Stocks drop on worries about economy, automakers

NEW YORK – Investors around the world are betting that even with government stimulus and bailout programs, the global recession will just have to run its course.

The problems that slammed stocks last year — ailing banks, foundering automakers, tumbling home prices and cash-strapped consumers — haven't let up. Instead, the issues have festered, and are threatening to push U.S. stocks back to levels not seen since the late 1990s.

As President Barack Obama signed his $787 billion stimulus bill and automakers scrambled to come up with restructuring plans, the Dow Jones industrial average closed down 297.81 points, or 3.79 percent, at 7,552.60 — just 31-hundredths of a point above its post-meltdown Nov. 20 close of 7,552.29, which was its lowest close in five-and-a-half years.

"You're looking at a crescendo, if you will, of uncertainty," said Richard E. Cripps, chief market strategist for Stifel Nicolaus. "We're still in that period where more information needs to come out."

The drop on Wall Street followed sharp pullbacks on overseas exchanges; investors around the world were looking at the reality of a delayed recovery — delayed for who knows how long.

"We don't think the recession's over until at least the middle of the year, and that's even starting to seem very early," said JPMorgan equities anayst Thomas J. Lee, adding that the market's worries are "nothing new — the magnitudes are worse."

The stock market is usually regarded as a forward-looking mechanism, but Lee pointed out that about one-third of the time, the S&P recovered around the same time as the economy.

"I'm tilting toward thinking we're going to have lows in mid-July," Lee said. "In the meantime, we're stuck in a range."

Wall Street is waiting for more specifics from the government on its various efforts to better assess when to expect growth again. Obama is scheduled to discuss a program Wednesday on preventing foreclosures, but investors are especially anxious for details from the Treasury Department about its new rescue plan for the troubled banking sector.

Over the weekend, a meeting of Group of Seven finance ministers failed to produce any specific steps to revive the global financial system, either.

"The government has their hand on the tiller. They're steering. And that's the problem — the markets are not confident the proper course has been set yet," said Henry Herrmann, chief executive officer at investment management firm Waddell & Reed.

A question on the street is whether the major indexes will breach their lows of last November, when investor sentiment was also sliding:

• The Dow came within 102 points of the five-year trading low of 7,449.37, reached Nov. 21. It briefly fell as low as 7,551.01 in afternoon trading, just below its Nov. 20 close, before edging up again.

• The Standard & Poor's 500 index, which fell 37.67, or 4.56 percent, to 789.17 Tuesday, came with 48 points of its 11-year low of 741.02, reached Nov. 21.

With the way the market has been trading, those milestones could be pierced in one or two sessions.

The Nasdaq composite index fell 63.70, or 4.15 percent, to close at 1,470.66 Tuesday. The Russell 2000 index of smaller company stocks fell 19.46, or 4.34 percent, to 428.90.

Only 219 stocks rose on the New York Stock Exchange, while 2,898 fell. Consolidated volume came to 5.78 billion shares, up from 4.5 billion shares Friday. Investors fled from stocks and flocked instead to Treasurys, sending government debt yields lower.

The retreat in U.S. stocks occurred alongside a pullback in markets overseas. In Asia, Japan's Nikkei stock average fell 1.4 percent, and Hong Kong's Hang Seng index fell 3.79 percent. In Europe, Britain's FTSE 100 fell 2.43 percent; Germany's DAX index fell 3.44 percent; and France's CAC-40 fell 2.94 percent. In Latin America, Brazil's Ibovespa index plunged 4.8 percent, and Mexico's IPC index fell 3.4 percent.

One big worry on Wall Street in particular is that General Motors Corp. and Chrysler LLC might not be able to repay billions of dollars in loans and return to profitability. GM has already received $9.4 billion from the government, and could get another $4 billion if the Treasury Department signs off on its viability plan. Chrysler, which has already borrowed $4 billion, said Tuesday in its restructuring plan that it wants another $5 billion — $2 billion more than its initial request of $3 billion in additional financing.

GM shares dropped 32 cents, or 12.8 percent, to $2.18. Chrysler's shares are not publicly traded. The White House said Tuesday it has not closed the door to a government-backed automaker bankruptcy.

The biggest fear in the market is not that the stocks of banks and automakers will get wiped out. If all the Dow companies involved in financial services or automaking — American Express Co., Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., General Electric Co. and General Motors Corp. — saw their shares sink to zero right now, the Dow would only lose about 400 points, or 5 percent.

Rather, the concern is that these ailing industries will keep hobbling the broader financial system and the economy. On Tuesday, Wall Street got another dose of grim economic news — the New York Federal Reserve said its regional index of manufacturing activity is showing the sharpest contraction in February since it started the gauge in 2001.

Not even slightly better-than-expected fiscal fourth-quarter results from the world's largest retailer, Wal-Mart Stores Inc., could help buoy stocks. The market recently has shrugged off bits of stronger-than-anticipated corporate data as anomalies rather than harbingers of improvement. There is a "tendency to dismiss them as, at the moment, not relevant," Herrmann said.

Wal-Mart reported operating earnings of $1.03 per share for the quarter ended Jan. 31, compared with analysts expectations for earnings of 99 cents per share, according to Thomson Reuters. But the company also said first-quarter earnings could miss Wall Street expectations.

Wal-Mart was only company among the 30 Dow components to rise Tuesday. Its shares rose $1.71, or 3.68 percent, to $48.24.

Bank stocks were the biggest losers of the day, but nearly all sectors performed badly on Tuesday — including technology, energy and airlines. Insurance companies were hit hard, too. Allstate Corp. fell $2.09, or 9.8 percent, to $19.14, and MetLife Inc. fel $2.71, or 10 percent, to $24.09.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 2.65 percent from 2.90 percent late Friday. The yield on the three-month T-bill, considered one of the safest investments, rose marginally to 0.29 percent from 0.28 percent late Friday. U.S. markets were closed on Monday.

The dollar rose against other major currencies. Gold prices also rose.

Oil prices fell $2.58 to $34.93 per barrel on the New York Mercantile Exchange.

