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A measure of U.S. business activity rose from a 26-year low in December, as an index of costs dropped to the lowest in almost 60 years. Measures of inventories and production fell.

The Institute for Supply Management-Chicago said today its business index increased to 34.1 this month from 33.8 in November. Fifty is the dividing line between growth and contraction. A gauge of prices paid fell to 30.5, the lowest level since April 1949, from 50.7, as fuel costs declined.

Manufacturers are reining in production and costs as global demand slows. A drop in business investment threatens to prolong the U.S. recession that started a year ago this month.

“Further weakness is still ahead,” Ryan Sweet, an economist at Moody’s Economy.com in West Chester, Pennsylvania, said before the report. “Businesses are very reluctant to increase production given the drop-off in demand.”

The Chicago index was projected to fall to 33, according to the median forecast in a Bloomberg News survey of 46 economists. Estimates ranged from 29.8 to 42.1.

Another private survey showed home prices in 20 U.S. cities declined at the fastest rate on record, depressed by mounting foreclosures and slumping sales.

The S&P/Case-Shiller index declined 18 percent in the 12 months to October, more than forecast, after dropping 17.4 percent in September. The gauge has fallen every month since January 2007, and year-over-year records began in 2001.

Orders, Production

The Chicago report’s measure of new orders rose to 29.4 from 27.2 from in November. The production gauge fell to 31.7 from 34.3.

Order backlogs dropped to 25.6 from 28.2, while the employment index increased to 39.6 from 33.4.

The Labor Department may report Jan. 9 that employers cut 475,000 jobs this month, according to the median estimate in Bloomberg survey. Last month they eliminated 533,000 positions, the most in 34 years.

Initial jobless claims rose to a 26-year high of 586,000 in the week ended Dec. 20 payday cash loan.

Caterpillar Inc., the biggest maker of construction equipment, said Dec. 22 it will cut executive pay as much as 50 percent and suspend merit increases for management and support staff in order to trim costs. The company is offering voluntary buyouts to U.S.-based employers through Jan. 12 and will continue to close plants temporarily and cut jobs.

Manufacturing Report

The Institute for Supply Management is scheduled to release its December manufacturing report on Jan. 2. Economists surveyed by Bloomberg project the measure dropped to the lowest level since 1982.

Regional surveys have already signaled the manufacturing slump persisted this month. The Federal Reserve Bank of New York’s general economic index fell in December to the lowest level since records began in 2001, and the Philadelphia Fed’s index showed industries in that region contracted for the 12th time in 13 months.

The Chicago group’s measure of inventories dropped to 36.4 from 41.2 the prior month.

Auto industry suppliers are hard hit by declining car sales. Car and light truck sales fell to a 10.2 million annual pace in November, the slowest rate since October 1982.

President George W. Bush said Dec. 19 the government will extend $13.4 billion in emergency loans to General Motors Corp. and Chrysler LLC in exchange for the companies substantially restructuring their businesses. Both companies had said they were only weeks away from insolvency without an infusion of cash.

Yesterday the Treasury committed $6 billion to support GMAC LLC, enabling GM’s financing arm to expand lending to car buyers.

The U.S. entered a recession in December 2007, the National Bureau of Economic Research announced Dec. 1. Economists surveyed by Bloomberg earlier this month projected GDP this quarter would shrink 4.3 percent, the biggest contraction since 1982, and would remain negative through the first half of 2009.

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Oil prices fell more than $3 a barrel or more than 9% - one of the largest percentage drops ever - on a shortened trading session Wednesday that brought more signs that demand continues to wane.

U.S. crude for February delivery settled $3.63 lower to $35.35 a barrel from the previous day’s close of $38.98. Prices had been down $1.60 just before the report’s release. Oil trading closed at 1:30 p.m. ET because of the holiday.

Earlier, the U.S. government reported that supplies and products used to make heating oil rose more than expected last week. The buildup points to falling demand as cash-strapped consumers and businesses cut back on spending.

