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U.S. consumer spending probably rose in February for a second month, a sign the biggest part of the economy may be steadying, economists said ahead of a government report today.

Purchases increased 0.2 percent after rising 0.6 percent in January, according to the median forecast of 68 economists in a Bloomberg News survey. Another report may show Americans are still pessimistic about the economic outlook.

Gains in consumer spending, which accounts for about 70 percent of the economy, are underpinning forecasts for a rebound in growth later this year, just when policy initiatives from the Obama administration and Federal Reserve are also likely to kick in. Still, any pickup may be constrained by mounting job losses that hurt Americans’ confidence and paychecks.

“The consumer is stabilizing after a really deep pullback,” said Stephen Gallagher, chief U.S. economist at Societe Generale in New York. “We’re pretty far from a strong recovery, but the sharp declines are over. That’s the first step.”

The Commerce Department’s spending report is due at 8:30 a.m. in Washington. Survey estimates ranged from a decline of 0.5 percent to a 0.5 percent gain. Incomes probably fell 0.1 percent, the survey showed.

At 10 a.m., figures from Reuters/University of Michigan may show its consumer sentiment index rose to 56.8 this month from 56.3 in February, according to the survey median. The gauge sank to 55.3 in November, the lowest level since 1980.

Fourth-Quarter Slump

The economy shrank in the fourth quarter at a 6 paydayloans.3 percent annual pace, the worst performance since 1982, in what may be the depths of the recession. Consumer spending fell at a 4.3 percent rate, marking the first back-to-back declines in excess of 3 percent since records began in 1947.

Purchases are doing better so far this year. Sales at retailers dropped less than forecast in February and January’s 1.8 percent gain was the biggest in three years, according to government figures.

“There are just a lot of deals and incentives being thrown at consumers,” Societe Generale’s Gallagher said. The price of gasoline at less than $2 a gallon in January and February leaves cash for other purchases, some tax cuts are starting to work, and plunging mortgage rates have spurred refinancing, which “puts more money to work,” he said.

Best Buy Co., the largest U.S. electronics retailer, yesterday reported profit that fell less than analysts forecast for the quarter ended Feb. 28.

Ended ‘Stronger’

“We prepared for reduced consumer spending, and we were pleased when the quarter finished stronger than it began,” Chief Executive Officer Brad Anderson said in a statement.

Carmakers General Motors Corp. and Chrysler LLC are still counting on government aid for survival. U.S. auto sales in February slid to the lowest rate since December 1981, led by a 53 percent plunge for Detroit-based GM.

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Premier Bank will have to get permission from the Federal Reserve to pay dividends or take on debt, inunder a written agreement made public Tuesday. The bank will also have to come up with a plan to keep sufficient capital, under the agreement signed with the Fed. Premier, based in Jefferson City, has five branches in the St. Louis area. It ranks 25th by share of the St paydayloan. Louis region’s deposits. The bank lost $32 million last year, and 4.7 percent of its loans were delinquent as of December, nearly double the percentage for similar banks. (Jim Gallagher) =”clear:both”>

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Federal regulators on Friday seized control of two large institutions that provide wholesale financing for U.S.credit unions, a move they say was needed to stabilize the credit union system.

The National Credit Union Administration said it has taken over and put into conservatorship the two corporate credit unions, U.S. Central Federal Credit Union, based in Lenexa, Kan., and Western Corporate Federal Credit Union in San Dimas, Calif.

A conservatorship enables the government to operate a financial institution. Corporate credit unions provide financing and investment services to retail credit unions. Some of the 28 corporate credit unions in the U.S. have sustained steep losses on paper from the depressed value of the mortgage-linked securities they hold.

The financial services provided by the two corporate credit unions "will continue uninterrupted," and there will be no direct impact on the 90 million members of retail credit unions nationwide, the NCUA said in a news release.

It said retail credit unions, cooperatives owned by their members, remain financially strong — with net worth exceeding 10 percent of assets, and sustained growth in assets and membership despite the deep recession no faxing payday loan.

In January, the NCUA injected $1 billion of capital into U.S. Central, an institution with about $34 billion in assets. At the same time, the agency moved to guarantee tens of billions of dollars in uninsured deposits at corporate credit unions overall, the latest in a series of actions to shore them up in the face of financial stress.

Western Corporate Federal Credit Union, known as

WesCorp, has an estimated $23 billion in assets.