GM seeks up to $30B in aid, to cut 47,000 jobs

DETROIT – General Motors Corp., presenting a dire outlook for the future, said Tuesday it may need $30 billion in total government financing to weather the economic downturn and would cut 47,000 jobs worldwide and shutter five more U.S. factories in a massive restructuring plan.

The automaker is already surviving on $13.4 billion in federal loans and said in a plan submitted to the Treasury Department that it would seek an additional $16.6 billion if economic conditions worsen, but it could achieve profitability in two years and fully repay its loans by 2017.

The U.S. automaker presented its turnaround plan to the Obama administration as it worked to win concessions from the United Auto Workers union and bondholders to dramatically resize the company. The UAW said it reached a tentative deal with GM, Chrysler LLC and Ford Motor Co. on contract changes but discussions were still under way about how the companies would fund union-run trust funds that will take over the companies' retiree health care obligations starting next year.

GM said it was making progress but had not yet achieved all the concessions from union workers, debt holders, dealers and suppliers that the Bush administration sough in the loan terms provided last December.

President Barack Obama's administration will review the plans from GM and Chrysler LLC but could pull the loans if they don't approve the turnaround plans by March 31. The review could be extended into April, but if the government demands the money back it would force the companies into bankruptcy.

GM predicted it could run out of money before the March deadline and said it is seeking the additional funding under a worst-case-scenario projection, as U.S. sales have plummeted to a 26-year low and auto sales have fallen in other parts of the world.

In December, GM said it might need a total of $18 billion in government financing but only got a commitment of $13.4 billion, including $4 billion that the automaker received Tuesday.

GM wants to receive an additional $2 billion in March and $2.6 billion in April. The company has a $4.5 billion revolving line of credit that must be refinanced in 2011 but now believes that private funding won't be available, so the automaker is asking the government to lend the money.

If market conditions deteriorate, GM says it may also need an additional $7.5 billion revolving line of credit to stay afloat, for a total potential request of $30 billion.

GM said it reviewed the potential costs of a bankruptcy filing, but said it was a poor option. If GM was forced into Chapter 11 reorganization proceedings, the company said the only credit available would be from the government, and the cost could reach as much as $100 billion.

GM's plan details extensive cuts. The automaker would reduce its U.S. manpower from 92,000 salaried and hourly workers at the end of 2008 to 72,000 employees by the end of 2012. Worldwide, it envisions slashing 47,000 workers, including 37,000 hourly workers and 10,000 salaried employees.

In its Dec. 2 plan to the Bush administration, GM said it would cut the number of plants from 47 in 2008 to 38 by 2012. But the new approach goes further, cutting an additional five plants by 2012 to a total of 33 facilities.

GM's brands would be reduced from eight to four — Chevrolet, Buick, Cadillac and GMC — as the automaker said in December.

The company is considering a sale of the Hummer brand and a decision could be made by the end of March. The Saturn brand could be phased out by the end of 2011. The company is also considering its options for the Pontiac and Saab brands.

GM said all of its major U.S. vehicle launches from 2009 to 2014 would be high-mileage cars and crossovers.

Obama signs stimulus bill, readies homeowner plan

DENVER – Racing to reverse the country's economic spiral, President Barack Obama signed the mammoth stimulus package into law Tuesday and readied a new $50 billion foreclosure rescue for legions of Americans who are in danger of losing their homes.

There was no recovery yet for beleaguered automakers, who were back in Washington for more bailout billions. General Motors Corp. said it was closing plants, Chrysler LLC said it was cutting vehicle models and both said they were getting rid of thousands more jobs as they made their restructuring cases for $5 billion more for Chrysler and as much as $16.6 billion more for GM. The United Auto Workers union said it had agreed to tentative concessions that could help Detroit's struggling Big Three.

Anything but reassured, Wall Street dove ever lower. The Dow Jones industrials fell 297.81 points, closing less than a point above their lowest level in five and a half years.

Obama focused on the $787 billion stimulus plan, an ambitious package of federal spending and tax cuts designed to revive the economy and save millions of jobs. Most wage-earners will soon see the first paycheck evidence of tax breaks that will total $400 for individuals and $800 for couples.

The stimulus package was a huge victory for Obama less than one month into his presidency. But he struck a sober tone and lowered expectations for an immediate turnaround in the severe recession that is well into its second year.

"None of this will be easy," he said. "The road to recovery will not be straight. We will make progress, and there may be some slippage along the way."

Still, he declared, "We have begun the essential work of keeping the American dream alive in our time."

Underscoring energy-related investments in the new law, Obama and Vice President Joe Biden flew separately to Denver where the president signed it at the Denver Museum of Nature & Science before roughly 250 people including alternative energy business leaders. Earlier, the pair examined solar panels on the museum's roof.

On Wednesday, Obama will outline another big piece of his recovery effort — a $50 billion plan to help stem foreclosures — in Arizona, one of the states hardest hit by the mortgage defaults that are at the center of the nation's economic woes.

Treasury Secretary Timothy Geithner mentioned the housing program last week as he rolled out a wide-ranging financial-sector rescue plan that could send $2 trillion coursing through the financial system. Obama is expected to detail how the administration plans to prod the mortgage industry to do more in modifying the terms of home loans so borrowers have lower monthly payments.

More than 2.3 million homeowners coast-to-coast faced foreclosure proceedings last year, an 81 percent increase from 2007. Analysts say that number could soar as high as 10 million in the coming years, depending on the severity of the recession.

In Denver, Obama said the stimulus package had received broad support in Washington and elsewhere, though Democrats pushed it to passage with only three Republican votes in the Senate and none in the House.

One of the biggest public spending programs since World War II, the new law is designed to create jobs in the short term and to boost consumer confidence to battle the worst economic crisis since the Great Depression. It also makes down payments on Obama's health care, energy and education goals.

Taking the long view, Obama cast the law as just "the beginnings of the first steps" to jerk the country out of a crisis he inherited from GOP President George W. Bush.

White House press secretary Robert Gibbs, asked by reporters, would not rule out another stimulus in the future, though he said a sequel was not in the works "at this point." He added, "The president is going to do whatever he thinks is necessary to get our economy moving again."