"The economic slowdown is just doing a lot more than people thought," said James Cordier, founder of commodities brokerage OptionSellers.com.

Personal spending slowed in November for the fifth month in a row, and jobless claims reached a 26-year high last week, according to government reports issued Wednesday.

Crude prices dropped suddenly in the last few minutes of the abbreviated session as investors hoping for a Christmas oil bonus waited till the last minute to get out of the market, according to oil analyst Stephen Schork, publisher of energy newsletter The Schork Report.

Oil price movements were also exaggerated because of the holiday week. "It’s a very thinly traded Christmas eve," he said no teletrak payday loan.

Supplies: The Energy Department said Wednesday that supplies of crude oil fell by 3.1 million barrels for the week ended Dec. 19.

Analysts had expected crude supplies to rise by 1.5 million barrels last week, according a survey by information firm Platts.

However, the government also said that fuel supplies had risen more than expected. Supplies of motor gasoline rose by 3.3 million barrels, and stocks of distillates, which are used to make diesel fuel and home heating oil, rose by 1.8 million, according to the report.

Investors were expecting a 900,000-barrel increase in gasoline supplies, and a 1.4 million barrel increase in supplies of distillates, according to the Platts survey.

The large build up in gasoline and distillate supplies indicates that demand continues to deteriorate. "There’s just no reason for refineries to chase oil, as we have much more than we need," Cordier said.

Crude prices could shed another $5 a barrel, he added.

All news is bad news in real estate right now. Have you recently bought a house anyway? Send your story and photos to realstories@cnnmoney.com and you could be featured in an upcoming article.  

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Japan’s inflation rose at the slowest pace in seven months in November as oil and commodity costs tumbled and the deepening recession weakened demand.

Consumer prices excluding fresh food rose 1 percent from a year earlier, less than 1.9 percent in October, the statistics bureau said today in Tokyo. The median estimate of 36 economists surveyed by Bloomberg News was for 1.1 percent.

Costs of fuel and commodities, which drove inflation to a decade high last quarter, are plunging amid a global slowdown. A deepening recession at home is also eroding demand, increasing the risk the world’s second-largest economy may slip into deflation next year, analysts say.

“Japan’s economy probably won’t grow for a while and that will continue to damp overall consumption, while crude oil prices are dropping at an unexpected pace,” said Mamoru Yamazaki, an international strategist at RBS Securities Japan Ltd. in Tokyo. “Japan’s prices are coming under mounting downward pressure.”

The yen traded at 90.45 per dollar at 8:36 a.m. in Tokyo from 90.46 before the report was published. Separate reports today showed the unemployment rate rose to 3.9 percent from 3.7 percent, job vacancies declined and households cut spending for a ninth month.

Crude oil has lost more than 70 percent its value since exceeding $147 a barrel for the first time on July 11. The yen’s 19 percent surge against the dollar since September is also making imports cheaper.

Slash Prices

Japanese retailers are competing to slash prices to lure cash-stripped consumers, who are pulling their purse strings as wage and job prospects deteriorate.

Seiyu Ltd., the local unit of Wal-Mart Stores Inc., this month announced a campaign to offer the lowest prices on grocery and household items. Aeon Co., Japan’s largest supermarket operator, this week cut prices of about 100 items, including toilet paper and cooking oil, by taking advantage of the yen’s strength payday loans.

Other reports also show inflation is fading. Wholesale price gains slowed for a third month in November and costs companies pay for services slid for a second month. Bank of Japan Governor Masaaki Shirakawa said this week inflation will moderate in coming months.

“We expect the headline CPI to fall over 2 percent year- on-year in summer 2009,” said Takuji Okubo, a senior economist at Merrill Lynch & Co. in Tokyo. “As the recession prolongs and deflation deepens into 2009, we think the BOJ needs to take a more innovative and radical policy.”

Pump Cash

The central bank lowered the overnight lending rate on Dec. 19 to 0.1 percent and offered to buy commercial paper and more government bonds to pump cash into the economy. The bank has pledged to explore other measures to ease the credit shortage and counter the deepening global recession.

