures with a one- month lag. The data show that Europe’s trade deficit with China widened to a 84.2 billion euros in the first nine months of the year. Exports to China increases 12 percent to 49 billion euros, while imports from the Asian nation grew 6 percent to 133.2 billion euros.

The January-September figures also show that the euro area’s energy deficit widened to 235.5 billion euros from 164.6 billion euros in the year-earlier period. Europe’s deficit with Russia, the world second-biggest oil producer, surged 40 percent to 31.3 billion euros.

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Bill Clinton was forced to abandon spending initiatives to boost the economy at the start of his presidency when advisers warned him that the borrowing needed to fund the programs would push interest rates higher. President- elect Barack Obama may not have the same problem.

While the total amount of U.S. government debt outstanding rose to $10.7 trillion in November from $9.15 trillion a year earlier, the amount of interest paid in the last two months fell by $10 billion, according to the Treasury Department.

Instead of shunning the U.S., where losses on subprime mortgages in 2007 triggered a global seizure in credit markets that led to the downfall of securities firms Bear Stearns Cos. and Lehman Brothers Holdings Inc., investors can’t get enough Treasuries. Even as estimates of Obama’s stimulus package and the budget deficit rise to a record $1 trillion, demand continues to increase as investors flee risky assets around the world and put their cash into U.S. bonds paying, in some cases, nothing in yield just to ensure the return of their principal.

“You still have a massive paranoia in the marketplace and you’ve got that safety-at-any-cost mentality,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. “People are not buying Treasury bills because they think the yields are attractive. They are buying them because they are afraid to put money anywhere else.”

Foreign Demand

Foreign central banks and other institutions are accumulating Treasuries at the fastest pace since 1988, boosting their holdings 12 percent since September, compared with a 7.7 percent increase last quarter, according to the Federal Reserve.

Purchases accelerated even as the yield on the benchmark two-year Treasury note tumbled to 0.76 percent last week from this year’s peak of 3.11 percent on June 13. Rates on three- month bills turned negative on Dec. 9 for the first time. The same day, the U.S. sold $30 billion of four-week bills at a zero percent rate. Yields on two-, 10- and 30-year Treasuries last week all fell to lowest since the U.S. began regular sales of those securities.

The two-year note yielded 0.77 percent as of 9:12 a.m. in London today, according to BGCantor Market Data, after falling as low as 0.66 percent on Dec. 12.

The drop in yields drove bond prices higher, pushing returns to 12.4 percent on average this year, the best performance since they gained 13.4 percent in 2000, according to New York-based Merrill Lynch & Co.’s U.S. Treasury Master Index. The returns compare with a drop of 40 percent in the Standard & Poor’s 500 Index and average losses of 15 percent in Merrill Lynch’s broadest corporate bond index.

‘Raw Fear’

“This is not about return and yield and value; investors are functioning out of raw fear,” said Barr Segal, a managing director at Los Angeles-based TCW Group Inc., which oversees $90 billion in fixed-income assets. At the same time, “this is fabulous for the Treasury because they are borrowing at virtually nothing,” he said.

Japan’s bond market suggests that low yields may remain for a sustained period. In an effort to revive sagging growth in the 1990s, the world’s second largest economy ran its national debt to 1.5 times of gross domestic product. Yields on Japanese bonds are near the lowest in three years, with the country’s benchmark 10-year bond paying 1.40 percent, compared with 2.59 percent in the U.S. The national debt in the U.S. is 72 percent of GDP.

“It’s good news,” said James Horney, director of federal fiscal policy at the Center on Budget and Policy Priorities in Washington. “Even though we’re borrowing larger amounts of money, the total amount we’re going to pay in interest is going to be somewhat lower.”

Stimulus Package

Interest was $92.5 billion from August through November 2007 on the $9.15 trillion in total debt outstanding, resulting in interest expense of 1.01 percent. In the same period a year later, interest was $87.5 billion on $10.66 trillion in total debt, dropping the expense to 0.8 percent.

While the median estimate of 49 economists and strategists is for 10-year Treasury yields to end 2009 at 3.65 percent, that’s still below the average of 6.91 percent paid on the securities since 1962 cheap payday loan. The security helps determine corporate and consumer borrowing rates.

Obama plans an economic stimulus package that may approach $1 trillion, in addition to a middle-class tax cut and universal health care, which may add $4 trillion or more to the national debt over 10 years, according to the Tax Policy Center in Washington and health-care economists.

Record Shortfall

The U.S. already posted a record $401.6 billion budget shortfall for the first two months of fiscal 2009, which began Oct. 1, according to a Treasury report last week. The largest postwar budget deficit by the U.S. was $412.7 billion in 2004.

“The role of the deepening economic slump in this deterioration coupled with the escalating size of the likely fiscal stimulus puts the deficit on course to exceed $1 trillion,” Edward McKelvey, a senior economist in New York at Goldman Sachs Group Inc., wrote in a Dec. 8 report to clients. “This implies upside risk to our $2 trillion figure for Treasury supply.”

Clinton’s proposals to spur the economy early in his administration in 1993 were stymied by concern how bond investors would react, according to James Carville, a Clinton consultant during the 1992 presidential campaign.

Clinton Days

“Early in the Clinton days, the hallmark of policy was if you did this, how would it affect the bond market,” Carville said in an interview last year. “Every time I would talk to someone they would say ‘you can’t do that, it will freak the bond market out.’ I said ‘goddamn, whoever the bond market is, these bastards are powerful.’”

