A Trillion Bucks Package, Euro Goes To?

If the package really kicks in with the Greek bailout their first target, the Euro might still be going down as it has been doing for past half a year. There is a longterm target at 1.15 for EUR/USD pair anyway. So which way will the Euro choose to go?

The Pound might follow the path of Euro and the GBP/USD pair has also a target at 1.2s. Maybe in next few months.

Hence in this matter the USD might still be getting stronger and stronger. Even USD/JPY pair might be going up instead of down, targetting around 110. The stock markets might still be bullish for next few months as well, after a short but quite sharp correction that happened few days ago.

US PPI is already up and soon CPI might follow as producers pass the increase to consumers. Employment is getting better again, inflation might start to go up in next few months. No more recession for the time being. The Fed might start hiking the interest rate again after so long at the bottom, maybe from Q4 this year or early next year.

New Hopes in WTO Meeting on New Global Trade Pact

A new sense of optimism surrounded WTO negotiations on a new global trade pact Saturday amid hopes of a breakthrough after seven years of deadlock.

Ministers from 35 leading nations headed for meetings hoping to finally bridge their differences, with pressure piling on emerging market countries India and Argentina which have signalled opposition to a proposed deal.

"This afternoon's session will be important. India will be looking to see what it can get out of the session to decide whether to ditch discussions," a diplomatic source told AFP on condition of anonymity.

Ministers from 35 leading economies have been meeting at the World Trade Organization since Monday to discuss cuts in subsidies and import tariffs with the aim of mapping out a new deal under the so-called Doha Round of WTO talks.

The Doha Round was launched in the Qatari capital seven years ago but has stalled because of disputes between the rich developed world and poorer developing nations on trade in farm and industrial products.

The talks this week looked doomed -- like so many others since Doha began in 2001 -- until a breakthrough late Friday saw the biggest powers find common ground on a draft agreement. "I think the situation looks strong. I think we can be very hopeful now," said European Trade Commissioner Peter Mandelson as he left talks late on Friday.

The United States warned that a handful of countries could still torpedo the exercise and Argentina said the draft agreement was unacceptable. "There are a handful of large emerging markets that quite frankly risk unravelling the entire package," said United States Trade Representative Susan Schwab. She added, however, that while there was "more work to do, it is a path forward."

Indian Commerce Minister Kamal Nath has insisted all week that he will protect his country's millions of subsistence farmers and nascent industry, which are shielded from imports by tariffs levied on foreign goods. "We're not very happy with the package, primarily on agricultural issues," said Indian ambassador to the WTO, Ujal Singh Bhatia, on Saturday.

Indian newspaper Business Standard reported Saturday that Nath had threatened to walk out of negotiations on Friday. "We have come with many goodies. We expect to return with many goodies. If not, we'll return with the same goodies we brought," said Bhatia, underlining that India was still ready to walk away.

Mandelson said Friday that he thought the Asian giant would eventually come on board, telling reporters: "I don't think India will be the one to break a world trade round. I really don't." The talks Friday focused on trade in farm and industrial products -- the two main sticking points of a deal -- but attention is set to turn Saturday to the services sector.

The gathering is due to over-run its original programme, which foresaw an end on Saturday, and continue throughout the weekend and early next week, sources said. "My opinion is that the chances of reaching an accord have risen to 65 percent from 50 percent," said Brazil's trade negotiator, Foreign Minister Celso Amorim, who said he had accepted the draft agreement.

The marked turnaround Friday emerged after meetings between seven key trading powers -- the United States, the European Union, Australia, Brazil, China, India and Japan. The talks then widened to a ministerial conference of all 35 key nations invited to Geneva to broker the pact. Anything approved by the 35 parties would still have to be cleared by all 153 WTO member states. A new pact can only be adopted with unanimity.

WTO Director-General Pascal Lamy had warned earlier on Friday that the talks faced failure unless countries showed flexibility and determination. Among new proposals he put forward Friday was a further cut in the US annual farm subsidies to 14.5 billion dollars (9.2 billion euros) and a clause to prevent developing countries from shielding entire sectors from tariff cuts. Diplomats and negotiators had said that Friday would be make-or-break at the end of gruelling week of bargaining that had produced scant evidence of progress.

US Housing Aid Bill Expected to Be Cleared

Senate expected to pass foreclosure rescue, mortgage giant backstop to revive housing market.

Homeowners struggling to make their house payments could get government mortgage relief under a rescue plan that seeks to revive the chaotic housing market and help reverse the economic downturn.

The Senate is expected Saturday to clear the wide-ranging legislation -- considered the most significant housing measure in decades -- for President Bush's signature, and the White House says he'll sign it quickly.

The bill gives the government power to throw troubled mortgage giants Fannie Mae and Freddie Mac a financial lifeline, in efforts to prevent the two pillars of the home loan market from going under and causing broader market turmoil. It is designed to help an estimated 400,000 homeowners escape foreclosure by letting them refinance into more affordable loans backed by the Federal Housing Administration.

The Senate on Friday cleared the last hurdle to its passage on a 80-13 test vote that showed broad support for the election-year package. Bush, who initially called it a burdensome bailout for irresponsible borrowers and lenders, dropped a threat to veto it this week after his Treasury Secretary, Henry M. Paulson, argued the backstop for Fannie and Freddie was vital to calming markets in the U.S. and abroad.

That was despite his opposition to $3.9 billion the bill sends to neighborhoods devastated by the housing crisis to buy and fix up foreclosed properties. The administration argues that would hurt homeowners by giving lenders an incentive to foreclose rather than help people stay in their homes.

Supporters called the bill a crucial and long-overdue response to the mortgage meltdown that would be a key ingredient to boosting the sagging economy. "Unless we provide some type of footing for housing in the United States, I do not think that the economy will begin to recover. It is perhaps the most significant economic issue that we face," said Sen. Jack Reed, D-R.I. "This legislation is going to be the linchpin that helps millions of families have decent, safe and affordable housing."

Paulson's request for the emergency power to rescue Fannie and Freddie helped forge a bipartisan deal on the legislation, which also creates a new regulator with tighter controls on the government-sponsored mortgage firms -- something Republicans have long sought.

Democrats also won key concessions as part of the compromise, including a permanent affordable housing program to be financed by Fannie and Freddie profits and the $3.9 billion in grants.

Many conservative Republicans are vehemently opposed to the foreclosure rescue, which they call a bailout of reckless homeowners and unscrupulous lenders. They are equally furious about the help for Fannie Mae and Freddie Mac, companies they say enjoy lavish profits in good times and wield their outsized political clout to resist regulation while depending on the government to bail them out should they falter.

Sen. Jim DeMint, R-S.C., slowed the measure's final passage because Democrats refused to allow a vote on his proposal barring the two mortgage companies from lobbying and making political contributions.

Wall Street Braces for Tough Earnings Season

Financial stocks set to lower S&P 500 earnings 13.5 percent during second quarter.

Investors already disheartened about the growing problems of the financial sector and the soaring price of oil are facing more depressing news with the release of second-quarter earnings reports.