The so-called output gap, a measure of the balance between supply and demand in the economy, fell 1.1 percent in the three months ended September, a second quarter of contraction. Economists say the gap, an indicator of deflation, will widen next year as the recession deepens.

A “widening output gap and falling asset prices could operate to deepen the deflation of general prices,” said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo.

Consumer prices excluding food and energy were unchanged in November. Core prices in Tokyo, where one in 10 Japanese lives, rose 0.8 percent in December from a year earlier, after climbing 1.1 percent in November, today’s report showed. Price trends in the capital tend to indicate future changes in nationwide inflation.

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China may need a second stimulus package focused on boosting consumption and helping the poor as the economy slumps before $4 trillion yuan ($585 billion) of infrastructure spending kicks in.

“China's economy is going through a shock period,” said Lu Ting, an economist at Merrill Lynch & Co. “The government must aid the unemployed and households in general to help people survive.”

China should cut taxes, do more to boost incomes, and follow Japan and Taiwan in handing out shopping coupons, economists at Merrill Lynch, China International Capital Corp. and Barclays Capital said. Announcing a package of measures could help to revive confidence as a slowdown deepens in the world's fourth- biggest economy.

“The government may announce a package at the start of next year to try to revive confidence,” said Xing Ziqiang, a Beijing- based economist for CICC. “That's when the economy may be at its worst.”

China can sustain a deficit of as much as 900 billion yuan next year, up from this year's budgeted shortfall of 180 billion yuan, to fund measures to boost consumption, according to Xing.

One measure would be to raise the threshold for individual income tax from 2,000 yuan, a proposal discussed at an economic planning summit this month, according to state media.

Spending Jolt

Another would be to issue shopping coupons, giving an immediate jolt to consumption, according to CICC's Xing. Taiwan announced a voucher scheme last month and Japan did the same in 1999.

The south-west city of Chengdu is giving 100-yuan coupons to 380,000 people, including low-income earners, the local government said this month, adding that it was the first Chinese city to do so savings account payday loans.

China's cabinet pledged Nov. 9, when it unveiled the infrastructure spending package, to boost incomes and consumption via measures including subsidies for the urban poor and farmers.

It may need to do more, faster, said Peng Wensheng, head of China research at Barclays Capital in Hong Kong.

“To stimulate consumption may be more difficult than boosting investment by directly increasing spending,” said Peng. “The government has to act early rather than late.”

Deepening Slump

China's economic slowdown is deepening because a slump in the property market and construction has coincided with waning overseas demand for the nation's toys and computers.

The World Bank forecasts a 7.5 percent expansion in 2009, the nation's weakest growth in almost two decades.

Last month, the lender said China needed to more quickly switch from investment, exports and industry to consumption and services as the drivers of growth.

Boosting spending on health, education and social welfare would aid low-income earners and “reduce the reluctance to consume,” it said in a report.

The National Development and Reform Commission, the nation's top economic planning agency, has proposed income-tax cuts, salary increases and larger housing subsidies, China's Economic Observer newspaper reported Nov. 23.

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Treasury Secretary Henry Paulson may ask Congress for the second half of the $700 billion bank rescue program, concerned that the deepening recession may spark further financial turmoil.

Paulson could soon exhaust the first $350 billion with the bailout that President George W. Bush’s administration has pledged for General Motors Corp. and Chrysler LLC. The Treasury chief is discussing with aides strategies to seek congressional approval for the rest of the Troubled Asset Relief Program, people familiar with the deliberations said.

“We’re far from out of this” financial crisis, said Joseph Mason, a Louisiana State University professor in Baton Rouge who previously worked at the Treasury’s Office of the Comptroller of the Currency. “It’s actually not hard to imagine a transition of power where Obama walks in on the tail end of a crisis” with no funds left in the rescue package.

