Financial thoughts

Michelle Price was attending college and despite working two jobs was unable to put together enough money to buy a house for herself and her daughter.

That was before she participated in a program run by St. Louis County that gave her a $3,000 down payment, covered her closing costs and provided a zero-interest second mortgage. She was able to buy a three-bedroom, two-bath house in Spanish Lake for $165,000.

Individuals and families that meet income guidelines and complete a home-buying counseling course may become first-time buyers for as little as $500 down. Price, 49, said she couldn’t be more pleased with the Plantation Court house she bought last year.

"I really like it," she said. "I’d been in an apartment for 15 years. My house has a big kitchen with an open breakfast and dining area. It has a living room and a full basement, even though it’s unfinished."

Bank of America financed $100,000 of the purchase price with the county-run program financing the rest, Price said.

"I got a good interest rate," she said. "It’s fixed for 30 years."

About 200 individuals and families take part each year in the affordable housing program known as the St. Louis Home Consortium.

The consortium, formed in 2003, includes unincorporated St. Louis and St. Charles counties, Jefferson County, and the cities of Florissant; O’Fallon, Mo.; St. Charles and Wentzville. The city of St. Louis has a similar but separate program.

The Department of Housing and Urban Development gives the consortium about $4 million a year for down payments and second mortgages for first-time home buyers. Income limits apply. To get help in St. Louis County, for example, an individual’s annual income may not exceed $38,000. A family of four cannot earn more than $54,300.

Darlene Rich, a community development manager for the county, runs the consortium. She said the second mortgages — forgivable after five years in Wentzville, Florissant and St. Louis and Jefferson counties — act as "gap financing" for the buyer guaranteed payday loans.

After a bank or other lender approves a program participant’s primary loan, a consortium member purchases a second mortgage equal to the difference between the home’s appraised value and what the buyer can afford, Rich said. If the buyer, for example, can afford a $100,000 mortgage on a house valued at $125,000, the consortium member provides a second loan of $25,000.

Buyers also can use the $8,000 federal tax credit for first-time home buyers.

Participants must complete a home buying-counseling class conducted by one of three not-for-profit housing agencies that also are approved as the program’s lenders.

Second-mortgage foreclosure rates are low, less than 0.5 percent, said Tyrone Turner, acting director of housing and asset management for Better Family Life, one of the three approved lenders.

"Plus, the classroom part, I think, is really crucial, especially for those persons who have never purchased a home before," he said.

Participants learn the basics of mortgages, credit, insurance and even get tips on home maintenance.

In St. Louis County, three small developments are geared toward the affordable housing program. They are Villas at Woodson Ridge in Woodson Terrace, Savannah Heights in Jennings and Glenechort Homes in Wellston. Second mortgages on the homes there range from $25,000 to $42,000.

Turner said the housing slump dropped the number of participants in his agency’s share of the consortium’s mortgage program to about 75 last year from a peak of "well over" 100 in 2006. The $8,000 federal tax-credit for first-time home buyers and the slowly recovering economy will bring the number back to about 100 this year, he said. "There are still people buying homes. There are still people going to work every day."

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Consumer confidence in Italy unexpectedly rose in December to the highest in more than seven years as Italians grew more optimistic about purchasing durable goods after Europe’s fourth-biggest economy emerged from a recession.

The Isae Institute’s consumer confidence index rose to 113.7, the highest since July 2002, from 112.8 in November, the Rome-based research center said today in an e-mailed statement. Economists had forecast a drop to 112.7, the median of 12 estimates in a Bloomberg News survey showed.

Italy’s economy snapped five quarters of contraction and expanded 0.6 percent in the third quarter and the recovery is gaining momentum as consumer spending and exports pick up. Confindustria, Italy’s employers lobby, this month raised its forecast for 2010 growth to 1.1 percent from 0.8 percent, saying the recovery “will not derail.”

The gain in Italian optimism contrasted with growing pessimism in Germany. Consumer confidence in Europe’s biggest economy fell for a third month as households became more concerned about job security and rising energy prices, a separate report said yesterday. Consumer confidence in France fell in December for the first time in nine months and spending by French consumers declined in November, a separate report said today.

Italians were more optimistic about their personal situation and their ability to buy durable goods such as cars and appliances, today’s report said.

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Once the world’s online search leader, Yahoo’s share has sharply declined, putting it in danger of losing its relevance in a market increasingly dominated by Google.

Yahoo’s search market share in November fell to 17.5% from 18% in October, according to a monthly comScore report released late Wednesday. It’s the lowest share ever recorded for Yahoo (YHOO, Fortune 500).

Cannibalizing Yahoo’s market share is Microsoft (MSFT, Fortune 500), whose new Bing search site gained 0.4 points of the search market to 10.3% in November. That was the first time Microsoft owned more than 10% of the market since September 2007.

Despite that good news, it’s really a mixed blessing of sorts for Microsoft, which entered into a search deal with Yahoo that is expected to start in the next several months. When the deal was announced in July, analysts largely praised the marriage, since the companies held a combined 28% of the market — close to the 30% that experts say is needed to convince advertisers that a company is a relevant competitor in a marketplace.