The coming week will bring the first big wave of results from America's largest companies, including seven Dow Jones industrial average components and 53 members of the Standard & Poor's 500 index. Investors shouldn't expect much: Earnings for all the companies in the S&P 500 index are forecast by the rating agency to be down 10 percent from a year earlier.

Thomson Financial, which compiles forecasts from analysts at banks and brokerages, estimates the decline at 13.5 percent. Either way, Wall Street is well past the nearly five years of double-digit growth that ended as the subprime mortgage crisis spilled into the credit markets last summer.

The credit crisis is responsible for the earnings plight; financial companies that have written down an aggregate of $300 billion in soured mortage-related assets remain the biggest drag on S&P 500 earnings. Results are expected this coming week from Merrill Lynch & Co., JPMorgan Chase & Co. and Citigroup Inc.

But profits and outlooks for the future are expected to be sobering for U.S. companies as a whole. "The feeling is that this will be a sloppy earnings season, the tone of the which is going to be very much like the previous three quarters," said Phil Orlando, chief equity market strategist at Federated Investors. "The banks and the housing sector, on through autos and retailers, are the problem children."

Financial company earnings are forecast to fall by 69 percent year-over-year, according to Thomson. Meanwhile, consumer discretionary companies -- which includes auto manufacturers and home builders -- are expected to see their profits fall by 19 percent.

There are some bright points, with energy companies expected to turn soaring oil prices into a 28 percent jump in profits. Crude oil is up nearly 50 percent this year, and hit a record on Friday over $147 a barrel.

With both oil and financial earnings certainly at extremes, analysts like Orlando find it useful to strip out their performance to get a better idea of how the broader market performed. If you remove the financials, Thomson forecasts the companies in the index would post an average earnings growth rate of about 9 percent; and if you remove financials and oil, the rest of the S&P 500 would have a 4 percent profit growth rate.

"There's some growth there, but nothing like we've seen in past years," said John Butters, director of U.S. earnings research for Thomson Financial. "You also have to take into consideration that the forecasts have come down during the quarter."

He said that at the start of the quarter, analysts expected the financial sector to tumble 31 percent year-over-year. The barrage of bad news during the quarter forced analysts' to rethink their forecasts, causing both expectations and stock prices to fall.

Concerns about financials didn't let up on Friday, when the Dow Jones tumbled nearly 130 points on concerns about the viability of Fannie Mae and Freddie Mac. Fannie Mae lost 22.35 percent of its value, while Freddie Mac lost 3.13 percent.

Investment banks -- many of which carry significant investments in mortgage-backed securities -- also fell. Lehman Brothers Holdings Inc., the weakest of Wall Street's firms, tumbled 16.59 percent by the end of the session.

And amid this uncertainty, analysts don't expect companies to be very optimistic about the future. By most accounts, lackluster second-quarter results are already factored into stock prices. That makes it even more important for corporate executives to manage expectations going forward.

For instance, the CEOs of both General Electric Co. and aluminum maker Alcoa Inc. -- the first of the Dow's 30 components to report -- issued lukewarm guidance. GE matched forecasts on Friday, while Alcoa surpassed them on Tuesday.

"Any guidance that management provides, from a self-serving standpoint, will be downbeat and cautious," Orlando said. "They will try to set the bar as low as possible to engineer an upside surprise in the third quarter."

Debates Over Helping Fannie and Freddie Awaiting Action

Fretting over Fannie and Freddie: Investors nervously await action to help mortgage giants.

Wall Street and Washington wrestled Friday with how to shore up mortgage giants Fannie Mae and Freddie Mac, two troubled pillars of the economy whose failure would deal a devastating blow to the already crippled housing market.

As investors grew more convinced that only some type of government bailout could rescue the firms, Treasury Secretary Henry Paulson said the focus was to support the pair "in their current form" without a takeover.

The government was considering giving Fannie and Freddie access to the Fed's emergency lending program as one option to prop up the firms, said Sen. Christopher Dodd, D-Conn., citing conversations with Fed Chairman Ben Bernanke and Paulson.

A Fed spokeswoman said the central bank had not talked with Fannie and Freddie about the emergency lending program. The spokeswoman declined to discuss any other options being considered.

Both companies issued statements late Friday calling their financial positions solid. Freddie Mac said it did not see an immediate need to raise fresh money, and said other options included cutting its annual shareholder dividend, which costs $650 million a year.

Investors drove Fannie and Freddie shares to 17-year lows before the stocks recovered somewhat. The turmoil, combined with a new high for oil prices, helped send the Dow Jones industrials briefly below 11,000 for the first time in nearly two years. The Dow finished down about 1 percent at 11,100.54.

Fannie and Freddie were created by the government to provide more Americans the chance to own a home by adding to the available cash banks can loan customers. Shares of both companies are publicly owned.

Their importance to the housing market and overall economy is hard to overstate: Fannie and Freddie either hold or back $5.3 trillion of mortgage debt, or about half the outstanding mortgages in the United States. "Without them, our economy would collapse," Piper Jaffray analyst Robert P. Napoli said in a note to clients.

In the mortgage industry, the prospect of doing business without Fannie and Freddie is truly frightening. "The cost of borrowing would go up dramatically," said Steve Habetz, president of Threshold Mortgage Co. in Westport, Conn. "We would be going back to dark ages where a homebuyer would be hoping that a local bank would (have enough resources) to make the loan that it will keep on its books."

Published reports suggested the government was considering taking over one or both of the companies and running them itself. President Bush met with senior economic advisers and said Paulson had assured him that Paulson and Federal Reserve Chairman Ben Bernanke "will be working this issue very hard."

Wall Street sent the companies' stocks lower nonetheless. Freddie Mac shares were down 25 cents, or 3.1 percent, to $7.75. Fannie Mae shares were down $2.95, or 22.4 percent, to 10.25. "I think everybody's just holding their breath in expectation that something substantive from the government will happen today or over the weekend," said Karen Shaw Petrou, managing partner of consulting firm Federal Financial Analytics.

Analysts also suggested the problems had as much to do with market perceptions than any fundamental change in the two companies' finances. One report from Citigroup titled "Fear Begets Fear" called the sell-off "overdone."

The government has several options that stop short of a dramatic takeover. The Federal Reserve could provide emergency loans, or take on either company's mortgage-backed securities in an effort to reassure the market.

Under a government takeover, operations would continue at Fannie or Freddie, but shareholders would probably see their investments erased, and the companies' ability to support the mortgage market could be reduced.

"Typically when this happens the business is a shell of its former self," said Louisiana State University banking professor Joseph Mason. "Shareholders aren't going to like it, managers and directors aren't going to like it, but it's not about whether they like it."

The mortgage giants could face a replay of the near-collapse in March of investment bank Bear Stearns Cos. A crisis of market confidence can make it difficult to raise day-to-day operating cash through routine debt sales. The chief regulator of Fannie and Freddie, the Office of Federal Housing Enterprise Oversight, said on Thursday that the two companies were "adequately capitalized."