Securing the extra money would give the Treasury a cushion in case another bank or insurer neared collapse. The obstacle: Democratic lawmakers have warned the Bush administration it must come up with a new effort to aid homeowners in danger of losing their properties.

Paulson hasn’t made a final decision. He continues to look at ways to use the money as well as when to move ahead, the people familiar with his plans said.

In a meeting with Bush last week, Paulson asked the president to publicly support a request for the $350 billion, a person familiar with the meeting said.

‘A Clear Justification’

President-elect Barack Obama urged U.S. regulators to take action as needed to preserve financial stability.

“It is important that the Treasury, the Fed and all of us do whatever is required to make sure that our financial system is stable and secure,” Obama said at a news conference today in Chicago.

He said that if Paulson decides his rescue efforts need more money, he’ll have to provide his reasoning.

“At the point where the Treasury comes forward” with a request for the remainder of the TARP, “I would expect that they would provide a clear justification for why they need additional dollars and how they intend to use it,” Obama said.

Treasury spokeswoman Jennifer Zuccarelli said no decisions have been made on whether to pursue the additional funds.

The Treasury hasn’t been shy about using its role helping bail out the auto companies as a potential negotiating tactic to get the additional funds, lobbyists and congressional staff said.

Addressing Viability

Paulson said two days ago that U.S. automakers will receive federal aid as soon as the government can draft a suitable plan that ensures the companies’ long-term survival. A possible cash infusion of $15 billion for GM and Chrysler would mean that Paulson has allocated the full first half of the TARP that Congress approved in October.

Treasury aides have also been working on programs designed to ease the housing crisis. While most Republicans on Capitol Hill are opposed to giving Paulson any more money, the Democrats could take Paulson’s actions on housing and the car industry as positive steps, and not mount a campaign against the request, lobbyists and congressional staff said guaranteed pay day loans.

Engulfing the Treasury chief are concerns that the government, in addition to rescuing automakers, may face another wave of economic distress in the final days of an administration that hands off on Jan. 20.

Deepening Recession

The U.S. economy may shrink more than 6 percent in the last three months of this year, private forecasters are projecting. Chrysler yesterday said it will idle all 30 of its plants for at least a month as demand plummets.

To access the rest of TARP, Paulson must persuade the White House to report to Congress that the funds are needed to preserve financial stability. Lawmakers then have 15 days to pass legislation blocking the money, a resolution that in turn could lead to a veto.

Some members of Congress have warned Paulson they will stand between him and the money.

“Please don’t come here and ask for another penny, because if you do, I’m going to work 24 hours a day with the same people that I worked with to support you to make sure that they do not support giving you another dime,” said Representative Maxine Waters, a California Democrat, at a Dec. 10 House hearing.

‘More Harm’

House Financial Services Chairman Barney Frank said at the same hearing that the Bush administration should get congressional consent for the funds. Frank said a veto fight would do “more harm than good.”

Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, told reporters last week that Congress wasn’t likely to give Paulson the funds unless the Treasury made a strong effort to help average Americans.

“Show me some leadership on the foreclosure mitigation issue, show me some leadership on consumer credit, and I think that door opens up,” Dodd said at a Dec. 12 press conference.

Paulson has sent mixed messages publicly. He has said in recent weeks that the Treasury is making good progress with the first $350 billion of rescue money. So far, he’s pledged $335 billion of those funds to recapitalize the banking system and rescue American International Group Inc. He has also indicated he’d consider letting automakers access some or all of the remaining $15 billion even if the Treasury doesn’t seek the extra money.

New Programs

Paulson and his aides have said they’re working on new programs and he’s indicated that if he sees an urgent need, he won’t hesitate to engage in the legislative process for seeking the second half of the bank bailout funds.

“I don’t have a timeline for drawing down the second half of the TARP,” he told reporters in Beijing earlier this month. “If and when I see a need to draw that tranche down, I’m confident that process will work.”

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Bank of England Governor Mervyn King should exercise “aggressive” policies to combat the credit crisis, said Charles Goodhart, a former member of the central bank’s monetary policy committee.