The NCUA, which oversees some 8,100 federally insured credit unions, said it would automatically guarantee uninsured deposits at all corporate credit unions through February and then on a voluntary basis through Dec. 31, 2010.
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The Obama administration put the finishing touches on a plan to remove troubled assets from banks’ balance sheets that will be unveiled early next week.

Treasury Secretary Timothy Geithner intends to expand the Federal Reserve’s new $1 trillion Term Asset-Backed Securities Loan Facility to buy frozen assets, according to people familiar with the proposal. The revamped Fed program will sit alongside the Treasury’s planned public-private investment funds, while the Federal Deposit Insurance Corp.’s role will probably involve buying distressed loans, the people said.

“We’re going to move quickly to lay out a new financing program to deal with these legacy assets,” Geithner said in an interview with Bloomberg television at a meeting of Group of 20 finance ministers in Horsham, England, last weekend. “We have and expect to see a lot of support for this program.”

Geithner’s next step to cleanse banks’ balance sheets so they can start lending again will be crucial after the lack of detail in a rescue he outlined last month caused a sell-off in financial stocks. The initiative’s success will depend on the participation of financial institutions, some of whose leaders yesterday criticized congressional proposals to tax Wall Street bonuses.

Private investment managers would run the Treasury funds that purchase the toxic securities. The rollout of details on the toxic-asset plan slipped into next week as the Treasury Department grapples with the outcry over bonuses awarded by insurer American International Group Inc. AIG has received more than $170 billion in government aid.

Revamping TALF

As it’s currently set up, the Fed’s TALF program may lend as much as $1 trillion to investors from hedge funds and pension funds to insurance companies to buy recently created securities backed by loans for car purchases, college education and real estate.

Broadening the TALF to include older, illiquid and lower- rated securities could allow the participants in the public- private investment funds to potentially repackage assets and sell them on to a wider group.

The Fed’s policy-making committee, which met this week in Washington, said in its March 18 statement that the range of eligible collateral for the TALF “is likely to be expanded to include other financial assets.” The Federal Open Market Committee also pledged $1.15 trillion of extra measures to lower borrowing costs, including purchases of long-term Treasuries.

The TALF is supported with money from the $700 billion bank-rescue fund passed by Congress in October. The Bush administration originally set aside $20 billion to seed $200 billion in loans; Geithner has proposed raising the government contribution to $100 billion. The facility could need additional money to address so-called legacy assets.

FDIC’s Role

The FDIC’s role will likely also expand to help finance the administration’s initiative, and may run an aggregator-type unit that would purchase whole loans — those not packaged into other securities — three people said. FDIC officials have extensive experience dealing with nonperforming loans from their role in taking over failed banks. Under one scenario discussed, the FDIC would attach a government guarantee to the assets and then sell them to investors.

Treasury spokesman Isaac Baker declined to comment. Details of the plan could still change. “The markets are just getting increasingly nervous, the longer they wait to announce the plan,” said Stephen Myrow, a former Treasury official in the Bush administration who helped create the TALF no teletrack payday loans.

Recession Impact

American banks have suffered more than $800 billion in writedowns and credit losses since the market for subprime mortgages collapsed in 2007. The credit crisis that followed pushed the economy into the deepest recession since 1982. A surge in unemployment and collapse in house prices has added to bad loans and further discouraged banks from lending.

The crisis pushed the U.S. government into pouring billions of dollars into financial institutions, including Citigroup Inc., Bank of America Corp. and AIG.

President Barack Obama has ordered Geithner to “pursue every legal avenue” to recoup money distributed to employees in an AIG unit that sold credit-default swaps and whose bad bets helped touch off the financial crisis.

Bank of America Chief Executive Officer Kenneth Lewis called a proposed tax on bonuses “unfair” in a memo to employees yesterday, while Citigroup CEO Vikram Pandit said his bank is “working in every appropriate way with policymakers.” JPMorgan Chase & Co. CEO Jamie Dimon held a conference call with about 200 executives, saying the firm is concerned about retention and is working with lawmakers.

Outcry in Congress

The banks are responding to an outcry in Congress over $165 million in bonuses paid by AIG after the insurer received $173 billion in federal bailout funds. The Senate will vote next week on levies on bonuses after the House of Representatives approved a 90 percent tax on bonuses at companies that received bailout funds.

“People are very anxious about this getting too widespread, this notion that no one on Wall Street or in banking deserves any money,” said Seamus McMahon, a consultant with Booz & Co. in New York, who works with financial firms.