Congress created Fannie, the Federal National Mortgage Association in 1938 and Freddie, the Federal Home Loan Mortgage Corp., in 1970. They were designed to buy mortgages and bundle them into securities for sale to investors worldwide, making home ownership affordable for more Americans. Under a 1992 law, they have less strict standards than commercial banks for the financial cushions they must hold to protect against risk.

Paul Miller, an analyst with Friedman, Billings, Ramsey & Co., said neither company is in as dire a financial position as Bear Stearns was in the spring -- making investors nervous no action will be taken over the weekend to shore them up. He said Fannie and Freddie could soothe market fears by selling more shares of stock to investors and raising cash. "I hope that they raise capital and they raise a lot of it," he said.

Congress is moving closer to completing a housing rescue package that would create a new regulator for Fannie and Freddie and tighten controls over them. The bills would also permanently raise the limit on the loans they can buy.

Oil Breaks Yet Another Record $147

Crude briefly jumps past $147 on Middle East tensions; heating oil, gasoline also hit records.

It's only July, but it might be time to start loading up on blankets and sweaters. Oil spiked to a new trading record as hostilities rise between the West and Iran -- raising the likelihood that this winter's heating bills will be the priciest yet.

Crude oil's brief jump past $147 a barrel Friday arrived not only as the United States and Israel view Iran as a growing threat, but also as the U.S. dollar fell and worries erupted over possible supply disruptions in two other major oil-producing nations: Nigeria and Brazil.

Those factors contributed to new all-time trading highs in crude, gasoline and heating oil. It looks like $4-a-gallon gasoline might be here to stay, and that heating oil costs might cause further problems for consumers as the weather gets colder. Futures prices for natural gas turned lower Friday, but are still about twice as high as a year ago. "If you think your gasoline bills are expensive now, wait till you get your home heating bill this winter," said Stephen Schork, an analyst and trader in Villanova, Pa.

Heating oil is used mostly in the Northeast United States; homes in most other parts of the country use natural gas. It's possible for people to cut back on heating as they do on driving, but it's not easy to slash the bill significantly.

"We've been building these ridiculous McMansions over the past few years. It's harder to trade in a McMansion than it is an SUV," Schork said. "But you can turn your thermostat down and throw on a sweater."

Political unrest in oil-producing regions -- along with production cutbacks by refineries and fairly resilient demand for diesel fuel -- have been keeping energy costs high. Iran, which has long been under U.N. scrutiny for its uranium enrichment program, has been testing missiles this week, including a new missile capable of reaching Israel.

On Thursday, Secretary of State Condoleezza Rice warned the oil-producing nation that the United States will defend its allies, and Iran responded with another missile launch. Neither the United States nor Israel has ruled out a military strike on Iran. Then on Friday, there were rumors of Israeli military exercises taking place in Iraqi air space. The rumors were reportedly denied by Israeli officials.

"The war of words is quite heated," said Michael Lynch, president of Strategic Energy & Economic Research Inc. in Winchester, Mass. "And it raises the possibility of some serious problems in the area -- either the cutoff of Iranian exports, or Iranian strikes on tankers in the Strait of Hormuz." About 40 percent of the world's tanker traffic passes through the Strait of Hormuz.

Meanwhile, Brazilian oil workers were threatening to go on a five-day strike next week unless the state-run oil firm Petrobras gives them an extra day off at the end of their 14-day shift. Those supply worries added to those sparked Thursday when Nigeria's main militant group said it would resume attacks in the oil-rich region.

Light, sweet crude for August delivery soared to an all-time high of $147.27 a barrel before settling at $145.08, up $3.43. That's slightly below last Thursday's settlement record of $145.29 a barrel.

Meanwhile, the dollar weakened against other major currencies Friday. Because oil is bought and sold in dollars, oil's rise has not been as severe for countries with stronger currencies; meanwhile, traders have been using commodities as a hedge against the tumbling dollar.

Weekend's Featured: Worsening Food Crisis Because of Climate Change

Climate Change Will Worsen World Food Crisis: UN Climate Chief.

The global food crisis will only worsen because of climate change, the U.N. climate chief said Friday, urging leaders of the world's richest countries meeting in Japan next week to set goals to reduce carbon emissions within the next dozen years.

Food security and soaring oil prices are likely to overtake climate change in the priorities of the G-8 meeting starting Monday, though global warming was the theme set by the host, Japanese Prime Minister Yasuo Fukuda.

Food and global warming are interconnected, said Yvo de Boer, executive secretary of the U.N. Framework Convention on Climate Change. "They are not competing with each other on the international agenda."

"It is absolutely right that the food issue is receiving a lot of attention. That is a human crisis that's out there right now," De Boer said in a telephone interview from his office in Bonn, Germany. But in the long term, climate change will bring still higher food prices, worsening water problems and more drought. Ignoring the issue "will get you into deeper trouble down the road," he said.

De Boer said it was uncertain whether the industrialized countries would firm up the goal adopted a year ago to "consider seriously" halving greenhouse gas emissions by 2050. But he said it was important to discuss more immediate goals. Knowing what the world's biggest economies intend to do by 2020 is critical for developing countries and business investors, he said.

"If you look at the signs of investment direction that the private sector is crying out for, that is the issue that is most critical," he said. He acknowledged, however, he expected no conclusions on emissions goals for 2020.

A Nobel prize-winning panel of U.N. scientists has said emissions must level off within the next 10-15 years and then start to dramatically decline to avoid a rise in average temperatures that could have catastrophic consequences.

Since the last G-8 meeting in Germany, oil prices have doubled to surpass $140 a barrel, and de Boer said soaring prices were already having an effect on climate issues. On the plus side, people were driving less, and renewable energy was winning more attention. For the first time, the International Energy Agency lowered its forecast for oil demand, he said.

At the same time, "very poor people who spend the bulk of their income on survival are not happy to see energy prices go up," he said. De Boer welcomed the move by the board of the World Bank on Tuesday formally launching two special investment funds for climate change that could raise up to US$10 billion.

The funds have been sharply criticized by some environmentalists who distrust the bank's environmental record and say the money should be put in the hands of de Boer's U.N. organization. "The Bank's new climate funds will undermine U.N. climate talks, increase debt and pay polluters," said the Friends of the Earth in a statement Friday.

De Boer said, however, the bank's funds had a clause that will phase them out when a new financial structure is adopted in a climate change treaty. That accord should be negotiated by the end of next year.

More than $200 billion will be needed annually by 2030 to bring the world's emissions down to 1990 levels — and still more will be needed to reduce that by half over the next 20 years, he said. "We will have to mobilize every possible financial channel to meet that challenge," he said.

Weekend's Featured: EU Needs to End Its Energy Dependence on Russia

European Union Needs to End Its Energy Dependence on Russian Gas.

The European Union should free itself from its dependence on Russian gas by developing renewable and nuclear energy, the former head of the International Energy Agency told EU ministers Saturday.