The nation's distressed economy has dominated Obama's first weeks in office.

While laying the groundwork to address woes in the auto, financial and housing sectors, Obama spent some of his political capital lobbying hard for the stimulus package that the Democratic-controlled Congress approved last week. Obama has essentially pinned his political future on his prescriptions for the ailing economy, going so far as to raise the possibility of a one-term presidency if he fails.

There's no guarantee that Obama's enormous marshaling of resources and multi-pronged approach will stunt the economic freefall, much less produce jobs or bring prosperity. The only thing certain is that Obama is on track to boost a federal debt that stands at $10.7 trillion.

Clearly mindful of that, Obama said: "We will need to do everything in the short term to get our economy moving again" as well as "begin restoring fiscal discipline and taming our exploding deficits over the long term."

As he spoke in Denver, General Motors Corp. and Chrysler LLC were racing to complete plans detailing how they would repay government loans and restructure their operations to remain viable. Detroit's third major automaker, Ford Motor Co., has not requested government help.

GM submitted a dire plan to the Treasury Department, saying it would try to borrow up to $16.6 billion more from the government on top of the $13.4 billion it has received. The plan includes cutting 47,000 more jobs and closing five more U.S. factories.

Chrysler said it needed $5 billion more to survive on top of the $4 billion in government loans it received in December. It said it would cut 3,000 jobs and three vehicle models as part of its restructuring plan.

The United Auto Workers union said it had reached a tentative deal with Chrysler, GM and Ford to modify its contracts with the automakers to help them endure.

As a White House task force prepared to oversee the companies' restructuring, presidential spokesman Gibbs said the administration had not closed the door to a government-backed bankruptcy for the companies.

GM said it had considered bankruptcy, but the only credit available to finance a reorganization would be from the government and that could cost as much as $100 billion.

As for the stimulus plan, Obama contends it will create or save 3.5 million jobs. Critics, mostly Republicans, contend it is filled with wasteful spending and provisions that won't boost the economy.

Recession victims will get extended unemployment benefits and help with health care coverage, as well as more food stamps and job training opportunities. States will get cash to prevent them from cutting aid for schools and local governments. Billions are slated for road and bridge construction, mass transit, high-speed rail and national parks.

Middle-income and wealthy taxpayers will be spared from income tax increase that would otherwise hit them. First-time home buyers, new car buyers, college students, poor families with several children and people who make their homes energy efficient also will get breaks.

The measure also includes money for three top items on the president's agenda — expanding computerized information technology in the health care industry, creating "green" jobs Obama says will help wean the country off foreign oil dependence, and improving the quality of kindergarten through 12th grade education.

Obama to lift ban on stem cell research soon: aide

WASHINGTON (Reuters) – U.S. President Barack Obama will soon issue an executive order lifting an eight-year ban embryonic stem cell research imposed by his predecessor, President George W. Bush, a senior adviser said on Sunday.

"We're going to be doing something on that soon, I think. The president is considering that right now," Obama adviser David Axelrod said on "Fox News Sunday."

In 2001, Bush limited federal funding for stem cell research only to human embryonic stem cell lines that already existed. It was a gesture to his conservative Christian supporters who regard embryonic stem cell research as destroying potential life, because the cells must be extracted from human embryos.

Embryonic stem cells are the most basic human cells which can develop into any type of cell in the body.

Scientists believe the research could eventually produce cures for a variety of diseases, including Parkinson's disease, diabetes, heart disease and spinal cord injuries.

Obama vowed to reverse Bush's ban during his presidential campaign and in his inaugural address last month promised to return science to its proper place in the United States.

The U.S. Food and Drug Administration last month cleared the way for the first trial to see if human embryonic stem cells could treat people safely.

The trial will try to use stem cells from already existing lines to regrow nerve tissue in patients with crushed spinal cords.

Stem cells are the body's master cells, giving rise to all the tissues, organs and blood. Embryonic stem cells are considered the most powerful kinds of stem cells, as they have the potential to give rise to any type of tissue.

Newest US troops in dangerous region near Kabul

LOGAR PROVINCE, Afghanistan – Close to 3,000 American soldiers who recently arrived in Afghanistan to secure two violent provinces near Kabul have begun operations in the field and already are seeing combat, the unit's spokesman said Monday.

The new troops are the first wave of an expected surge of reinforcements this year. The process began to take shape under President George Bush but has been given impetus by President Barack Obama's call for an increased focus on Afghanistan.

U.S. commanders have been contemplating sending up to 30,000 more soldiers to bolster the 33,000 already here, but the new administration is expected to initially approve only a portion of that amount. White House press secretary Robert Gibbs said Monday the president would decide soon.

The new unit — the 3rd Brigade Combat Team of the 10th Mountain Division — moved into Logar and Wardak provinces last month, and the soldiers from Fort Drum, N.Y., are now stationed in combat outposts throughout the provinces.

Militants have attacked several patrols with rifles and rocket-propelled grenades, including one ambush by 30 insurgents, Lt. Col. Steve Osterholzer, the brigade spokesman, said.

Several roadside bombs also have exploded next to the unit's MRAPs — mine-resistance patrol vehicles — but caused no casualties, he said.

"In every case our vehicles returned with overwhelming fire," Osterholzer said. "We have not suffered anything more than a few bruises, while several insurgents have been killed."

Commanders are in the planning stages of larger scale operations expected to be launched in the coming weeks.

Militant activity has spiked in Logar and Wardak over the last year as the resurgent Taliban has spread north toward Kabul from its traditional southern power base. Residents say insurgents roam wide swaths of Wardak, a mountainous province whose capital is about 35 miles from Kabul.

The region has been covered in snow recently, but Col. David B. Haight, commander of the 3rd Brigade, said last week that he expects contact with insurgents to increase soon.

"The weather has made it so the enemy activity is somewhat decreased right now, and I expect it to increase in the next two to three months," Haight said at a news conference.