The Treasury secretary disappointed markets and lawmakers when he didn’t provide many specifics about the distressed asset clean-up in his Feb. 10 unveiling of the administration’s approach.

Stock Rebound

The Standard & Poor’s 500 Financials Index slumped 11 percent that day. It has since advanced about 12 percent after statements from banks including Citigroup and Bank of America that earnings accelerated since the start of the year.

Still, the index has retreated the past two days as legislators worked to increase restrictions on executive pay. The Fed said earlier this month that existing pay limits wouldn’t apply under the TALF program.

Opening the TALF to legacy assets “is the most effective and efficient way to purge troubled assets from the financial system,” Myrow said. To guard against losses the Fed would take so-called haircuts, or discounts on the loans, for the collateral it accepts.

It’s not clear when Obama will need to ask Congress for more money to continue to fund the bank-rescue program. Most of the $700 billion has already been allocated to existing programs.

“We’re talking about big numbers here,” said Kevin Petrasic, a former official at the Office of Thrift Supervision, who is now a lawyer at the Paul, Hastings, Janofsky & Walker law firm in Washington. Congress is still “smarting” from having to dole out for saving Wall Street, he said.

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The U.S. House of Representatives swiftly passed a bill on Thursday to recoup controversial bonuses paid to American International Group Inc as Treasury Secretary Timothy Geithner tried to calm the furor by taking responsibility.

In the face of public outrage at the fact that AIG paid $165 million in bonuses after receiving $180 billion in government aid, the House voted 328-93 to approve a 90 percent tax on bonuses for certain executives at companies that are getting taxpayer-financed help.

The No. 2 Republican in the Senate, Jon Kyl of Arizona, blocked an initial bid to approve a Senate version of the legislation that would put a 70 percent excise tax on bonuses for employees at companies that have received at least $100 million in bailout aid.

Kyl said more study was needed, putting into question when the Senate might again try to pass the legislation.

House Financial Services Committee Chairman Barney Frank said his panel will consider legislation on Tuesday to prohibit bonus payments by companies who have received government bailout funds, until investments are repaid in full. The full House of Representative was expected to consider the bill in the following week, the panel said.

‘BUBBLE AND BUST’

President Barack Obama urged lawmakers to press on with measures that he can sign into law, calling AIG bonuses a symptom of “a bubble and bust economy that valued reckless speculation over responsibility and hard work online cash advance.”

Meanwhile, Geithner took some blame for the controversy over the AIG payments, telling CNN that Treasury was concerned that trying to squelch bonuses agreed previously might come under legal challenge.

Senator Christopher Dodd, chairman of the Senate Banking Committee, had been scrambling to explain how a tough provision to restrict bonuses got watered down in a recently passed stimulus bill.

In response to questions, Geithner said Treasury staff had expressed concern that provisions originally in the bill that would have prevented bonus payments might not survive a legal challenge.

The U.S. Treasury chief, who has come under criticism for not doing more to stop the AIG bonuses, repeated he only learned “the full scale and scope of these specific bonus problems” on March 10 and conceded he was partly at fault.

WHO’S TO BLAME?

“You know, it’s my responsibility, I was in a position where I didn’t know about these sooner, I take full responsibility for that,” Geithner said.

He dismissed calls for his resignation as something that “just comes with the job.”

It is still not widely known who at AIG received the bonus payments, which were supposed to be aimed at keeping highly skilled employees on the job at the troubled insurer. 

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WASHINGTON – The head of battered insurance giant AIG told Congress today that "we've heard the American people loudly and clearly" in their rage over executive bonuses and appealed to employees to voluntarily return at least half of the money.

Testifying under oath at a congressional hearing as intense as any in recent memory, Edward Liddy said that some workers already have stepped forward to give money back.

The company became the target of a political firestorm after the disclosure over the weekend that it had paid $165 million in “retention bonuses" to its employees at the same time it was accepting bailout funds from U.S. taxpayers. Some of the payments were made to the same traders and executives whose risky financial behaviour caused the company's near collapse.

Liddy took the hot seat as President Barack Obama said he wants legislation to give the federal government vast new powers over financial institutions like AIG (NYSE: AIG) to protect the public.

Obama, speaking to reporters at the White House, said the new powers he is seeking would be similar to those now exercised over banks by the Federal Deposit Insurance Corp. It would be part of the administration's broader package of new finance regulatory steps, he said.