“The monetary authorities have got to be aggressive,” Goodhart, now a professor at the London School of Economics and Political Science, said in a Bloomberg Radio interview to be broadcast today. He said King should approach next year with “courage, flexibility and perhaps going a bit too far with the very serious occasion we’re in.”

Goodhart said that the Bank of England, along with other central banks, didn’t fully realize “ the extent of the problem of liquidity.” He added that if the banks “had taken the steps that they have taken in the last few months much earlier we would never have got to the stage that we’re currently in.”

The Federal Reserve cut the main U.S. interest rate to “a target range” of between zero and 0.25 percent and said it will take all necessary steps to end the recession and unclog credit markets. Policy makers “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” the Federal Open Market Committee said in a statement.

Goodhart, who made his remarks before yesterday’s interest- rate cut by the Fed, said the U.S. central bank has been “doing exactly the right thing” to help alleviate the credit crisis by purchasing commercial paper wired payday loan. “There is a case also for trying to provide guarantees for certain securitized mortgages,” he said.

U.S. Deficit

Expanding the Fed’s balance sheet is not a concern, Goodhart said, while the U.S. budget deficit poses a greater challenge. “The Fed can shift its monetary policy back from quantitative easing to greater restraint much more easily, I think, than the federal government can shift from deficits back to surpluses,” he said.

The U.S. deficit for the fiscal year that started Oct. 1 climbed to $401.6 billion in November, a record for the first two months of the government’s budget. The gap is likely to widen if President-elect Barack Obama implements a stimulus package next year.

The euro zone faces similar difficulties, Goodhart said, as the “maintenance of the euro system” puts some of the weaker member countries “under intensive stress.” Still, Goodhart warned, “leaving the euro is just unbelievably expensive for the country that might try to do so.”

Other central banks have initiated interest-rate cuts. The European Central Bank lowered its main rate to 2.5 percent this month from 4.25 percent in July, while the Bank of England reduced its rate to 2 percent this month from 5.75 percent in July.

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South Korea’s jobless rate rose to the highest in 16 months in November as fewer people found work in manufacturing, construction, shops and restaurants.

The unemployment rate climbed to 3.3 percent, the highest since July 2007, from 3.1 percent in October, the National Statistical Office said today in Gwacheon. The number of people employed increased by 78,000 from a year earlier, from 97,000 in October. November’s gain was the lowest since Dec. 2003.

Policy makers are pumping funds into banks, lowering income taxes, boosting public spending and cutting borrowing costs to limit the fallout from the global recession. The economy faces increased “downward risks” as the slump hurts production, domestic demand and exports, the finance ministry said last week.

“The local and external environment are far from favorable for the job market,” said Ryu Seung Sun, an economist at HMC Investment Securities Co. in Seoul. “Even if the economy picks up in the second half of next year as the government forecasts, it’ll take time for companies to start hiring new people compare car insurance prices.”

The economy grew 0.5 percent in the third quarter from the previous three months, the weakest pace since 2004, as exports fell and consumer spending stagnated.

South Korea’s central bank lowered its benchmark interest rate to 4 percent on Nov. 7, the third reduction in four weeks.

The number of people employed in the manufacturing sector fell 1.4 percent in November from a year earlier and jobs at retail outlets, hotels and restaurants dropped 1.4 percent, today’s report showed. The number of people employed in the construction sector declined 1.6 percent from last year.

The nation’s unadjusted jobless rate was 3.1 percent, compared with 3 percent in October.

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President-elect Barack Obama is focusing his economic recovery strategy on making the biggest investment in the nation’s infrastructure since President Dwight D. Eisenhower created the interstate highway system a half- century ago.

Speaking yesterday at a Chicago news conference and on NBC’s “Meet the Press,” Obama said state governors have many such projects that are “shovel ready,” meaning they could be undertaken swiftly and have an immediate impact on jobs.