"We need to give ourselves a flexibility that we are missing," Claude Mandil told the European bloc's 27 energy ministers at an informal meeting on the outskirts of Paris. "We need more energy efficiency, more liquefied natural gas, more renewable energy, more nuclear energy," he told the ministers, who are wrapping up a three-day gathering that also included environmental ministers.

Mandil, a French official who headed the IEA from 2003 to 2007, also said European nations had got themselves into an "awkward position" politically vis-a-vis their eastern neighbour. "We are horrified at the thought that there might be lack of Russian gas, that we won't be able to get it, and at the same time we are being very aggressive verbally to Russia. Let's stop provoking Russian sovereignty, claiming that we can dictate Russian behaviour on energy on their own territory," he said.

Against the backdrop of record energy prices, reducing the EU's dependence on Russian gas has become an major focal point in the bloc's foreign policy. Russia has on several occasions reduced or cut altogether gas supplies to its neighbour Ukraine, raising concerns in the EU countries about Moscow's reliability as an energy supplier.

The bloc has been busy since November 2006 working on an energy partnership with Azerbaijan, inking an accord with Kazakhstan, reviving relations with Libya and working on a deal with Algeria.

To date, however, most of these discussions remained stalled, according to energy analysts. Under current estimates, by 2030 the EU will not be able to avoid becoming more dependent on Russian gas, which already in 2005 accounted for 46 percent of their imports.

Mandil spoke at the invitation of French environment and energy minister Jean-Louis Borloo, who is chairing discussions Saturday on biofuels and energy efficiency. France took over the rotating, six-month presidency of the European Union on July 1. "Energy security cannot be separated from the combat against climate change and the demands for economic growth," Mandil said.

The European ministers have placed energy efficiency at the heart of plans to ease the soaring cost of fossil fuels and help meet the EU's goals on climate change. Mandil also pointed to sharply divergent energy portfolios among the bloc's 27 nations, and highlighted the need for a cohesive policy and "solidarity" within the EU.

"Any attack on the security of one of the members should give rise to a reaction from the Union as a whole," he said. "But solidarity does not mean that member states should not be responsible for their actions. You can't expect your neighbour to sort things out for you -- you have to do it yourself."

No Serious Downturn for Asian Economies

High inflation pressuring Asian economies, but ADB president said region remains robust.

Soaring inflation is battering Asian economies and threatens to stifle growth, but the still-robust region isn't at risk of a serious downturn, said Asian Development Bank President Haruhiko Kuroda Friday.

Energy and food prices are hitting record highs and pushing up inflation -- 7.7 percent in China, 7.8 percent in India, 6.2 percent in Thailand and more than 20 percent in Vietnam. And rising food prices have set off riots and protests worldwide and raised fears about a global crisis that could drive millions into poverty and malnutrition.

The problem is particularly acute in Asia, which is home to one billion people who spend at least 60 percent of their income on food, Kuroda said at the Foreign Correspondents' Club of Japan.

Still, the ADB remains bullish on the region. It estimates 7.6 percent aggregate GDP growth this year for the region, though that figure may be cut by 1-2 percentage points when revised figures are released in September, Kuroda said on his way to the Group of Eight leaders' summit this weekend in northern Japan.

Food and energy prices are expected to figure prominently in discussions at the meeting. "For now, Asia and the Pacific -- the world's largest and fastest growing geographic region -- remains a stabilizing force," Kuroda said. "But it is tremendously important to respond to these new circumstances in a timely and appropriate manner to keep regional growth on track."

The Asian Development Bank, which was founded four decades ago to fight poverty in Asia, recently announced $500 million in emergency aid for poor countries struggling with soaring food prices. It will also double its lending to the agricultural sector in 2009 to $2 billion.

For Asian central banks, the issue presents a tricky monetary policy dilemma of controlling inflation without excessively sapping economic growth, Kuroda said. Central banks so far have been "successfully tightening monetary conditions in order to contain inflationary pressures" -- a trend that is likely to continue for awhile, Kuroda said.

"I'm reasonably confident that emerging economies in the region would be able to overcome current inflation and go back to more stable and sustainable growth," he said.

G-8 Battles With Worst Economic Outlook in Decade

G-8 leaders face worst economic outlook in at least a decade with surging prices, global slump.

Between surging oil prices, food inflation and a credit crunch that's depressed global growth, leaders from the Group of Eight economic powers face the gravest combination of economic woes in at least a decade when they gather next week.

The outlook has darkened dramatically since last year's summit in Germany, when the leaders declared the global economy was in "good condition" and oil cost $70 a barrel -- which seemed high at the time.

Since then, the U.S. subprime mortgage crisis has erupted, roiling markets and battering financial firms. Oil has doubled to above $140 and food prices have jumped, hurting the poor in particular and raising the threat of political instability. "Things have changed for the worse across the board," said Robert Hormats, vice chairman at Goldman Sachs (International) Corp. in New York.

Hormats argues that the economic problems now are more serious and widespread than during the Asian financial crisis of 1997-98, where the pain was largely limited to emerging markets. "Now you have a financial disorder where the epicenter is the U.S.," he said. And fuel and food inflation "are serious matters that affect large numbers of people."

Host Japan put global warming at the top of the summit's agenda, but the dilemma of how to respond to accelerating inflation and slowing global economic growth could grab the spotlight. Prime Minister Yasuo Fukuda has said he hopes the July 7-9 meeting at a hot springs resort in Hokkaido, Japan's northern island, will "show some direction" in tackling oil and food prices but stressed it was only "one step" in a longer process.

On oil, analysts are skeptical that the G-8 leaders -- representing the U.S., Japan, Britain, France, Germany, Russia, Italy and Canada -- will come up with much beyond urging major petroleum producers to boost output, reiterating the message of their finance ministers, who met last month in Osaka.

Foreshadowing possible disagreement among the leaders, the finance ministers were divided on where to assign blame for the run-up in oil prices. Germany, France and Italy held speculators largely accountable, while the U.S. and Britain said the focus needed to be on boosting production capacity that has barely kept up with growing global demand.

Soaring crude prices have already forced India, Malaysia, and Indonesia to cut subsidies and raise state-set prices on gasoline and other fuels. Last month, China hiked fuel prices as much as 18 percent.

At the same time, prices of corn, wheat, rice, soybeans and other farm goods have surged due to changing diets, urbanization, expanding populations, extreme weather, growth in biofuel production and speculation.

Spiraling fuel and food costs could drive millions into poverty, the Asian Development Bank has warned. In India, inflation has jumped to a 13-year high of 11.4 percent. On the food front, the G-8 leaders may announce an aid package or pledging agricultural investment in poorer countries, experts say.

The credit crisis and global market turmoil are sure to be discussed, but with central bankers absent the leaders will most likely avoid saying anything specific about interest rates and currencies. The European Central Bank raised its benchmark interest rate a quarter point Thursday, suggesting it saw inflation as a greater threat than slower growth.

Overall, the summit's main goal will be demonstrating confidence that they can "work through the oil crisis without causing the global economy to melt down," said Tom Cooley, dean of New York University's Stern School of Business.