Since the July announcement, "Microhoo" has gone in the wrong direction. The companies’ combined share has taken a 0.4-point hit, as Yahoo’s share has fallen by 1.8 points, outpacing Bing’s 1.4-point gain.

"They’re still going to be a viable No. 2 behind Google, but less so than they expected," said Daniel Ruby, research director at search-advertising firm Chitika, Inc. "Everyone is surprised by the fact that Yahoo has lost such a significant amount of traffic. Thirty percent seems like a very long shot."

Google (GOOG, Fortune 500) grew its share by 0.9 points since July to take 65.6% of the search market in November. That’s the largest share Google has ever garnered.

Meanwhile, Yahoo has lost share for 10-straight months. As the closing date nears for the search rivals’ deal, some say Yahoo is reaching a tipping point that could make or break the value of its partnership high risk personal loans.

The devil is in the details

Under the 10-year agreement, Microsoft will power the searches that users make on Yahoo.com. In return, Microsoft will pay Yahoo 88% of the revenue it gains from searches on Yahoo’s sites. Yahoo.com and Bing.com will maintain their own branding but search results on Yahoo.com will say "powered by Bing."

"There is no getting around the fact that the market share trend for Yahoo is absolutely awful," said Benjamin Schachter, analyst for Broadpoint AmTech. "The Microsoft deal does not guarantee any search revenue, only revenue-per-search levels; therefore, search share and volume are as critical as ever."

Still, another school of thought says not all is lost for Yahoo.

Both Yahoo and Microsoft have poured millions of dollars into advertising campaigns to get users to come to their Web sites. Yahoo’s new "It’s Y!ou" campaign has been plastered all over billboards and television spots. Microsoft just launched its new highly publicized Bing iPhone App on Tuesday.

As a result, some advertisers believe users who search on those sites are more likely to indulge a sales pitch and therefore are more likely to click on their ads than Google’s users.

"Microsoft and Yahoo offer quality versus quantity," said Ruby. "The traffic they drive is more valuable than Google’s in some advertisers’ eyes, because their users are going to be delivering higher margins."

So even as Google continues to gain share at "Microhoo’s" expense, Yahoo and Microsoft live on to fight for high-quality searchers as a way to stay relevant. 

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Social gaming leader Zynga Inc. has taken $180 million in capital from various investors, with the largest portion coming from the Russian firm Digital Sky Technologies, which this year also made a $300 million investment in Facebook Inc.

Others in the round included new investors Andreessen Horowitz and Tiger Global and existing investor Institutional Ventures Partners. Previous investors include Kleiner Perkins Caulfield & Byers, Union Square Ventures, Foundry Group and Avalon Ventures.

A portion of the new capital will be used to fuel Zynga’s growth and the rest will provide liquidity for employees and investors, Zynga said in a press release saving account payday loan.

Founded in 2007, San Francisco-based Zynga has grown at a spectacular rate with games including FarmVille, Café World, Zynga Poker, Mafia Wars, YoVille, FishVille and the new PetVille, currently the fastest growing social game online.

Zynga’s games are available on social networks such as Facebook, MySpace, Bebo, Friendster and Tagged, as well as on Yahoo and the iPhone.

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Roshni Sircar racked up nearly $20,000 in credit card debt after using a number of special purpose cheques that came with her credit card.

The 75-year-old had never used her American Express card before. But when faced with a family emergency, she began using the special offers to help her grandchildren.

She didn’t know the introductory 2 per cent interest rate was just that – a short-term "teaser" rate. "We were really in a tight spot and we used the money," Sircar said.

As her interest rate began to rise, she missed some payments. Her rate eventually jumped to 25.99 per cent. At that point, Sircar realized she couldn’t pay off her bill.

After writing to the head of Amex Canada, Finance Minister Jim Flaherty and the Star, her rate was lowered to a more manageable level. But she still feels "entrapped" by the special offer.

Banks and credit card companies often argue the popularity of credit cards represents a "democratization of credit." Yet, some experts suggest the current system is fundamentally rigged against the consumer and the merchant.

"In consumer contracts highly sophisticated corporations will often exploit consumers’ behavioural biases," Oren Bar-Gill of Harvard Law School wrote in a paper entitled Seduction by Plastic. "Competition cannot cure such exploitation. On the contrary, competitive forces compel sellers to take advantage of consumers’ weaknesses."

The federal government is facing increased pressure to regulate Canada’s credit card market and has taken steps to respond to consumers’ and retailers’ complaints. Within days, the Competition Bureau is expected to rule on two key issues that could fundamentally alter the payments-industry landscape.

The first deals with a request from the Interac Association, Canada’s non-profit debit network operator, to become a for-profit company better able to compete with Visa and MasterCard as those two multinational giants enter Canada’s $168-billion a year debit market.

The second has to do with allegations that Visa and MasterCard have abused their market dominance in the credit card market, where they hold 94 per cent of market share.