Since AIG is an insurance company and not a bank, it is not subject to the same oversight.

"We've got a big mess that we're having to clean up," the president said. "Nobody here drafted those contracts" that resulted in the bonuses being paid out to AIG employees over the weekend, he added.

Obama also defended his administration – and specifically Treasury Secretary Timothy Geithner – against questions about how it has handled the AIG fiasco.

"Nobody here was responsible for supervising AIG and allowing themselves to put the economy at risk by some of the outrageous behaviour that they were engaged in," Obama said. "We are responsible, though," he added.

"The buck stops with me. And my goal is to make sure that we never put ourselves in this kind of position again," the president said.

Liddy told a House Financial Services subcommittee that, while the bonuses were a legal obligation of the company that is now 80 per cent owned by the federal government, he had "asked those who have received retention payments in excess of $100,000 or more to return at least half of those payments. Some have already stepped up and returned" 100 per cent.

He provided no details.

Responding to a question, Liddy also said the Federal Reserve knew in advance of the bonus payments and acquiesced in them.

Fed Chairman Ben Bernanke has been publicly critical of the bonuses, as has Obama, Geithner, and congressional leaders from both parties.

Despite Liddy's announcement that employees were stepping forward to return bonus money, he ran into a wall of criticism from committee members.

Rep. Barney Frank (D-Mass.), chairman of the Financial Services Committee, demanded that the company submit to Congress a list "of people who received the bonuses, whether they paid them back or not." If the names were not provided "without restriction," Frank warned, he would ask the committee to vote to subpoena them.

Liddy, while saying "we will obviously comply with the law," told Frank he was "concerned about the safety of our people payday loan companies."

He said he would only give the names of the bonus recipients on the basis of confidentially. He read aloud threats that AIG employees had received, including one that suggested that all bonus recipients should be "executed with piano wire around their necks."

Another one read: "If the government can't do this properly, we the people will take it in our own hands and see that justice is done. I'm looking for all the CEO's names, kids, where they live, etc."

Frank said he would consult with security officials, but that his request for the names stands.

For the American public, AIG now stands for "arrogance, incompetence and greed," said Rep. Paul Hodes (D-N.H.).

Rep. Scott Garrett of New Jersey, the senior Republican on the subcommittee, complained that the administration still has no exit strategy for disentangling itself from the insurance giant.

"Part of me wants to say to some of the loudest critics, `What did you expect and why weren't you asking more questions before?' I would argue that the real outrage now is the $170 billion of taxpayer money that's been pumped into this company and to what effect," he said.

Rep. Gary Ackerman (D-N.Y.) cited a "tidal wave of rage" throughout the country.

Meanwhile, the agency that oversees AIG said that, while its criticism of the company's practices had sharpened over the past five years, it failed to recognize the extent of the risk posed by the exotic financial instruments the insurance company offered, many of them tied to a housing market that had long been rising.

Scott Polakoff, acting director of the Office of Thrift Supervision, said regulators failed to accurately predict what would happen to AIG's so-called credit default swaps – a form of insurance – if housing values collapsed, as they have. "There are a lot of people walking around who failed to understand how bad the real estate market had gotten," he said.

AIG is under fire for $220 million in retention bonuses paid to employees in its troubled financial products division. The most recent payment of $165 million began to be paid last Friday.

The retention payments – ranging from $1,000 to nearly $6.5 million – were put together in early 2008, long before then-treasury secretary Henry Paulson asked Liddy to take over the company. Liddy, the retired former chief of Allstate Insurance Co., himself is not getting a bonus and is only drawing $1 a year in salary.

"No one knows better than I that AIG has been the recipient of generous amounts of governmental financial aid. We have been the beneficiary of the American people's forbearance and patience," he said. But he also said that "we have to continue managing our business as a business – taking account of the cold realities of competition for customers, for revenues and for employees."

The clamour over compensation overshadowed AIG's weekend disclosure that it used more than $90 billion in federal aid to pay out to foreign and domestic banks, including some that had multibillion-dollar U.S. government bailouts of their own.

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The combined wealth of Canadian households shrank by $285 billion last year.

Our financial assets lost value as our debt grew, leaving our net worth down 4.89 per cent from a year earlier, and down 4.4 per cent since just the end of September.

The 12-month decline in wealth was the first since 1970, when Statistics Canada began tracking market values to calculate the national balance sheet. The quarterly decline to end 2008 was the worst since 1990.