Haight said he believes the increase of militant activity in the two provinces is not ideologically based but stems from poor Afghans being enticed into fighting by their need for money. Quoting the governor of Logar, the colonel called it an "economic war."

Afghan officials "don't believe it's hardcore al-Qaida operatives that you're never going to convert anyway," Haight said. "They believe that it's the guys who say, 'Hey you want $100 to shoot an RPG at a Humvee when it goes by,' and the guy says, 'Yeah I'll do that, because I've got to feed my family.'"

Still, Haight said there are hardcore fighters in the region, some of them allied with Jalaludin Haqqani and his son Siraj, a fighting family with a long history in Afghanistan. The two militant leaders are believed to be in Pakistan.

A new report from the RAND Corp. think tank argues against that approach. It contends a "game-changing" strategy is urgently needed in Afghanistan that would have the additional troops train Afghan security forces rather than directly confront militants.

"It is unlikely the United States and NATO (on their own) will defeat the Taliban and other insurgent groups in Afghanistan," said the paper, which was being released Tuesday.

Logar Gov. Atiqullah Ludin said at a news conference alongside Haight that U.S. troops will need to improve both security and the economic situation.

"There is a gap between the people and the government," Ludin said. "Assistance in Logar is very weak, and the life of the common man has not improved."

Ludin also urged that U.S. forces be careful and not act on bad intelligence to launch night raids on Afghans who turn out to be innocent.

It is a common complaint from Afghan leaders. President Hamid Karzai has long pleaded with U.S. forces not to kill innocent Afghans during military operations and says he hopes to see night raids curtailed.

Pointing to the value of such operations, the U.S. military said Monday that a raid in northwest Badghis province killed a feared militant leader named Ghulam Dastagir and eight other fighters.

Other raids, though, have killed innocent Afghans who were only defending their village against a nighttime incursion by forces they didn't know, officials say.

"We need to step back and look at those carefully, because the danger they carry is exponential," Ludin said.

Haight cautioned last week that civilian casualties could increase with the presence of his 2,700 soldiers.

"We understand the probability of increased civilian casualties is there because of increased U.S. forces," said the colonel, who has also commanded Special Operations task forces in Afghanistan and Iraq. "Our plan is to do no operations without ANA (Afghan army) and ANP (Afghan police), to help us be more precise."

The U.S. military and Afghan Defense Ministry announced last week that Afghan officers and soldiers would take on a greater role in military operations, including in specialized night raids, with the aim of decreasing civilian deaths.

The presence of U.S. troops in Wardak and Logar is the first time such a large contingent of American power has been so close to Kabul, fueling concerns that militants could be massing for a push at the capital. Haight dismissed those fears.

"Our provinces butt up against the southern boundary of Kabul and therefore there is the perception that Kabul could be surrounded," Haight said. "But the enemy cannot threaten Kabul. He's not big enough, he's not strong enough, he doesn't have the technology. He can conduct attacks but he can't completely disrupt the governance in Kabul."

Clinton warns NKorea on missile launch

TOKYO – Secretary of State Hillary Rodham Clinton on Tuesday warned North Korea against following through on a threatened missile launch, saying it would damage its prospects for improved relations with the United States and the world.

In Tokyo on her first trip abroad as America's top diplomat, Clinton also stressed U.S. commitment to Japan's security, signed a military deal to advance that and underscored the importance of the alliance by inviting Japanese Prime Minister Taro Aso to Washington next week.

Aso, deeply unpopular at home, will be the first foreign leader to visit President Barack Obama at the White House, and the Feb. 24 summit is a sign that the world's two largest economies know they have a special responsibility to deal the global financial crisis, Clinton said.

She had hoped to broaden U.S.-Asian relations to include climate change, clean energy and the world's economic woes on her maiden overseas voyage, but North Korea and its increasingly belligerent rhetoric toward its neighbors were clearly at the top of her agenda.

Just before she arrived in Japan on Monday, North Korea used the 67th birthday of its leader Kim Jong Il to claim it has the right to "space development" — a term it has used in the past to disguise a long-range missile test as a satellite launch.

A day later, Clinton, without prompting, told reporters at a joint news conference with Japanese Foreign Minister Hirofumi Nakasone that such a move would jeopardize the Obama administration's willingness to work for better ties with Pyongyang.

"The possible missile launch that North Korea is talking about would be very unhelpful in moving our relationship forward," she said, adding that if Pyongyang wants to end its isolation it also has to fulfill unmet denuclearization pledges made during the Bush administration.

"The decision as to whether North Korea will cooperate in the six-party talks, end provocative language and actions is up to them and we are watching very closely," Clinton said, referring to the six-nation talks aimed at getting North Korea to abandon nuclear weapons.

"If North Korea abides by the obligations it has already entered into and verifiably and completely eliminates its nuclear program, then there will be a reciprocal response certainly from the United States," she said. "It is truly up to the North Koreans."

Those responses include a chance to normalize relations with the United States, formally ending the 1950-53 Korean War with a peace treaty to replace the current armistice, as well as energy, financial and humanitarian assistance for the North Korean people.

Clinton also vowed to keep up pressure on the North to resolve Japan's concerns about the status of Japanese citizens abducted by Pyongyang in the 1970s and '80s. She met with relatives of some abductees in a private session at the U.S. Embassy to promise such steps.

Many abductee families were angered by the Bush administration's decision last year to remove North Korea from the U.S. list of state sponsors of terrorism as an incentive in the nuclear talks without addressing their concerns.

At the meeting, representatives of the families presented Clinton with a letter repeating their disappointment with the step and asked that the Obama administration put North Korea back on the list pending a resolution to the abductee issue. There was no immediate response to the letter from U.S. officials.

Clinton said the United States remained firmly committed to the defense of its allies in the region, particularly Japan and South Korea, and signed an agreement with Nakasone to reduce tensions caused by the presence of U.S. troops on Japanese soil.

Under the deal, which has been in the works for years, 8,000 Marines now stationed on the Japanese island of Okinawa will be moved to the U.S. Pacific territory of Guam. There are 50,000 American troops in Japan, about 20,000 of them on Okinawa.