He declined to specify a price tag for the stimulus, saying his advisers are “busy working, crunching the numbers, looking at the macroeconomic data to make a determination as to what the size and the scope of the economic recovery plan needs to be. But it is going to be substantial.”

The remarks sparked a stock market rally, with oil and mining shares leading indexes higher in Europe and Asia. The MSCI World Index added 2.7 percent to 871.09 at 10:01 a.m. in London. Futures on the Standard & Poor’s 500 Index expiring in December surged 2.4 percent to 893.1.

Obama’s plans to invest in infrastructure led to gains in shares of construction and engineering companies that may benefit from the higher public spending and demand for products.

The Standard & Poor’s Construction and Farm Machinery Index rose 7 percent at 9:52 a.m. Manitowoc Co. Inc., was the largest gainer in the group with a 14 percent increase.

Caterpillar Inc., the world’s largest maker of construction equipment based in Peoria, Illinois, rose $2.38 or 6.2 percent to $40.64 at 9:33 a.m. in New York Stock Exchange composite trading.

Jacobs Engineering Group Inc., of Pasadena, California, rose $3.84 or 9 percent to $46.27 in New York. It is the second- largest publicly traded U.S. engineering company.

Housing Crisis

Dealing with the loss of jobs, frozen credit markets, falling home prices and other signs of economic turmoil is “my No. 1 priority,” Obama told NBC. Later at the Chicago news conference, he said “more aggressive steps” are needed to cope with the housing crisis.

Even with the prospect of a federal budget shortfall approaching $1 trillion, “we can’t worry, short term, about the deficit,” he said on NBC. “We’ve got to make sure that the economic stimulus plan is large enough to get the economy moving.”

Obama also said in Chicago that his economic team is working on plans to address the housing crisis, noting that he hasn’t seen the “kind of aggressive steps in the housing market to stem foreclosures” that he wants to see from President George W. Bush. Obama’s transition team has spoken with the outgoing administration about the situation, he said.

“If it is not done during the transition, it will be done by me,” Obama said.

Worsening Economy

“We will emerge stronger than we are right now,” Obama said at the Chicago news conference, called to announce that former Army Chief of Staff Eric Shinseki is his choice to head the U fast pay day loan.S. Department of Veterans Affairs.

He also indicated that proposals — which could include updating health care administration and public schools — would be reviewed as part of his broader plan.

Earlier, on NBC, Obama said the U.S. recession will worsen before a recovery takes hold and that he will offer a plan to boost the economy “equal to the task.”

The economy has shown signs of worsening since the Nov. 4 election. The Labor Department reported Dec. 5 that employers cut 533,000 workers last month, bringing job losses this year to 1.91 million. U.S. stocks fell for the fourth time in five weeks as the worsening job market added to concern the recession is deepening.

‘Rippling’ Recession

“Things are going to get worse before they get better,” Obama, 47, who takes office on Jan. 20, said on NBC. In Chicago, Obama said the recession is still “rippling” through the economy.

Lawmakers in Congress suggested last month that the size of such a program may be between $500 billion and $700 billion. Jared Bernstein, named as economic policy director for Vice President-elect Joe Biden, said after the job numbers were released Dec. 5 that “it’s fair to assume the upper bound on a stimulus package is going up, not down.”

Obama sidestepped questions about whether he would delay making good on his campaign promise to repeal Bush administration tax cuts for those making $250,000 or more annually. He said his economic team is studying whether to raise those rates right away or wait until the tax cuts to expire on schedule in 2011.

During the hour-long NBC interview, Obama also said that while it’s not an option to let U.S. automakers collapse amid a recession and throw more workers out of jobs, any government loans or aid they get must be conditioned on the companies revamping their business and their products.

Auto Industry

That also may mean management changes at General Motors Corp., Ford Motor Co. or Chrysler LLC, he said. The executives must abandon their “head-in-the-sand” approach and develop a “sustainable business model” that begins by building fuel efficient vehicles.

“They can’t keep on putting off the changes that they frankly should have made 20 or 30 years ago,” Obama said.