There have been years – 1981, 1982, 1990 and 2001 – when net worth did not rise faster than consumer prices. But we could at least feel wealthier as a group, if StatsCan told us we were.

"The turmoil in equity markets significantly reduced the value of shareholdings as well as that of pension and life insurance assets of households," StatsCan reported yesterday.

Meanwhile, household debt grew by $109 billion. Only a rise in the value of our homes compared with a year earlier acted as a partial offset to the gloom from the stock markets.

Our combined wealth was still ahead of where we were partway through 2007, when most of us still felt comfortable having a piece of $5.5 trillion of net worth.

But even though our reported decline in wealth was less than the 7.6 per cent decline experienced in the United States in the fourth quarter, economists say it obviously affected householder attitudes.

"The Canadian consumer had been on wheels earlier in 2008," said Douglas Porter of BMO Capital Markets. "But we started to see consumers reel it in, even before employment started to drop meaningfully.

"Consumer spending did decline. The savings rate went up. I think consumers were responding to this drop in wealth we saw in the fourth quarter."

Statistics Canada noted that household wealth had been rising faster than the economy was growing, as we bid up the price of homes and more households were invested in stocks through mutual funds, pension plans and life insurance products freecreditscore.

The rise in wealth, combined with a decline in interest rates, encouraged Canadians to increase debt faster, relative to their incomes, than Americans did in the 1990s.

Statistics Canada noted that the cost of servicing our debt fell from 10 per cent of personal disposable income in the early 1990s to a low of 6.5 per cent in 2004, but that cost is currently measured at 7.9 per cent.

"Net worth went up unsustainably," said economist Derek Burleton of TD Bank Financial Group. "Now of course there is some payback."

While the pressure on the wealth of Canadian households is not nearly as much as south of the border, Burleton expects wealth to decline further as unemployment rises and home prices fall.

"We don’t anticipate the Canadian housing market seizing up as much as in the United States (where prices fell an average of 35 per cent from peak to trough)," he said, but there will likely be further declines in prices.

Burleton said he is hopeful that stock markets will stabilize and rebound as the North American economy starts to grow again later this year.

Meanwhile, however, the balance sheet of the country will suffer as governments take on more debt to deal with increasing unemployment.

StatsCan reported the net worth of governments increased last year, but governments are predicting large budget deficits in the next couple of years.

James Daw, CFP, appears Tuesday, Thursday and Saturday.

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Obama administration officials and lawmakers lambasted plans by American International Group Inc., the insurer rescued by the government, to dole out $1 billion in bonuses and retention pay to employees.

Lawrence Summers, director of the White House National Economic Council, called the payments “outrageous” in an interview on ABC’s “This Week” program yesterday. AIG is “abusing the system,” Barney Frank, the Massachusetts Democrat who heads the House Financial Services Committee, told “Fox News Sunday.”

AIG, which has received $170 billion in taxpayer money, succumbed to demands from the U.S. Treasury to scale back the payments. AIG agreed to reduce some retention payments in 2009 by 30 percent and tie bonuses to the company’s recovery. The New York-based insurer still plans to hand out about $165 million on March 15 because of legally binding contracts, according to a person briefed on the matter.

Public anger has been stoked by revelations of bonuses paid by firms at the center of the financial-market meltdown that has plunged the U.S. into what may become the deepest recession since World War II. New York Attorney General Andrew Cuomo is investigating $3.6 billion in bonuses paid by Merrill Lynch & Co. shortly before it was acquired Jan. 1 by Bank of America Corp.

“There are a lot of terrible things that have happened in the last 18 months, but what’s happened at AIG is the most outrageous,” Summers said yesterday on CBS’s “Face the Nation.”

Safeguarding Taxpayer

Summers said the Obama administration’s priority is safeguarding the U.S. taxpayer. “No one cares about the shareholders of AIG. No one feels the slightest obligation to people who led us into these difficulties.”

Even so, the administration can’t abrogate existing contractual obligations without shaking confidence in the legal system, Summers said.

“The easy thing would be to just say, you know, ‘Off with their heads,’ and violate the contracts,” he said. “But you have to think about the consequences of breaking contracts for the overall system of law.”

Frank said that starting when the Federal Reserve initiated the AIG rescue last September there should have been stricter rules on executive compensation and clearer guidelines for major financial institutions getting a government bailout payday loans.

“Clearly there was a mistake at the beginning,” Frank said on Fox. “These people who were receiving this should have been given much stricter rules at the beginning.”