On the financial crisis, Clinton said the United States and Japan had to work together to formulate an adequate response.

"As the first and second largest economies in the world, we understand those responsibilities and we also know the importance of making sure our economies work on behalf of our own citizens," said Clinton. "It is a great responsibility that both Japan and the United States assume."

Nakasone agreed. "This is a global financial and economic crisis and therefore all economic powers will need to cooperate with each other and try to resolve the issue in a concerted manner," he said.

He said the Obama administration's economic stimulus bill, to be signed by the president Tuesday, was "most meaningful" with its combination of spending and tax cuts and added that Japan was looking at ways to improve its situation.

Clinton's invitation to Aso to visit the White House came a day after figures showed the Japanese economy shrank at its fastest rate in 35 years and shows no signs of reversing course anytime soon.

It was delivered as Aso's already battered government was dealt another blow when Finance Minister Shoichi Nakagawa announced he would resign due to health problems after facing allegations he was drunk at a recent economic meeting in Rome.

Big goals and hurdles await Obama

WASHINGTON – Now what?

With the stimulus plan all but done, President Barack Obama faces a host of opportunities — and as many hurdles — in choosing his next big push.

Overhauling health care is a logical choice, but there is no health secretary or White House point man now. The president has promised a summit on entitlement costs this month, but has done little spadework. Advocates want major changes in energy and immigration policy, yet deep divisions remain.

Moreover, Obama just spent considerable resources persuading a wary Congress and public to accept multibillion-dollar plans to spur the economy and rescue the financial sector. With those programs just beginning, he says the nation cannot wait to tackle even more expensive problems: fixing the long-term funding mechanisms for Medicare, Medicaid and Social Security.

Dealing with the immediate economic crisis means massive spending, huge deficits and widespread tax cuts. The longer-term cures for entitlements and budgets call for spending cuts, smaller deficits and likely tax increases.

"How do you mesh those two without making people get dizzy?" said Henry Aaron, an economist at the Brookings Institution who tracks government actions.

Some in the administration and Congress ask a more basic question: How many big, expensive and ambitious initiatives can the country swallow at once, especially when partisanship in the House and Senate appears unabated? As Aaron put it, "This is not the environment that seems conducive to grand bargains."

But Obama says he wants to do big things and avoid playing "small ball," even if there is no rest between innings.

For instance, five days before his inauguration he told Washington Post editors he would convene a "fiscal responsibility summit" in February to tackle questions of entitlement overhaul and long-term budget deficits. "We have to signal seriousness in this by making sure some of the hard decisions are made under my watch, not someone else's," Obama said.

White House Chief of Staff Rahm Emanuel said late Thursday that the fiscal summit will be Feb. 23. The leaders of groups heavily involved with Medicare and Social Security say they have heard little or nothing about the event, so they don't know what to expect. But some are urging Obama to be bold and ambitious, even as Republicans pound him for pushing the $789 billion economic stimulus through Congress.

The Peter G. Peterson Foundation is running ads calling for a bipartisan commission to make far-reaching recommendations for Social Security, Medicare, spending and taxes that would be subject to limited amendments in Congress.

"The normal legislative process is clearly dysfunctional" in coping with such big issues, David M. Walker, the foundation's president and former comptroller general of the United States, said in an interview. The public may be reeling from the size of the stimulus and bailout packages, he said. But the economic crisis is "a teachable moment" showing that budgets, deficits, entitlements and taxes are interwoven.

"To do a grand bargain" that forces all sides to sacrifice something for the greater good, he said, a government "must work on multiple things at once."

A White House's agenda is crowded under any circumstances. Obama soon must present a fiscal 2010 budget plan to Congress, and he must fill the Cabinet posts at Commerce and Health and Human Services.

David Axelrod, a White House senior adviser, said in an interview Thursday that the administration wants to move on multiple fronts and "keep the momentum going." Besides putting the stimulus plan in place, he said, the White House will focus on housing, education, energy and health care.

"If you view these things in isolation, I think they can be daunting," Axelrod said. "They become fodder for the kind of political small ball that sometimes consumes Washington."

He acknowledged that plans for health care were interrupted by Tom Daschle's failed bid to become the White House's health chief as well as Health and Human Services secretary, and that matters aren't helped by Sen. Edward Kennedy's frequent absence from Congress because of illness. Kennedy, D-Mass., heads the Senate committee that deals with health care matters.

"I don't know if that will affect the sequencing of things," Axelrod said, but the White House's efforts to expand health coverage and control costs will continue.

Emanuel said the administration will hold a bipartisan health care summit soon.

This week in Florida, Obama said he soon will announce "what our overall housing strategy's going to be." He will outline more plans in a speech to Congress on Feb. 24.

"While in other circumstances there would be real concern about trying to cram too much in big policy changes too quickly, there are real problems, and I think they have to, and will, keep going," said Jennifer Palmieri, a former Clinton White House aide with ties to the Obama administration.

"The American people get that," she said.

Obama eyes home loan subsidies in rescue plan: sources

WASHINGTON (Reuters) – The Obama administration is hammering out a program to subsidize mortgages in a new front to fight the credit crisis, sources familiar with the plan told Reuters on Thursday, boosting financial markets.

In a major break from existing aid programs, the plan under consideration would seek to help homeowners before they fall into arrears on their loans. Current programs only assist borrowers that are already delinquent.

Wall Street stock indexes quickly retraced earlier losses on the report, with the blue-chip Dow Jones industrial average jumping 245 points, or 3.0 percent, to close just 6 points lower on the day. Earlier in the session, stock prices had been testing lows seen last November on investor worries about the economy.

Under the evolving plan, sources said homes would undergo a standardized reappraisal and homeowners would face a uniform eligibility test.

The administration may also lower the trigger level that decides who would be eligible for relief. Under an existing program, loans are reworked if a borrower is spending more than 38 percent of their gross income on their mortgage.

In an interview, James Lockhart, the regulator who oversees government-controlled mortgage finance companies Fannie Mae and Freddie Mac, told Reuters the industry was eager to have a standardized loan modification standard.