Given the meeting's emphasis on climate change, the leaders could highlight the links between energy issues and global warming by stressing the importance of energy efficiency and alternative forms of energy, said Hormats of Goldman Sachs. "The key thing is not what they do at these meetings but what they do at home," he said.

Oil and energy have remained recurring themes at the annual summits, said Hormats, who participated in several of the first meetings, which started in 1975. The initial gathering came after the 1973-74 oil embargo, when fuel prices surged after Middle East oil producers cut off the U.S. and other countries supporting Israel. "We now have another oil crisis," Hormats said.

The summits were originally meant to focus on economic issues, but the agenda has expanded to include terrorism, Africa's development and the environment. The group's membership also has grown from six to eight, adding Canada in 1976 and more recently Russia in 1997.

But many argue that it should be expanded to include China, the world's fourth-largest economy, and other emerging powerhouses like India and Brazil -- especially to tackle global issues like energy and climate change.

"At what point will the G-8 realize we're no longer the steering committee for the world economy?" said Lael Brainard, a former deputy national economic adviser in the Clinton administration who attended several summits in the 1990s and now is a director at the Brookings Institution, a Washington think tank.

Already, the G-8 has been reaching out. It plans meetings with African leaders on the summit's first day, and later with leaders from China, India, Mexico, Brazil and South Africa -- countries that someday might be a part of the Group of 13. "These countries are critical to the solution of any of these problems," said Brainard. "I believe it's only a matter of time" until the club expands.

Oil Spikes to Another Record Above $145

Oil closes in on $146 per barrel after drop in US stockpiles and potential Iran conflict.

Oil prices neared $146 a barrel Thursday for the first time ever on reports of declining U.S. stockpiles and the threat of conflict with Iran. Comments by Saudi Arabia's oil minister suggesting his country had no immediate plans to boost production also lifted prices.

Expectations that the European Central Bank will raise interest rates later Thursday could further weaken the U.S. dollar and drive oil prices even higher, as investors turn to commodities as a hedge against a falling greenback, traders said.

By midday in Europe, light, sweet crude for August delivery rose $2.28 to a record $145.85 a barrel in electronic trading on the New York Mercantile Exchange. On Wednesday, the contract set a new closing record for floor trade at $143.57 -- a full $2.60 above the previous close.

The latest spike means a barrel of crude has gone up by more than 50 percent since the end of last year, when oil was going for $96 a barrel. In London, Brent crude futures rose to a trading record of $146.69 a barrel on the ICE Futures exchange before retreating to $146.07, up $1.81.

"Even though the rise of European interest rates has been priced into oil, an official announcement by the ECB will still add momentum to oil prices," said Victor Shum, an analyst with Purvin & Gertz in Singapore.

The push above $145 a barrel was seen as a last technical barrier to prices hitting $150, in what analyst Olivier Jakob of Petromatrix in Switzerland called "the Morgan Stanley self fulfilling prophecy." In early June, a prediction by Morgan Stanley analyst Ole Slorer that oil prices could reach $150 by the July 4 weekend caused the Nymex contract to jump nearly $11 in a single day.

Speaking Thursday in Madrid, Saudi Arabia's oil minister, Ali Naimi, left the door open for increased output, but said the kingdom's oil customers were satisfied and that no production growth was planned for now.

The Energy Department's Energy Information Administration said Wednesday crude oil supplies fell by 2 million barrels last week, or about 800,000 barrels more than analysts surveyed by the energy research firm Platts had predicted.

However, the report offered a mixed picture of energy use by the world's thirstiest oil consumer. Gasoline supplies unexpectedly grew by a considerable amount, and demand continued to slide -- suggesting record fuel prices are prompting a shift in American driving habits.

Ongoing rhetoric about possible attacks on Iran, the world's fourth-largest oil producer and OPEC's second-largest exporter, also left the market jittery. Traders are worried Tehran could try to halt shipments and seize control of the strategically important Strait of Hormuz if attacked by Israel or the United States. About 40 percent of the world's tanker traffic passes through the Middle Eastern choke-point.

Iran's foreign minister did not rule the possibility that Iran could try to restrict oil traffic in the strait if the country was attacked. "In Iran we must defend our national security, our country and our revolutionary system and we will continue to do so," Foreign Minister Manouchehr Mottaki said. Mottaki said he does not believe Israel or the United States will attack, however, calling the prospect of another war in the Middle East "craziness."

A senior U.S. military commander vowed to ensure that the strait remains open. "We will not allow Iran to close it," said Vice Adm. Kevin Cosgriff, commander of the 5th Fleet based in Bahrain, after talks with naval commanders of Persian Gulf countries in the United Arab Emirates. The saber-rattling has left energy traders on edge as they try to ascertain the likelihood of a Middle East flare-up and the effect it could have on the world's already tight supply of oil.

ECB Hikes Rate to 4.25%

European Central Bank raises benchmark interest rate to 4.25 pct amid inflation pressure.

The European Central Bank raised its benchmark interest rate Thursday by a quarter percentage point to 4.25 percent in an effort to reign in escalating inflation in the 15-nation euro zone.

The move comes despite worries in some quarters that it could dampen growth. Bank president Jean-Claude Trichet was expected to explain the decision at a news conference, with attention focusing on whether more increases are coming.

Trichet has stressed that his main objective is to keep prices stable, and all but promised an increase this month at last month's meeting. But he has also suggested that repeated interest rate hikes are probably not likely.

Inflation has been troubling central banks around the world as commodity prices including oil and food have spiked in a surge of new global demand. While higher interest rates slow inflation, they can also slow economic growth as money becomes more expensive to borrow; Trichet appears to have targeted inflation as the bigger threat.

At the ECB's June meeting, Trichet said members of the bank's governing council stated a case for raising rates to combat inflation even then. On Monday, the EU statistics agency Eurostat said inflation in euro nations hit a record 4 percent in June, double the ECB's inflation target of below or around 2 percent.

The Bank for International Settlements -- a sort of central bank for central banks -- also said Monday that world headline inflation has risen significantly to 4.75 percent. Higher euro zone interest rates tend to send its currency higher against the dollar as investors park money where it earns more interest. Meanwhile a sinking dollar generally boosts the price of oil, which is denominated in the U.S. currency, as more buyers move in.

Earlier Thursday, oil reached another record high. Light sweet crude oil for August delivery on the New York Mercantile Exchange.rose $2.28 to a record $145.85 a barrel in electronic trading by midday in Europe.

"The fact that a hawkish note from the ECB today could hit the dollar hard and in turn push oil prices to fresh record highs and on toward that massive $150 a barrel level also needs to be taken into account," said James Hughes, a currency analyst with CMC Markets in London. "Couple this with the likes of the euro zone retail sales data and there's going to be an awful lot to digest in the near term," Hughes said.

Bush Attends His Final G-8 Summit

Final Bush G-8 summit may be harmonious amid shared economic woes and eased Iraq tensions.

The issues are as difficult as ever, but the conditions are likely to be more conducive to agreement as President Bush attends his eighth and final economic summit of industrial democracies.