‘Abusing System’

AIG is “abusing the system,” said Frank. “Any bank that thinks we’re being too tough on compensation, or trying to get foreclosures reduced, or stopping some of the lavish entertaining, they can give the money back.”

“With AIG, I would just say we need to find out, one, are they legally recoverable,” Frank added. “But I do want to find out at what point these illegal obligations were incurred, who said, and at what point, we’re going to give these bonuses no matter what.”

Senate Minority Leader Mitch McConnell, speaking on ABC’s “This Week,” said the example of AIG might be followed by other companies lining up for government assistance.

“The message here, I’m afraid, to any business out there that’s thinking about taking government money, is let’s enter into a bunch of contracts real quick, and we’ll have the taxpayers pay bonuses to our employees,” the Kentucky Republican said. “This is an outrage.”

Treasury Secretary Timothy Geithner was “really upset” by AIG’s plan to distribute the $165 million, Austan Goolsbee, a top White House economist, said on Fox. “You worry about that backlash” from the public, “but you’re also angry,” he said.

‘Not Sensible’

“I don’t know why they would follow a policy that’s really not sensible, is obviously going to ignite the ire of millions of people,” Goolsbee said. “And we’ve done exactly what we can do to prevent this kind of thing from happening again.”

AIG Chief Executive Officer Edward Liddy, who was recruited by the U.S. to run the insurer after the bailout, has vowed that the company will repay “every penny” to the U.S. of its bailout package by selling subsidiaries, and said the retention pay for talented people helps taxpayers by making the units attractive to buyers.

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Finance chiefs from the biggest developed and emerging economies pledged a “sustained” effort to ending the global recession, papering over differences on what policy steps that should entail.

“We were seized by the fact that there was a sense of urgency” U.K. Chancellor of the Exchequer Alistair Darling told reporters after the Group of 20 finance ministers and central bankers met in southern England. U.S. counterpart Timothy Geithner said there was a “clear commitment to do what’s necessary, to keep at it to get the economy on track.”

That promise marked a compromise at the end of a week in which U.S. calls for governments to spend more were rebuffed by euro-region ministers who argued they had eased fiscal policy enough and lacked the space to do more. The world economy is crumbling 19 months after the financial crisis began with the International Monetary Fund this week predicting it would shrink this year for the first time in six decades.

The G-20 officials said their “key priority” is to restore bank lending by providing financial companies with liquidity, fresh capital and assistance with toxic assets.

Having cut interest rates to record lows, central banks will maintain expansionary monetary policies for “as long as needed” using all the tools they can, while maintaining price stability, the G-20 said.

Sound Institutions

Officials repeated a vow to ensure the soundness of key institutions and published guidelines on cleaning banks of toxic assets and injecting them with capital.

Financial companies are still hoarding cash after being stung by almost $1.2 trillion of writedowns and losses and interbank lending rates this week rebounded to the highest level since Jan. 8.

Geithner approached the G-20 meeting by lobbying his counterparts to follow the U.S. in injecting fiscal stimulus equivalent to at least 2 percent of their economy’s gross domestic product this year low fee payday loans. European officials argued they had already spent enough, ran bigger social safety nets and didn’t want to blow out budgets.

Setting aside those differences, the G-20 said the International Monetary Fund will watch stimulus programs and judge if more is needed. They also promised to coordinate policies amid concern an uneven approach is delaying recovery.

Stimulus Packages

“Yes to stimulus packages but without losing sight of feasibility,” Italian Finance Minister Giulio Tremonti told reporters today.

The G-20 agreed “on the urgent need to increase IMF resources very substantially” without giving a target and said smaller countries should have more say in the running of the fund. The Washington-based lender, which is seeking a doubling in firepower to $500 billion, has been inundated with loan requests from Pakistan to Hungary as the turmoil spread.

Turning to the longer-term, the officials said they were working to intensify oversight of the financial system and ensure regulations “dampen rather than amplify economic cycles.” Options include introducing buffers that limit leverage and encourage banks to save capital in good times.

The G-20 members said they would strengthen ties between their individual banking supervisors to prevent future crises. Credit rating companies, off-balance sheet vehicles and credit derivatives markets will be subjected to greater monitoring.

G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union.

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European Central Bank President Jean-Claude Trichet’s new weapon to battle the recession is taking him closer than it seems to zero interest rates.