"I've talked to all the major servicers -- both the big bank ones and the big independent ones -- and they are all ready to go, they're chomping at the bit," Lockhart, the director of the Federal Housing Finance Agency, said. "The other thing they're asking for standardization."

However, he declined to speculate on any plans the administration may be considering. The Treasury Department, which is taking the lead role in financial rescue efforts, did not respond to a request for comment.

EFFORT TO LOWER RATES

A rising wave of U.S. mortgage delinquencies has saddled the global banking system with big losses that have led banks to recoil from lending, choking economies around the globe.

U.S. Treasury Secretary Timothy Geithner this week outlined a plan to take up to $1 trillion in bad assets off the banks' books in the hope of restarting lending.

He also vowed the administration would spend $50 billion to combat foreclosures.

Geithner said on Thursday the administration would soon put a housing program in place that uses "a mix of incentive and persuasion" to get mortgage companies to rewrite loans.

"The key elements of the strategy are going to bring mortgage interest rates down to help avoid the foreclosures that we can reasonably expect to avoid," he said.

Late mortgage payments and home foreclosures hit record highs last year. Foreclosure filings eased last month, but were still 18 percent higher than a year ago, industry research firm RealtyTrac said on Thursday.

Sources said Fannie Mae and Freddie Mac would play a supporting role in the new plan, but said the two companies are not expected to repackage the reworked loans as securities for investors, a main line of their business.

OTHER PLANS DISCARDED

Homeowners would have to make a case of hardship to qualify for new loan terms, according to the sources.

Officials weighed, but have shelved for now, another plan that would have the government stand behind low-cost mortgages of between 4.0 percent and 4.5 percent, the sources said.

Howard Glaser, a housing official in the Clinton administration, said the type of program under discussion would give officials more "bang for the buck" than the government would get by guaranteeing troubled loans.

"Federal purchase or guarantee of these same distressed mortgages would be vastly and prohibitively expensive," he said.

Subsidizing existing mortgages would have the added benefit of using the mortgage companies' existing infrastructure, rather than creating a new bureaucracy.

Lockhart said policy-makers are eager to prevent a large drop in home values from their current, deflated levels.

"Just as we had a large overshooting to the upside. Is there any way to prevent going much further to the downside? That will cause tremendous harm to the U.S. economy, to the financial system and it's not necessary," he said.

Gregg withdraws as commerce secretary nominee

WASHINGTON – Saying, "I made a mistake," Republican Sen. Judd Gregg of New Hampshire abruptly withdrew as commerce secretary nominee on Thursday and drew a testy reaction from the White House, suddenly coping with the third Cabinet withdrawal of Barack Obama's young presidency.

Gregg cited "irresolvable conflicts" with Obama's handling of the economic stimulus and 2010 census in a statement released without warning by his Senate office.

Later, at a news conference in the Capitol, he sounded more contrite.

"The president asked me to do it," he said of the job offer. "I said, 'Yes.' That was my mistake."

Obama offered a somewhat different account from Gregg.

"It comes as something of a surprise, because the truth, you know, Mr. Gregg approached us with interest and seemed enthusiastic," Obama said in an interview with the Springfield (Ill.) Journal-Register. "But ultimately, I think, we're going to just keep on making efforts to build the kind of bipartisan consensus around important issues that I think the American people are looking for."

White House spokesman Robert Gibbs said once it became clear Gregg was not going to support some of Obama's top economic priorities, it became necessary for Gregg and the administration "to part ways," Gibbs said. "We regret that he has had a change of heart."

Gregg said he'd always been a strong fiscal conservative. "It really wasn't a good pick." When the Senate voted on the president's massive stimulus plan earlier this week, Gregg did not vote. The bill passed with all Democratic votes and just three Republican votes.

The unexpected withdrawal marked the latest setback for Obama in his attempt to build a Cabinet. It came as the new president expended political capital in Washington — and around the country — for his economic package.

Treasury Secretary Tim Geithner was confirmed despite revelations that he had not paid some of his taxes on time, and former Senate Democratic Leader Tom Daschle withdrew as nominee as health and human services secretary in a tax controversy.

New Mexico Gov. Bill Richardson of New Mexico was Obama's first choice as Commerce Secretary. He withdrew several weeks ago following disclosure that a grand jury is investigating allegations of wrongdoing in the awarding of contracts in his state. Richardson has not been implicated personally.

Gregg was one of three Republicans Obama had put in his Cabinet to emphasize his campaign pledge that he would be an agent of bipartisan change.

White House Chief of Staff Rahm Emanuel said Obama and Gregg met in the Oval Office on Wednesday and there were no hard feelings.

"It's better we figured this out now than later," Emanuel said. "It's unfortunate. ... There's a disappointment."

In an interview with The Associated Press, Gregg said, "For 30 years, I've been my own person in charge of my own views, and I guess I hadn't really focused on the job of working for somebody else and carrying their views, and so this is basically where it came out."

Gregg, 61, said he informed the White House "fairly early in the week" about his decision. He said he changed his mind after realizing he wasn't ready to "trim my sails" to be a part of Obama's team.

"I just sensed that I was not going to be good at being anything other than myself," he said.

The New Hampshire senator also said he would probably not run for a new term in 2010.

Sen. Jay Rockefeller, D-W.Va., chairman of the Senate Commerce Committee, said he wished Gregg "had thought through the implications of his nomination more thoroughly before accepting this post."

Senate Majority Leader Harry Reid, D-Nev., called Gregg a friend and said, "I respect his decision."

In his statement, Gregg said his withdrawal had nothing to do with the vetting into his past that Cabinet officials routinely undergo.

Gregg's reference to the stimulus underscored the partisan divide over the centerpiece of Obama's economic recovery plan. Conservatives in both houses have been relentless critics of the plan, arguing it is filled with wasteful spending and won't create enough jobs. Gregg has refrained from voting on the bill — and on all other matters — while his nomination was pending.

The Commerce Department has jurisdiction over the Census Bureau, and the administration recently took steps to assert greater control. Republicans have harshly criticized the decision, saying it was an attempt to politicize the once-in-a-decade event.