The potential for massive deficits has done nothing to damp demand for government debt as the U.S. prepares to spend $8.5 trillion to bailout financial institutions, homeowners and the economy. The biggest deficit as a percentage of the economy was 6 percent in 1983. A trillion-dollar 2009 gap would top that.

To prevent yields from rising, Fed policy makers indicated that the central bank may buy Treasuries. Fed Chairman Ben S. Bernanke suggested in a Dec. 1 speech that he would consider such a measure, saying one option is to buy “longer-term Treasury or agency securities on the open market in substantial quantities.”

‘Printing Press’

“If there is a whiff of anything getting worse, the Fed can just go downstairs and start that printing press,” said Kevin Gaynor, head of economics and interest-rate strategy at Royal Bank of Scotland Group Plc in London. “They can easily stop targeting the federal funds rate and start targeting a two- or five-year Treasury yield.”

Policy makers may also cut interest rates again, which may keep bond yields low. The Federal Open Market Committee will reduce its target rate for overnight loans between banks by a half-percentage point, to a record 0.50 percent, when it meets Dec. 15-16, according to the majority of economists surveyed by Bloomberg News.

The U.S. economy has been in a recession for a year, the National Bureau of Economic Research declared on Dec 1. The economy will continue to contract through June, with unemployment rising above 8 percent the end of 2009, from 6.7 percent last month and this year’s low of 4.8 percent in February, according to Bloomberg surveys of economists. That would make the current slump the longest since the Great Depression.

‘It’s Ironic’

“In some ways it’s ironic,” said Meg Browne, senior currency strategist at Brown Brothers Harriman & Co. in New York. “The U.S. turned down first and the crisis appeared first in the U.S., yet people continue to flock to the U.S. government debt market because it’s the biggest and deepest market in the world and still has a low risk.”

The U.S. will eventually have to commit to balanced budgets, said Alice Rivlin, former Fed vice chairman and founding director of the Congressional Budget office.

“We can’t press our luck,” said Rivlin, now a scholar at the Brookings Institution in Washington. “Eventually, we’ve got to show the world that we are fiscally responsible.”

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An oversight committee set up by Congress criticized the U.S. Treasury for not using the $700 billion financial bailout to help average Americans, and questioned its commitment to stem home foreclosures.

The panel, which met for the first time about two weeks ago, issued a report faulting the department for not having a comprehensive plan for stabilizing financial markets and urging it to more clearly explain its efforts. The group’s chairwoman, Harvard Law Professor Elizabeth Warren, is scheduled to testify before the House Financial Services Committee today.

“Households that are struggling with debts — mortgages, student loans, credit cards, car loans, payday loans and other credit devices — are at the center of the current crisis,” the report said. “For Treasury’s disbursements to be effective in the context of the broader economic downward spiral, Treasury must have a strategy that addresses this underlying problem.”

While the findings are likely to further inflame critics of Treasury Secretary Henry Paulson’s efforts to unfreeze credit markets, they have split the oversight panel along party lines, raising concerns about the group’s legitimacy and effectiveness. Paulson is under fire for abandoning his original plan to buy toxic mortgage assets, instead using most of the funds for boosting capital in banks.

Representative Jeb Hensarling of Texas, the lone Republican appointee on the four-member oversight committee, issued a statement saying he voted against the report. “The jury is still out” on whether the panel “will eventually be an effective vehicle” for monitoring the Troubled Asset Relief Program, Hensarling said yesterday.

Divided Panel

“I have to ensure that every panel member has the resources and the rights necessary to conduct effective oversight,” he said, adding that he had raised “concerns” with his fellow committee members that weren’t addressed.

Hensarling is also scheduled to appear at today’s hearing, along with Warren, Treasury Assistant Secretary Neel Kashkari and an official from the Government Accountability Office.

The congressional panel is one of several layers of oversight called for in the legislation car insurance. It is supposed to have five members, three named by Democratic lawmakers and two by Republicans. Earlier this month, Republican Senator Judd Gregg of New Hampshire quit the group, citing the pressure of his legislative activities.

The bailout already has its own inspector general, confirmed this week by the Senate, and is subject to GAO audits. A committee headed by Federal Reserve Chairman Ben S. Bernanke is also charged with watching over the TARP.

Finding a Role

Warren and some other members of the panel met recently with top staff at the Fed and Treasury in an effort to determine what role the group would have in watching over the rescue plan.

While officials who attended the sessions said the committee was struggling to define its mission, its new report paints its work broadly.

“Most importantly, we are here to ask the questions that we believe all Americans have a right to ask,” the panel said. “Who got the money, what have they done with it, how has it helped the country and how has it helped ordinary people?”

The report is required under the rescue law passed Oct. 3. The group’s criticism follows a GAO review last week that called for the Treasury to tighten its oversight of the program.

Paulson has allocated $335 billion of the funds so far. Lawmakers have said they may try to block the Treasury from using the second half of the $700 billion. Paulson hasn’t yet asked for the money and officials say it’s unclear whether he will do so before President George W. Bush’s second term ends next month.

“I would be a very hard person to convince that this crowd deserves to have their hands on the next $350 billion,” Senate Banking Committee Chairman Christopher Dodd told reporters on Dec. 4 in Washington. “I am through with giving this crowd money to play with.”

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