The annual Group of Eight meeting, which begins Monday on the northern Japanese island of Hokkaido, comes amid economic turmoil in most of the member nations, as well as political uncertainty for many of the leaders. Oil prices are hitting new record highs and worries about inflation are mounting. Like the United States, most of the nation's major trading partners are experiencing slow growth and market declines.

And Bush isn't the only one suffering low approval ratings. In fact, the president may have more clout at the gathering than his own low approval number -- 29 percent in an AP-Ipsos poll conducted in mid-June -- and the vast unpopularity of the Iraq war would suggest.

For one thing, the just-below-the-surface animosity toward him -- based on his Iraq moves and perceived hostility toward what then-Defense Secretary Donald H. Rumsfeld derisively described as "old Europe" -- is now mostly gone.

His two biggest detractors on Iraq -- Germany's Gerhard Schroeder and France's Jacques Chirac -- are gone from power, replaced by leaders who are much more U.S.-friendly: French President Nicolas Sarkozy and German Chancellor Angela Merkel.

One old partner in the Iraq war, Tony Blair, is gone, replaced as British prime minister by Gordon Brown. Brown, who is having political problems at home of his own, so far has generally had good relations with Bush. And another Iraq war ally from the past, Silvio Berlusconi, who was thrown out of office in part because of that support, is back once more as Italian prime minister and G-8 member.

"It's a G-8 with a lot of political leaders who are pretty weak," said Michael Green, a former Bush assistant on Asian affairs and now an Asia specialist at the Center for Strategic and International Studies.

Still, Green said, "I don't think that the president's potential leadership role or stature is as diminished as you might think in this forum, in part because he knows them all quite well. They have a working relationship. They have a common interest in demonstrating that this forum can do something."

The gathering includes the heads of states of the U.S., Japan, Britain, Germany, France, Italy, Canada and Russia. Vladimir Putin, whose relationship with Bush was at times contentious, is no longer a head of state and is not expected to attend the session, even though his influence and authority remain in Russia in his new post as prime minister. Bush has said he looks forward to meeting Putin's hand-picked successor, President Dmitry Medvedev, on the sidelines of the summit.

For his part, Bush, now a lame-duck leader, says a top priority is urging summit partners to make good on prior pledges to help poor and developing nations address challenges from health care to education to corruption. "We need people who not only make promises but write checks," Bush said at a Rose Garden news conference on Wednesday previewing the summit.

The host, Japanese Prime Minister Yasuo Fukuda, faces his own domestic problems. His government has suffered from support ratings as low as 20 percent amid constant brinkmanship between ruling and opposition parties, including an unprecedented no-confidence vote for him in the upper house in June.

For Fukuda, who got to set most of the agenda for the gathering, the overriding issue is climate change. He would like to come out of the meeting with an agreement on 50 percent reductions in so-called greenhouse gases by 2050.

Bush said he supports efforts for the group to agree on long and short-term goals, with national plans to achieve them. But he also told reporters, "Look, we can't have an effective agreement unless China and India are a part of it. It's as simple as that. I'm going to remind our partners that's the case."

China and India are playing increasingly important roles in the world economy, raising fresh questions about the Group of Eight's relevancy as now constituted. In 2001 at Bush's first meeting of the exclusive club, the members pretty much lived up to their billing as the world's leading industrial democracies.

No more. India, the world's most populous democracy, now has the world's fourth biggest economy, according to a World Bank rundown of the gross domestic product of countries based on purchasing power.

The U.S. remains the world's biggest economy, with Japan still at No. 2. But in third place now is China. Also, Brazil's economy is bigger than that of G-8 members Italy and Canada. In fact, the economies of Spain, Mexico and South Korea are bigger than that of G-8 laggard Canada, according to the World Bank report.

Bush spearheaded an effort to bring these and other fast-growing economies into the process, with a "major economies meeting" now scheduled for next Wednesday at the summit's conclusion.

Some want to see the group itself expanded to include China, India, Brazil and other major economies. "If we don't take this step, G-8 risks becoming increasingly irrelevant," said Richard Burt, a former U.S. ambassador to Germany. Instead of being able to deal with sensitive economic problems, "you get feel-good declarations," Burt said.

US Paulson Expects No Quick Fix to Calm Oil Prices

US Treasury chief says there will be no quick fix to calm record oil price.

U.S. Treasury Secretary Henry Paulson warned Thursday that rising oil prices are likely to prolong the world economic slowdown. Speaking at a London news conference, he said there will be no quick fixes to calm soaring oil prices which hit a trading record, above $145 a barrel on Thursday.

"I think that the oil prices are a strong head wind and at this level, they have got a high risk that they are going to prolong the slowdown," Paulson said, winding up a European tour. Paulson was holding talks on Thursday with British Treasury chief Alistair Darling and banking executives following meetings in Russia, Germany and others in Britain.

British Prime Minister Gordon Brown, who met Paulson on Wednesday, told a parliamentary committee that he agreed that oil prices are likely to continue rising. "If demand exceeds supply and is likely to exceed supply for years to come, people will expect the price to rise," Brown told the House of Commons liaison committee.

Paulson and Darling told reporters that the United States and Britain urgently need to end their addiction to oil, reduce dependence on foreign energy imports and promote investment in renewable alternatives. However, Paulson also conceded there is unlikely to be any short term impact to lower prices.

Saudi Arabia's oil minister, Ali Naimi, said Thursday that his country has no immediate plans to boost production, despite the new price record. "I don't believe this situation avails itself of quick fixes," Paulson said. "But that doesn't mean we shouldn't be focused on this intensely right now, in terms of taking measures that will lead to changes."

Paulson and Darling called for more transparency from oil producers about their reserves and urged the Group of Eight industrialized nations to consider how to increase oil production at a summit in Japan next week. "There are questions in the short term about the ability to meet the demand," Paulson said.

Darling said action to lower dependence on foreign oil must take place faster than previously anticipated. Nations need to "move far more quickly than many people thought was necessary," he said.

Attack on Iran Would Provoke a Fierce Reaction

Iranian minister says any attack would provoke a fierce reaction.

An attack on Iran would provoke a fierce response, the country's oil minister warned Wednesday at the World Petroleum Congress in Madrid. Minister Gholam Hossein Nozari, however, said Tehran would not cut oil deliveries and would continue supplying the market even if struck by Israel or the United States.

Tehran "is not going to be quiet," if attacked, Nozari told reporters. It's "going to react fiercely, and nobody can imagine what would be the reaction of Iran," he added. Nozari spoke outside the 19th World Petroleum Congress after a presentation on Iran's oil and gas industry to a packed audience, including representatives of European and U.S. energy companies.

Tehran is under U.N., U.S. and European sanctions because it has defied U.N. Security Council demands to suspend its uranium enrichment program. But with oil supplies tight and prices at unprecedented levels, the energy industry remains tempted by the possibilities of investing in Iran, OPEC's second largest oil producer and No. 2 in terms of the world's natural gas reserves.

President Bush has repeatedly said that a military strike on Tehran is possible as a last-resort if Iran continues to pursues uranium enrichment and fails to heed other Security Council demands. Israel too has warned that it is ready to hit the Islamic Republic's nuclear installations.