Trichet is allowing the ECB’s deposit rate, which lenders earn on overnight deposits with the central bank, to usurp the benchmark refinancing rate and become the main driver of short- term borrowing costs. At just 0.5 percent, the deposit rate matches the Bank of England’s key setting and is only a step away from the zero-to-0.25-percent range the Federal Reserve uses.

That is pushing interest rates for banks down, helping Trichet answer critics who accuse him of not doing enough as the euro-region economy sinks into its deepest recession since World War II. The deposit rate is “very, very low,” Trichet said three times in an hour at a press conference on March 5.

He “is implicitly admitting that the deposit rate has now become the key barometer of the ECB’s policy,” said Nick Kounis, chief European economist at Fortis in Amsterdam. “The ECB has become more and more comfortable in pointing that out, not least because it’s been accused of keeping interest rates too high.”

The euro overnight index average, or Eonia, fell to 0.85 percent yesterday after the ECB’s latest rate cuts took effect — about 0.7 percentage point below the 1.5 percent benchmark rate. Overnight deposits dropped to 56.3 billion euros, the lowest amount since Oct. 8.

Unlimited Cash

The ECB’s decision to offer banks unlimited amounts of cash, announced on Oct. 8, has culminated in the deposit rate setting the new de facto cost of short-term money. The measure removed the need for banks to borrow in the money market to meet their reserve requirements.

Banks have been reluctant to lend to each other since Lehman Brothers Holdings Inc. went bust on Sept. 15, preferring to stash excess money with the ECB instead of taking the risk.

As demand dried up, interbank-lending rates dropped toward the deposit rate. The Eonia rate averaged 106 basis points above the deposit rate in the seven years before the ECB started providing unlimited liquidity in October. Since then, the gap has shriveled and yesterday stood at just 35 basis points.

Unlimited cash “results in refinancing costs for banks well below the current benchmark interest rate,” ECB council member Axel Weber said on March 5. “We expect banks to pass this on to consumers and companies to stimulate the economy.”

Boost for Economy

The overnight Eonia rate “is a very important starting point for all market expectations,” said Julian Callow, chief European economist at Barclays Capital in London. “Any further reduction in Eonia expectations would lower Euribor rates and so be a considerable benefit for the real economy.”

The euro interbank offered rate, or Euribor, that banks say they charge each other for six-month loans dropped to a record low of 1 quick cash.79 percent today. Market rates of the same maturity traded at 2.07 percent in the U.K. and 1.90 percent in the U.S.

Trichet hasn’t ruled out further rate cuts. The ECB has “not decided ex-ante that the present level was the lowest,” he said during a press conference in Vienna today. Still, “we are at very low rates.”

Officials are hesitant to go much lower. There is “no reason to see the refinancing rate below 1 percent,” Weber said on March 10. “I also see a problem with lowering the deposit rate to zero. I would prefer to leave it at 0.5 percent.”

That reticence may be linked to Japan’s experiment in the 1990s, when it lowered its key rate to zero to revive its economy in what became known as the “lost decade.”

‘Excessively Low’

Japan shows that keeping rates too low for too long “will cause interbank trading to run dry, despite the ECB’s efforts to revive it,” said Michael Schubert, an economist at Commerzbank AG in Frankfurt.

Some ECB officials are concerned that too-low market rates will become counterproductive because they will sap banks’ returns and give them less incentive to trade with each other. That would undermine the ECB’s aim to revive interbank lending through its unlimited liquidity operations.

“If we had excessively low interest rates, why would banks start lending to each other?” ECB council member Yves Mersch asked March 10. “It would be much safer to put their excessive funds into the central bank rather than engage in the interbanking market.”

The ECB has cut its main refinancing rate, which is used as a benchmark in money-market operations, by a total of 2.75 percentage points since early October.

Not so Different

That’s still well above the key rates of the Fed and the Bank of England, which have started buying assets such as commercial paper and government bonds to ease credit tensions and boost their countries’ economies.

So far, the ECB is focusing its efforts on providing unlimited liquidity to banks and said on March 5 it will provide these funds until at least the end of the year.

“With the extension of providing unlimited liquidity, the ECB committed to keep the overnight rate very low for the foreseeable future,” said Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Group Plc in London.

That is allowing Trichet to argue “that the ECB does not have such a different monetary-policy stance from the Fed and Bank of England,” said Gilles Moec, an economist at Bank of America Merrill Lynch in London.

He is “driving home the point that the ECB is doing much more than people think.”

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