The outcome of the census has deep political implications, since congressional districts are drawn based on population. Many federal funds are distributed on the basis of population, as well.

Both of those factors mean there is a premium on counting as many residents as possible. Historically, the groups believed to be most undercounted are inner-city minorities, who tend to vote Democratic.

Gregg's announcement also undid a carefully constructed chain of events.

The New Hampshire senator had agreed to join the Cabinet only if his departure from the Senate did not allow Democrats to take control of his seat.

New Hampshire Gov. John Lynch, in turn, pledged to appointed Bonnie Newman, a former interim president of the University of New Hampshire.

She, in turn, had agreed not to run for a full term in 2010, creating an open seat for Democrats to try and claim.

In a statement, Senate Republican leader Mitch McConnell of Kentucky said Gregg "made a principled decision to return and we're glad to have him."

Lynch, who spoke to Gregg several hours before the announcement, said he respected Gregg's decision to withdraw and remain in the Senate. He thanked Newman for her willingness to serve.

A day after Gregg's nomination had been announced, the AP reported that a former staffer was under criminal investigation for allegedly taking baseball and hockey tickets from a lobbyist in exchange for legislative favors while working for Gregg.

The former staffer, Kevin Koonce, has been identified in court papers only as "Staffer F" in the sprawling corruption probe stemming from disgraced lobbyist Jack Abramoff.

Gregg said at the time that he had been told he was neither a subject nor target of the investigation, and would cooperate fully.

U.S. steel companies press for Buy American plan

WASHINGTON (Reuters) – U.S. steel companies urged congressional leaders on Tuesday to maintain a strong "Buy American" provision as part of a final economic stimulus bill sent to President Barack Obama.

The plea came as major U.S. exporters like Caterpillar and Microsoft pushed for either eliminating or substantially weakening the measure, which they say would raise the cost of public works projects funded by the stimulus bill and send a protectionist signal to the rest of the world.

Canada, the European Union and other U.S. trading partners are also closely watching congressional negotiations on the Buy American plan, which would give preference to domestic steel companies and possibly other U.S. manufacturers.

"Procurement of competitively priced steel products and specialty metals from competitive domestic sources will not cost the U.S. taxpayer more," the American Iron and Steel Institute said in a letter to congressional leaders.

"It will in fact generate payroll and income tax returns to the U.S. government as a result of stimulating American jobs," the steel companies said, adding the United States has various Buy American provisions on the books for years without causing a trade war.

House Majority Leader Steny Hoyer, a Maryland Democrat, said the Buy American provision would "continue to be an item of discussion" as the House and Senate negotiate a final version of the economic recovery package.

The Senate took a step in the right direction last week by "softening the adverse impact that total adherence to Buy American would have had," Hoyer said.

The Senate bill requires all public works projects funded by the stimulus bill to use only U.S.-made iron, steel and manufactured goods. But in a step to address some foreign concerns, senators approved an amendment requiring the provision be applied in a manner consistent with U.S. obligations under international agreements.

That would help trading partners like the European Union and Canada which have reciprocal government procurement agreements with the United States, but not countries such as China, India, Brazil and Russia which do not.

Cal Cohen, president of the Emergency Committee for American Trade, said many U.S. companies outside the steel sector believe the Buy American provision would "defeat the basic objective of the stimulus package which is to ensure the quick release of funds to create jobs."

Before work could begin on a project, government agencies would have to first issue rules to ensure that purchases comply with the Buy American measures, he said.

Under the Senate language, many U.S. manufactured goods also would not be eligible because they contain some foreign component, Cohen said.

The House Buy American provision is narrower than the Senate version because it does not cover manufactured goods.

At the same time, it does not have the Senate stipulation that the provision be implemented in a manner that complies with U.S. commitments under trade pacts.

Even some lobbyists who oppose the Buy American measure say they are skeptical that lawmakers will drop it from the bill sent to Obama. They think it is more likely that congressional negotiators will agree on language close to the Senate version.

Obama's Stimulus Address Shows His Power at the Pulpit

In the final years of his second term, it was not unusual to find George W. Bush's motorcade routes lined with protesters chanting their objections or spelling them out on handmade signs. On Monday, President Barack Obama traveled to one of the most economically imperiled parts of the country - Elkhart, Ind. - to find his route bordered by hundreds of waving supporters.

It continues to be this way for Obama, despite a three-week run in the White House that has seen tax scandals, a public admission of presidential missteps and a bitter, sometimes chaotic legislative battle over his $800 billion stimulus plan. The new President remains close to a national golden boy, even as he now oversees a U.S. economy in free fall, the likes of which has not been recorded since before World War II. After Obama was pilloried by pundits for losing control of the stimulus fight inside the Beltway, a Gallup poll conducted late last week found that twice as many Americans approved of Obama's handling of the stimulus package than of his Republican congressional foes' work on the issue. (Read "How to Know When the Economy Is Turning Up.")

Obama proved what a skilled communicator he is on the campaign trail. But with the presidential bully pulpit now at his disposal, his substantial ability to explain himself at a time of widespread disillusionment is the source of tremendous power. Obama chose Monday to come before the American people for his first prime-time address, a dour and downbeat press conference that he used to offer a blunt warning of the perils ahead.

On the economy, he spoke of his concern that the country, burdened by government debt, could descend into a "catastrophe" if no immediate action is taken by Congress. On the war in Afghanistan, he warned of a "big challenge" and an uncertain time line for a withdrawal. He even bemoaned the revelation that slugger Alex Rodriguez had used steroids. "It's depressing news on top of what's been a flurry of depressing items when it comes to Major League Baseball," he said. (See pictures of the world watching Obama's Inauguration.)

In extended answers constructed like well-written essays, Obama spoke of the threat of a downward economic spiral and plummeting growth, and announced that "this year is going to be a difficult year." He used the word crisis 12 times and was careful to qualify his own abilities to solve the country's problems. "I can't tell you for sure that everything in this plan will work exactly as we hoped," he said of the stimulus package. "But I can tell you with complete confidence that a failure to act will only deepen this crisis."