ABC News quoted an unnamed senior Pentagon official warning of an "increasing likelihood" that Israel will strike Iran's nuclear facilities before the end of the year. Such an attack could prompt Iran to retaliate, potentially disrupting oil shipments from the strategically vital Persian Gulf.

Nozari said such any attack would send oil prices further into uncharted territory. "We don't think the wise people in the world even think about any action like that," he said. "Can you imagine ... what would be the result in the oil market?" Oil prices hit a record high above $143 this week.

But Nozari indicated Iran would not withhold its crude from the market even if attacked, although other officials have indicated otherwise. "Iran has always been a reliable source of supply to the market, and Iran remains a (reliable) source of supply," he said.

He dismissed suggestions that the standoff over Iran's nuclear program has diminished Iran's oil and gas exports, despite U.S. sanctions that prohibit American companies from doing business with Tehran and growing pressure from Washington on other countries to follow suit. "We have increased our production in the past two years by 250,000 barrels a day and we have added to the production of our gas," he said.

Weak Dollar Pushes Oil to Record Above $143

Oil rises above $143 a barrel on falling dollar, tensions in the Middle East.

Oil prices surged above $143 a barrel for the first time ever Monday, as a weaker dollar spurred investors to seek refuge in dollar-denominated oil futures to hedge against inflation.

"The main factors behind the rise today are the U.S. dollar remains fragile and geopolitical tensions, particularly surrounding Iran," said David Moore, a commodity strategist at the Commonwealth Bank of Australia in Sydney. "That's unsettling for the oil market." The European Central Bank may raise interest rates at its next meeting on Thursday, a move that would help strengthen the euro against the dollar, Moore said.

Light, sweet crude for August delivery rose $3.46 to $143.67 a barrel in electronic trading on the New York Mercantile Exchange, by midday in Europe. On Friday, crude futures spiked to a record $142.99 a barrel in New York before closing at $140.21. In London, Brent crude futures rose $2.87 to $143.18 a barrel on the ICE Futures exchange in London.

Analysts said daily trading volumes for Nymex oil would probably continue last week's trend and stay on the light side, leading to higher volatility during the trading sessions. "We would not expect liquidity to be much better this week, as it will be a short trading week due to the July 4 weekend," Olivier Jakob of Petromatrix in Switzerland said in a research note.

Worries about tight oil supplies and growing global demand are also major factors in the doubling of oil prices since last year, Moore said. Traders were digesting reported comments from the commander of Iran's Revolutionary Guards, who warned that if his country is attacked, Tehran would strike back by barraging Israel with missiles. In a report published Saturday in the conservative Jam-e-Jam newspaper, Gen. Mohammad Ali Jafari said that if Iran were provoked, it would also move to control a key oil passageway in the Gulf.

Iran is the world's fourth-largest oil exporter and about 60 percent of the world's oil passes through the strategic Strait of Hormuz. The report comes after the disclosure of a recent Israeli military exercise over the Mediterranean Sea that was seen as sending a message to Iran to curb its nuclear ambitions.

The dollar has weakened on expectations the Federal Reserve Board won't soon raise interest rates as the U.S. economy struggles with low growth. The Fed left its benchmark rate unchanged last week. The dollar dipped to 105.15 yen on Monday from 106.12 late Friday, while the euro was slightly higher at $1.5813.

"ECB President Jean-Claude Trichet's hawkish stance (on) inflation" could mean the dollar may be headed for further weakness against the euro "and that's not bearish for oil," said The Schork Report edited by U.S. analyst and trader Stephen Schork.

A falling U.S. stock market has also led investors to seek higher-yielding investments such as oil and other commodities. The Dow Jones industrial average has fallen to its lowest level in nearly two years -- and is down nearly 20 percent since its peak in October.

Bank for International Settlements Expects Deeper Economic Downturn

Central banks' banker says world economy could see deeper, longer downturn than most expect.

The global economy could face a deeper downturn than many currently expect amid rising inflation and the turmoil on financial markets, the Bank for International Settlements said at its annual meeting Monday.

"In the aftermath of a long credit-driven boom, it would not be surprising to see turmoil in financial markets, slowing real growth and temporarily rising inflation," the BIS said in its annual report. "While difficult to predict, their interaction does appear to point to a deeper and more protracted global downturn than the consensus view seems to expect."

The Basel-based bank added that the current "consensus view is still that the global economy will slow only modestly further in 2008" and that growth continued to be strong in the euro zone, Japan, and major emerging market economies.

Often called the central bank of central banks, the BIS said during its last fiscal year central banks worldwide reacted to the financial and monetary policy situation differently, and that given their countries' different economic situations, a "one size fits all" monetary policy can't necessarily be predicted or suggested.

The bank said that with inflation rising, a global bias toward higher interest rates was probably appropriate. Higher interest rates can cool inflation, but run the risk of lower growth. The bank warned against a cookie-cutter approach to interest rates from country to country, and warned than an excessive tightening exacerbated by the credit contraction caused by the crisis over mortgage-backed securities in the United States could worsen any downturn.

"Unfolding developments at the core of the global financial system have, however also created great uncertainty about the future economic prospects," the bank said. "Banks in several advanced industrial economies have been tightening lending standards, and thus a generalized squeeze in the availability of credit remains a distinct possibility."

The European Central Bank has indicated it could raise its key interest rate from the current 4 percent "by a small amount" as soon as this week, in an effort to combat rising inflation in the 15-nation euro zone, which is well above its preferred level of at or near 2 percent.

The BIS said it would have been best to avoid the large buildup of loose credit in the first place and urged new regulatory frameworks to prevent a recurrence. The BIS is a center for economic and monetary research, and coordinates regulations in the fields of financial services to promote international financial stability. All of BIS' capital is held by central banks BIS' customers include international central banks, as well as international organizations..

The BIS board of directors has 20 members and is currently chaired by Jean-Pierre Roth of the Swiss National Bank. Six non official directors are the central bank governors of Belgium, France, Germany, Italy and the United Kingdom as well as the chairman of the Board of Governors of the U.S. Federal Reserve System.

EU Inflation Hits 4% Record

Euro inflation hits new record high of 4 percent as consumers dodge big purchases.

Yearly inflation in euro nations hit a record 4 percent in June, the EU statistics agency Eurostat said Monday. Soaring prices for fuel and food are raising pressure on the European Central Bank to raise interest rates for the first time in a year when it meets this week.

Inflation is Europe's biggest economic headache as consumers pay far more at the gas pump and food, and steer clear of major purchases. ECB officials have signaled they may hike borrowing costs from 4 percent to 4.25 percent to try to cool prices.

This would be the first time they have shifted the rate since June 2007 despite major cuts from the U.S. Federal Reserve and the Bank of England, who moved to encourage reluctant banks to lend in the wake of a credit market crisis.

The inflation figure for June tops the previous record of 3.7 percent in May, far above the ECB's recommended guideline of just under 2 percent. Eurostat says inflation has not been higher since it started keeping records for each euro nation in 1996.

