President George W. Bush eased pressure on financial markets Tuesday with assurances that a $700 billion bailout for the financial sector can be revived, but the crisis spread further through European banks.
The dollar rallied and U.S. stocks recovered 3 percent after suffering their blackest day in 20 years on Monday as the U.S. House of Representatives rejected the rescue plan. The White House, Treasury Secretary Henry Paulson, congressional leaders and the two candidates hoping to succeed Bush as president, Sens. John McCain and Barack Obama, kept up a steady drumbeat of support for the plan, and around the world markets stabilized.
"There's an overarching belief that at some point this week, whether it's Wednesday or Thursday, we'll get something passed by the House," said Arthur Hogan, chief market analyst at Jefferies & Co in Boston.
But global money markets remained frozen, and London interbank offered rates shot to record levels, indicating banks were not lending to each other. The rate for overnight dollar loans rose to nearly 6.9 percent from just over 2.5 percent on Monday.
Without the bailout plan, which would allow the U.S. Treasury to buy toxic mortgage-related assets from banks, credit markets could remain frozen and lead to a recession.
"I assure our citizens and citizens around the world that this is not the end of the legislative process," Bush said.
From Dublin to Moscow, the financial crisis was an ominous presence.
Ireland unveiled a blanket guarantee for savings held by its banks, and for the second time in a month Russia briefly shut down its stock markets.
France, Belgium and Luxembourg poured 6.4 billion euros into Franco-Belgian bank Dexia to avoid defaults on its loans, and France promised new bank measures to help savers.
Shares of British bank HBOS Plc fell on fears that Lloyds TSB Group Plc could renegotiate a deal to buy HBOS.
Dutch banking and insurance group Fortis and regional U.S. bank Wachovia succumbed on Monday.
Wall Street stocks rose as investors bet the bailout package would be approved by the U.S. Congress this week. The dollar rose against the yen and oil rebounded. European stocks recovered from earlier losses.
The White House said Bush had "constructive" talks with McCain, a Republican, and Obama, a Democrat, on Tuesday. Both presidential candidates have urged their fellow members of Congress to pass the bailout package and called for the limit on bank deposit insurance to be increased to boost confidence in banks.
Sen. Harry Reid and Sen. Mitch McConnell, the top Democrat and Republican in the U.S. Senate, promised swift action.
Congress was not in session on Tuesday because of a Jewish holiday. The Senate could take up bailout legislation as early as Wednesday. The House is to return on Thursday.
Lawmakers held discussions with each other and Bush administration officials on Tuesday to explore options, including possible changes in the measure the House defeated.
They could revise the bill or bring it up for another House vote. The next vote could occur in the Senate, where there has been more bipartisan support for the plan.
Monday's defeat in the House was driven by a collection of Republicans and Democrats -- many of whom are in tight re-election races -- who received angry calls and e-mails from constituents upset at the idea of bailing out Wall Street.
(Additional reporting by Ellis Mnyandu in New York, Donna Smith and Thomas Ferraro in Washington, Jamie McGeever in London, and James Mackenzie and Tim Hepher in Paris; Editing by John Wallace)
Stressed financial markets risk doing severe damage to the broader economy, Atlanta Federal Reserve President Dennis Lockhart said on Tuesday.
"Problems in our financial system add significant risk to the downside for the economy," Lockhart told a business group in prepared remarks.
Lockhart said things had become worse rather than better in the past month, noting a considerable deterioration of market conditions and ever-increasing reluctance on the part of banks to lend.
He said labor market conditions had also become more dire, with layoffs becoming more widespread and hiring intentions fading fast.
In this context, Lockhart said inflation would likely be less of a problem.
"I feel better about inflation," he said.
Lockhart added that one recent bright spot in the economy, export growth, was threatened by signs of slowing growth in the economies of major U.S. trading partners.
(Reporting by Pedro Nicolaci da Costa, Editing by Chizu Nomiyama)
Consumer confidence was holding up well this month before the latest bout of financial turmoil but house prices suffered another record annual drop during July, according to data released on Tuesday.
Prices of U.S. single-family homes were down a record 16.3 percent in July from a year earlier, according to the Standard & Poor's/Case-Shiller Home Price Indexes, though a slowing monthly rate of decline has encouraged some hopes that the worst falls may be over.
The Conference Board said its index measuring consumers' mood rose to 59.8 in September from 58.5 in August. That was above Wall Street's expectations but the timing of the survey may not fully reflect the latest chapter in the financial crisis.
"They took the survey before the latest fallout, so I don't know what people would be saying today," said Al Kugel, chief investment strategist, Atlantic Trust in Chicago.
"I think consumers are feeling better more because of the gasoline prices are going down. That was the thing that spooked them earlier this year, every time they had to fill their tank it was $40 or $50."
U.S. stocks held onto gains after the stronger-than-expected consumer confidence data, as did the dollar. U.S. government bond prices, which usually benefit more from weak economic data, extended their losses.
Another report showed business activity in the U.S. Midwest expanded in September at a faster rate than expected, with production picking up rapidly and hiring on the rise.
The Institute for Supply Management-Chicago business barometer slipped to 56.7 from 57.9 in August, but economists had forecast the index at 53.0. A reading above 50 indicates expansion.
LESS PESSIMISM, NOT OPTIMISM
Markets remain vulnerable to swings in sentiment over a bid to bail out the beleaguered financial sector.
A plan to remove up to $700 billion in bad mortgages from financial institutions failed to pass the U.S. House of Representatives on Monday, sending markets reeling.
Tuesday's data was a timely reminder that the economy's woes are a result of the worst housing slump since the Great Depression. Since the peak of the housing boom in July 2006, house prices have dropped by about 20 percent.
Still, there was a case to be made for less pessimism than in recent months, though few would expect a rapid recovery given current economic and financial conditions.
The monthly pace of home price declines since May has slowed to about a third of the rate of the two previous three-month periods, S&P said.
"There are signs of a slowdown in the rate of decline across the metro areas but no evidence of a bottom," David Blitzer, chairman of S&P's index committee, said in the statement.
The Conference Board data showed the gauge of consumers' inflation expectations fell to 6.2 percent from August's downwardly revised 6.6 percent. That was the lowest since 6.1 in March and may help the Federal Reserve feel more comfortable keeping rates low to ride out the economic turbulence.
There were conflicting signals throughout that report. Consumers' evaluation of their present situation fell to 58.8 -- the lowest since October 1993 -- from 65.0 in August. The gauge of expectations improved to 60.5 -- the highest in eight months -- from 54.1.
However, consumers' estimation of the labor market deteriorated. The "jobs hard to get" index rose to 32.8 -- its worst reading since October 2003 -- from 31.7. Similarly, the "jobs plentiful" gauge fell to its lowest also since October 2003, dropping to 12.2 from 13.5.
If the current financial crisis continues to worsen, consumer confidence could take another hit after spending much of the year undermined by high oil prices, which have only recently retreated from record highs.
"September's increase in the Consumer Confidence Index was due solely to an improvement in the short-term outlook," the survey quoted Lynn Franco, director of the Conference Board Consumer Research Center, as saying.
"However, these results did not capture all of the tumultuous events in the financial sector this month and until the dust settles a bit more, we will not know the full impact on consumers' expectations."
The overall consumer confidence index dates back to 1967. Its lowest reading ever was 43.2, reached in December 1974.
(Additional reporting by Al Yoon and Kristina Cooke in New York; Editing by Chizu Nomiyama)