He called for “a new ethic of responsibility” for corporate leaders when it comes to executive compensation, saying they should be willing to give up some pay and bonuses to allow more workers to keep their jobs, retain medical insurance and stay in their homes.

“That kind of notion of shared benefits and burdens is something that I think has been lost for too long and is something that I’d like to see restored,” he said.

The circumstances aren’t unique to the auto industry, he added. “We have seen that across the board. Certainly we saw it on Wall Street.”

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Neel Kashkari, who oversees the U.S. Treasury’s $700 billion financial-rescue plan, defended the program today after congressional leaders threatened to withhold the remaining half of the funding.

“We are confident we are pursuing the right strategy to stabilize the financial system and support the flow of credit to our economy,” Kashkari, a Treasury assistant secretary, said in a speech today in Washington.

Treasury Secretary Henry Paulson, who has committed $330 billion to aid financial companies, is under pressure from some members of Congress to also help homeowners avoid foreclosure. The conflict makes it more likely that decisions about the rest of the money will be deferred until after President-elect Barack Obama takes office on Jan. 20.

The Treasury has ignored the “clear congressional intent” of the Troubled Asset Relief Program to reduce home foreclosures, House Financial Services Committee Chairman Barney Frank warned yesterday. Senate Banking Committee Chairman Christopher Dodd echoed that sentiment, telling reporters yesterday, “I would be a very hard person to convince that this crowd deserves to have their hands on the next $350 billion.”

In his speech, Kashkari said the banking system is “more stable” now than in October, when Congress passed the bailout legislation. Firms that have taken money from the program should increase their lending, “particularly in this time of economic disruption,” he said.

‘Obligation’ to Lend

Banks “have an obligation to continue making credit available to creditworthy borrowers and an obligation to work with borrowers who are struggling to avoid preventable foreclosures,” he said. “This lending won’t materialize as fast as any of us would like, but it will happen much faster as a result of using the TARP.”

Kashkari acknowledged that the department’s intervention in the credit markets has caused unintended consequences that required new efforts to “put out the fire.” Kashkari, speaking to a group of mortgage bankers in Washington, faced some tough questions about why the Treasury keeps devising new programs for the bailout.

“We understand that there is confusion because there are additional programs coming, but hard choices are easy to make when you really don’t have a choice,” Kashkari said online payday loans. “When the consequences of inaction are so great, we have to step in.”

Frozen Credit

One audience member noted that the Treasury’s shifting decisions for aiding the markets may have actually kept them frozen. The series of new programs are blindsiding investors who have decided to stay on the sidelines, he said.

Kashkari defended the administration’s approach, saying the consequences of allowing the financial system to fail were too great for a go-slow approach.

“Over the last 15 months or 18 months of the credit crisis it’s only gotten deeper, it’s only gotten more severe,” he said. “And I would rather be on our front foot, going after the problem aggressively with new programs, trying to be creative, trying new things, rather than just sitting back and saying, ‘Let’s just let it happen and see what happens, see if the system collapses.’”

Kashkari said TARP money should be used to make investments, rather than loans, because the $700 billion, while “a lot of money,” is “finite.” The Federal Reserve is in charge of loans because it doesn’t have a cap on the amount of money it can use, he said.

Lending Program

“It wouldn’t make sense, for example, to have the TARP become a lending program because it would use capacity, when the Fed could do it,” he said. “We want to use the right tool for the right job.”

Kashkari said the narrowing of credit-default swap spreads for the nation’s eight largest banks shows the program is working. He said the Treasury is working to determine the impact of the capital injections, a point raised by a report this week from the Government Accountability Office, which called on the department to bolster its supervision of the plan.

“We want to see the credit crisis run its course, see our institutions healthy, extending credit, and some return to normalcy,” Kashkari said. “But we’re not there yet.”

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European investment fell for a second quarter and consumer spending stagnated as the global financial crisis dragged the region into a recession that pushed central bankers into a third interest-rate cut within two months.