If there was anything uplifting to be found in the address, it was in the contrast. Whereas President Bush steadily eroded his credibility over eight years in office, resorting to rosy statements about the war in Iraq, the response to flooding in New Orleans and the economic boom that proved unfounded, Obama seems determined not to sugarcoat the facts. He spoke of them harshly, without much adornment. With each grim pronouncement, he attempted to claim a level of confidence and competence - even pragmatism - that the nation has not seen for a while.

This is not to say that Obama was always willing to answer reporters' questions. He declined to say whether he supported a "truth commission" to review possible law-breaking by the Bush Administration, saying he needed more time to study the matter. He skirted around questions about his fitful attempts to build true bipartisan support in Congress for his measures, claiming that it will take Washington some time to break its "bad habits." And he issued a series of broadsided attacks on some of his Republican foes, dismissing their critiques of the stimulus plan as pork-barrel spending. "It's a little hard for me to take criticism from folks about this recovery package after they presided over a doubling of the national debt," he said.

By all external measures, the Washington political universe that President Obama now oversees still looks and acts very much like the capital he ran against for two years on the campaign trail. But Obama's performance at the podium is something else entirely, a study in relative candor and nuance. His ability to arouse economically cratering towns to cheer on roadsides remains unmatched. A nervous nation and its new President now pin their hopes for salvation on this ability. The power of the presidential pulpit has rarely been so well used. The only question is how far it can take us.

$3 trillion! — Senate, Fed, Treasury attack crisis

WASHINGTON – On a single day filled with staggering sums, the Obama administration, Federal Reserve and Senate attacked the deepening economic crisis Tuesday with actions that could throw as much as $3 trillion more in government and private funds into the fight against frozen credit markets and rising joblessness.

"It's gone deep. It's gotten worse," President Barack Obama said of the recession at a campaign-style appearance in Fort Myers, Fla., where unemployment has reached double digits. "The situation we face could not be more serious."

If any more emphasis were needed, Wall Street investors sent stocks plunging, objecting that new rescue details from the government were too sparse. The Dow Jones industrials dropped 382 points.

The president spoke shortly after Senate passage of an $838 billion emergency economic stimulus bill cleared the way for talks with the House on a final compromise. In a display of urgency, White House chief of staff Rahm Emanuel traveled to the Capitol for meetings that stretched into the night with Democratic leaders as well as moderate senators whose views — and votes — will be key to any deal.

Separately, Treasury Secretary Timothy Geithner outlined plans for spending much of the $350 billion in financial bailout money recently cleared by Congress, and the Federal Reserve announced it would commit up to $1 trillion to make loans more widely available to consumers.

Taken together, the events marked at least a political watershed if not an economic turning point — the day the three-week old administration and its congressional allies assumed full control of the struggle against the worst economic crisis since the Great Depression.

The vote was 61-37 in the Senate to pass the stimulus, with moderate Republican Sens. Susan Collins and Olympia Snowe of Maine and Arlen Specter of Pennsylvania joining Democrats in support.

Even before the vote, Majority Leader Harry Reid and House Speaker Nancy Pelosi met with Obama at the White House to go over the task ahead.

The Democratic leaders have long pledged to have legislation on Obama's desk by mid-month, and some Democrats said there was an informal target of Wednesday for agreement on a bill that would likely wind up in the range of $800 billion.

The political urgency bumped up against other obstacles, though.

The House measure includes roughly $70 billion more spending than the Senate's, but it lacks Senate-approved tax breaks totaling more than $100 billion for new car buyers, home purchasers and upper middle income families.

In a further obstacle, Collins and other Senate moderates — in both parties — signaled they will work to hold the cost of the final bill below $800 billion. That's less than the $820 billion in spending and tax cuts combined in the bill that cleared the House as well as the $838 billion legislation the Senate wrote.

Additionally, Obama has campaigned particularly energetically to include funds for school construction in the bill. At the insistence of Collins, the Senate measure omitted money for that purpose, and it wasn't clear whether she had eased her position on the presidential priority.

Whatever the cost of the final bill, it will add to the deficit, and that created another little-mentioned dilemma for the administration and Democrats.

Future spending bills on domestic programs or tax cuts will probably have a far more difficult time gaining the support necessary to pass without offsetting spending cuts or tax increases that would hold the deficit level.

Obama has campaigned energetically in recent days for passage of the stimulus bill, at the White House, on visits to other federal agencies, in his trip to Florida and a similar appearance Monday in a high-unemployment area of Indiana.

Reid depicted a president deeply involved in the compromise effort as well. He said Obama had "certain set ideas as to what he thinks should be done" but declined to elaborate.

The president set the context for the unfolding events Monday night at his first presidential news conference when he said, "With the private sector so weakened by this recession, the federal government is the only entity left with the resources to jolt our economy back into life."

Geithner outlined some of the details, although he and aides left numerous questions unanswered.

"We have to both jump-start job creation and private investment, and we must get credit flowing again to businesses and families," Geithner said at a news conference. He pledged to "fundamentally reshape" the financial industry bailout that began last fall under the Bush administration, and he announced that at least $50 billion would be spent helping homeowners facing foreclosure. He also said new steps would hold banks accountable for their use of bailout funds.

One element of the administration's approach calls for using as much as $100 billion in federal bailout funds to give banks, hedge funds or other investors the incentive to purchase so-called toxic assets carried on the books of other financial institutions. The goal is to return struggling banks to health so they can resume making loans, and an administration fact sheet said the amount of government and private funds combined will be "on an initial scale of up to $500 billion, with the potential to expand up to $1 trillion."

The Federal Reserve announced it would commit up to $1 trillion to purchase bonds or other assets backed by consumer loans. The Treasury will guarantee a portion of the Fed investment by putting up $100 billion, an increase from a $20 billion commitment that Bush administration had announced.

The goal of this program is to make it easier for consumers to buy cars or obtain student loans, small business loans or other types of credit that have dried up in recent months.

Geithner said $50 billion in bailout funds would be dedicated to an effort to prevent mortgage foreclosure of "owner-occupied middle class homes." Few details were provided.