The European economy appears to be slowing sharply after a brief boom -- triggered by exports to a swelling global economy -- cut jobless rates to record lows. Confidence in the 15 nations that share the euro dropped to a near three-year low in June and inflation is now a major worry.

Oil prices have quadrupled in the last seven years, hitting Europeans hard because they also pay heavy taxes on fuel that can cost them some 80 euros ($126) to fill up a tank of a passenger car. Fishermen and truck drivers say that surging fuel prices are threatening their livelihoods, and have protested, sometimes violently, in recent weeks.

Weekend's Featured: Oil Twists Determine Market Jittery This Time

Record crude prices biggest difference from last market downturn in 2002.

Investors who remember the stock market's steep and prolonged decline earlier this decade may be wondering if the recovery from Wall Street's current morass will also take several years to accomplish.

The dot-com bust, terrorist attacks, recession and corporate wrongdoing combined to send stocks plunging in 2002. Today's market has some similar problems, in particular the troubled economy and a devastated industry -- this time, it's the financial sector. But there's one variable that may be impossible to resolve: oil prices that have more than doubled in a year and show no signs of abating.

"The economic gloom is far greater today then it was in 2002 because we have concern about worldwide inflation and what oil is going to do to the economy," said Alfred E. Goldman, chief market strategist at Wachovia Securities. "The problem for investors is when all of this is going to end, and the bottom line is nobody knows. Nostradamus wouldn't have known, neither would Albert Einstein."

Crude oil has risen nearly 44 percent in the past five months, and OPEC's president said this week he believes oil could rise to between $150 and $170 a barrel this summer; it closed at a record high past $142 a barrel on Friday. That's still lower then the $200 peak recently forecast by economists at investment bank Goldman Sachs.

The uncertainty about where energy prices are going makes it harder for economists to make forecasts. Many believe the high price of energy will eventually reverse after oil goes so high that demand shrivels and supplies increase -- but calculating a timeline is difficult. That leaves investors "just along for the ride," Wachovia's Goldman said.

Wall Street saw a return this past week of the volatility that had pummeled stocks since last summer but disappeared for a while during the spring. Investors were rattled not only by the uncertainty about oil's impact, but discouraging outlooks for the financial, high-tech and automotive industries.

This past week, the Dow Jones industrials plunged 4.2 percent, the Standard & Poor's 500 shed 3 percent and the Nasdaq composite index fell 3.8 percent. The market is worried about the direct correlation between the cost of energy, especially gasoline, and consumers' spending habits. Higher pump prices mean Americans might think twice about discretionary items like going out to dinner, buying new clothes, or paying for a new big screen television. Or buying a new car.

Consumer spending accounts for more than two-thirds of U.S. economic growth. Though there are no signs that spending has dried up entirely, many market observers fear it could happen -- especially as gasoline hovers near a national average of $4.08 per gallon.

Wall Street's low point in 2002 was attributed to a host of problems such as the accounting fraud at corporate names like Enron, Adelphia Communications and WorldCom. Global tensions after the Sept. 11, 2001, terror attacks also hung over the market. There was still fallout from the near-collapse of the high-tech industry, and the country's collective problems had also sent the economy into recession.

But, with oil at about $30 a barrel, inflation was under control. The market's troubles were not seen as a systemic risk, as they are today. "I knew we'd get through all the problems in 2002 because it was your plain vanilla, fairly shallow recession," said Stephen Leeb, president of New York-based Leeb Capital Management and author of "The Oil Factor."

"Right now, I think we're in one of the most threatening crisis of our history, and it is going to take a Manhattan Project to figure out what to do and it will take billions of dollars to implement it," he said, referring to the program during World War II to build the atomic bomb. "It can't immediately be cured because we need long-term answers."

The Federal Reserve, which kept interest rates on hold this past week, is well aware of the problem of expensive oil. The Fed statement released after its rate decision said "the rise in energy prices are likely to weigh on economic growth over the next few quarters."

But, Leeb and others believe this isn't something the Fed can solve on its own. The central bank's weapon against inflation is raising interest rates, which runs the risk of slowing down an already fragile economy. The higher oil goes, the more important of an issue it will become during the election cycle: "Washington needs to actively take charge if we want to turn this situation around," he said. "People are recognizing that the Fed is now in a total box."

Fed Helps Big Firms to Prevent Financial 'Contagion'

Fed: Emergency help for Wall Street was necessary to avert "contagion" of financial system.

The Federal Reserve was scrambling to prevent a "contagion" from infecting the nation's financial system when it took unprecedented actions to back a Bear Stearns rescue package and provide emergency loans to big Wall Street firms.

The Federal Reserve released documents Friday providing insights into its private deliberations in March that led to those controversial decisions. The Fed's actions came when credit and financial problems were intensifying, threatening to paralyze the entire financial system and plunge the economy into a recession.

Given the financial markets' fragile condition at that time, the Fed said it felt compelled to intervene because an "immediate failure" of Bear Stearns would bring about an "expected contagion."

Fed Chairman Ben Bernanke and his colleagues initially moved on March 14 to provide temporary emergency financing to investment bank Bear Stearns Cos. through an arrangement with JPMorgan Chase & Co. Two days later, as the nation's then-fifth-largest investment bank teetered on the brink of bankruptcy, the Fed agreed to provide backing for up to $30 billion for a deal in which JPMorgan would take over the troubled company.

That same day -- March 16 -- the Fed said it would let big Wall Street firms go directly to the Fed for emergency loans, a privilege only commercial banks had previously enjoyed. It was the broadest use of the Fed's lending powers since the 1930s.

The Fed's decision to take this action was "based on recent, rapidly changing developments," the documents said. "These developments demonstrated that there had been impairment of a broad range of financial markets" that Wall Street firms rely on for financing.

There was fear that other Wall Street firms could fall into jeopardy, sending problems cascading through the financial system. Democrats in Congress and other critics contend the Fed's actions are akin to a government bailout and are putting billions of taxpayer dollars at risk.

However, Bernanke has defended the actions, and in appearances on Capitol Hill has said he doesn't believe taxpayers will suffer any losses. The Fed's financial lifeline in JPMorgan's takeover of Bear Stearns was subsequently changed to $29 billion and -- most recently -- to $28.82 billion.

The documents said the Fed, in discussions on March 16, believed the takeover -- and the Fed's involvement in helping to bring it about -- were "necessary to avoid serious disruptions to financial markets." The Fed said "many potential investors" had been invited to back Bear Stearns but the investment firm determined that JPMorgan was "the most suitable bidder."

Bear Stearns began to unravel last year when two hedge funds it managed collapsed because of heavy bets on subprime mortgage securities, which soured when the housing market fell into a deep slump. Along with other big investment banks, it was forced to take multibillion-dollar writedowns on the bad investments. Then rumors in mid-March about the company's cash position triggered a run on the investment bank that left it close to bankruptcy. Earlier this month, JPMorgan closed its acquisition of Bear Stearns, bringing to an end an 85-year-old institution.