Gross domestic product shrank 0.2 percent from the second quarter, matching an initial estimate, the European Union’s Luxembourg-based statistics office said today. Investment fell 0.6 percent in the first back-to-back decline since 2002, and household spending stagnated after dropping 0.2 percent in the previous quarter.

“The downturn we see now is without recent comparison and is developing much faster and deeper than expected,” Royal Philips Electronics NV Chief Executive Officer Gerard Kleisterlee said today. “The speed and ferocity by which the weakening economy is affecting demand in key markets is now also taking its toll” on Europe’s largest maker of consumer electronics.

The European Central Bank today cut its key rate by three quarters of a percentage point, the biggest reduction in its 10- year history. ECB President Jean-Claude Trichet told a press conference after the rate decision that the European economy will contract next year.

Economists were divided on how much the ECB would cut, with 35 of 56 surveyed by Bloomberg News predicting a 50-basis-point reduction and 21 forecasting 75 points or more. The Frankfurt- based ECB has now lowered its key rate from 4.25 percent since early October, having increased the rate as recently as July as record oil prices boosted inflation. Crude oil has dropped by two-thirds since July to less than $50 a barrel.

Key Rate

The euro has dropped 20 percent against the dollar from a July peak of $1.60. It was little changed after today’s rate decision and traded at $1.2659 at 2:15 p.m. in London.

Europe’s economy is suffering from multiple shocks that have dragged consumer and executive confidence to a 15-year low and led to a slump in manufacturing and services activity. From a year earlier, expansion slowed to 0.6 percent in the third quarter, the weakest in five years, from 1.4 percent in the prior three months, according to today’s report.

Exports rose 0.4 percent in the third quarter from the prior three months, while imports surged 1.7 percent. Net trade knocked 0.5 percentage points off quarterly growth.

After facing record levels for the euro and oil prices earlier this year, the cost of credit then surged after the collapse three months ago of New York-based Lehman Brothers Holding Inc., which forced banks to cut lending to businesses and households and curbed demand for euro-area exports cash advance payday loans.

‘Serious Recession’

Europe is facing a “very serious recession,” said Holger Schmeiding, chief European economist at Bank of America in London. “Despite a major monetary stimulus and some help from lower oil prices and a looser fiscal policy, we do not expect the economy to recover before late 2009.”

Philips, Europe’s largest maker of consumer electronics, said today it won’t meet its goal of doubling earnings per share by 2010. Semiconductor maker Infineon Technologies AG, yesterday forecast revenue will drop this fiscal year because of sliding orders from automakers and mobile-phone manufacturers.

As well as a monetary stimulus, the European Commission is trying to coordinate 200 billion euros in fiscal measures among its member states to spur growth.

The economic crisis isn’t unique to the euro area, with the International Monetary Fund predicting the U.S., Europe and Japan will all contract next year, the first simultaneous downturn since World War II.

First Decline

The U.K. economy shrank in the third quarter for the first decline in 16 years and the Bank of England today lowered its benchmark interest rate by one percentage point to 2 percent, the lowest level since 1951. New Zealand reduced rates by a record 150 points overnight and Sweden today lowered its key rate by 175 points, the biggest reduction since 1992.

The U.S. economy, the world’s largest, entered a recession a year ago this month, the panel that dates American business expansions said on Dec. 1. Japan’s economy shrank last quarter, entering the first recession since 2001.

As growth slumps and commodity prices fall, that has sparked concern over deflation. Luigi Speranza, an economist at BNP Paribas in London, said this week that while deflation is not in his central scenario, its risks “should not be overlooked.”

European Monetary Affairs Commissioner Joaquin Almunia has discounted the threat, saying there is no “real risk.” Schmieding at Bank of America agrees.

“A genuine deflation caused by a persistent shortfall in demand as consumers hold back from buying now because they expect goods and services to be cheaper in the future is highly unlikely,” he said. “It would probably take a severe three-year recession to get the somewhat sticky euro-zone price level there.”

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