And by Jan. 18, industry members are to issue comments on Flaherty’s proposed voluntary code of conduct for the credit and debit sector. The code contains provisions that would help retailers, especially smaller ones, gain some clarity and clout in dealing with their payment processing fees.

Earlier this year, Flaherty announced new regulations aimed at protecting consumers from some of the problems that may have contributed to Sircar’s situation.

Among other things, these new rules require a "summary box" on all credit-card contracts and applications clearly outlining information about interest rates, minimum payments, annual fees and other applicable costs, including penalty charges for bounced cheques.

But while initiatives like these are helpful, experts say more could be done to help low-income Canadians. They cite innovative new card products that give consumers the power to set their own spending limits, or require Ottawa to be the guarantor on the kind of secured card offered to people consider poor credit risks.

The Canadian Bankers Association says "income is not a factor on who pays off their credit cards" in Canada.

But research by the Bank of Canada this year shows the bottom 20 per cent of earners carry a larger share of credit card debt in percentage terms than other income groups. Additionally, the lowest-income earners have the largest share of "unsecured" debt, which includes credit cards.

Canada’s banks say a multitude of cheaper options, such as low-rate credit cards and personal lines of credit, are available to those consumers who carry a balance.

Nancy Hughes Anthony, president and chief executive of the Canadian Bankers Association, estimates more than 60 low-interest-rate credit cards are available in Canada. The Financial Consumer Agency of Canada, however, recently told the Senate banking committee that some low-interest credit cards have disappeared.

And critics say low-income Canadians are often denied access to those low-rate cards because they lack sufficient assets. "They don’t have low-cost options at all," said Armine Yalnizyan, senior economist with the Canadian Centre for Policy Alternatives payday loans.

Banks do not release data about the number of low-rate cards they issue compared with the number of applications they receive, and the bankers association has no statistics on the number of Canadians with low-rate cards.

When asked about consumer eligibility earlier this year, Hughes Anthony said acceptance is "determined on a case-by-case basis."

Other alternatives, such as secured credit cards or prepaid credit cards, disadvantage consumers with unfavourable terms or high service charges, experts say.

"For low-income consumers who don’t have access to a conventional credit card, the costs go up much higher," said Michael De Santis, a researcher at the Public Interest Advocacy Centre.

Low-income consumers, those with spotty credit scores and new immigrants are often encouraged to get secured credit cards to build or repair their credit histories.

But many consumers lack sufficient funds to pay the required lump sum. That upfront cost is usually equivalent to or higher than the card’s credit limit. The bank collects that money as security but the funds do not earn the customer any interest, even if the sum remains tied up for years.

In addition, prepaid cards are more costly to use than regular credit cards. Not only must users load their own money on the card, but they are also on the hook for "significant fees," De Santis said.

Those can include upfront fees for the card to be issued, monthly maintenance fees, invoice charges, customer service fees, transaction fees, ATM fees, reloading fees and even cancellation fees.

"It is very expensive to have one of these prepaid cards in your pocket and they don’t offer any advantages over a conventional card other than the fact that they are more available to people who might not otherwise qualify," De Santis said, adding the product does not help build a credit history. "The less fortunate classes actually end up having to pay the greater amount than the more fortunate ones, which I think is a terrible irony."

The advocacy centre is urging the federal government to collaborate with the banking industry on creating a new financial product that could help low-income Canadians, new immigrants and aboriginals build financial credibility and make payments in an increasingly "digital marketplace."

It argues that eligibility "could be proportional to income level, so as to avoid a lower income becoming a barrier to build a level of creditworthiness."

That may involve a new type of secured card, where the federal government provides some security to the lender so the entire burden does not fall on cash-strapped consumers, De Santis said.

Others champion the idea of "self-directed" credit cards. Angela Littwin, an assistant professor at Harvard Law School, says such cards would allow consumers to cap their credit limits and even block the card’s acceptance at certain stores.

Merchants are also lobbying for change. Retailers want Ottawa to quickly set new ground rules for the debit market as Visa and MasterCard prepare to take on the non-profit Interac Association, whose low-cost flat fee model is the envy of the world.

Flaherty’s proposed voluntary code of conduct won praise from merchants when it was announced Nov. 18. But retailers and small businesses fear credit card firms will be pushing Ottawa during the current 60-day consultation period to water down certain key provisions.

One proposal, designed to give merchants more power in dealing with Visa and MasterCard debit, is at greatest risk, the retailers fear.

During the period when Visa and MasterCard are building their debit networks, the credit card companies plan to issue co-badged cards that also run on the more ubiquitous Interac system.

MasterCard says its new debit product will automatically run on its Maestro network, wherever it is present. Visa says it’s giving consumers the choice but merchants says Visa’s network will show up first on the PIN pad and then Interac.

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Greek Finance Minister George Papaconstantinou promised to speed up fiscal and budget reforms to overhaul the economy, saying the country has no time to spare after investor concerns sent bonds and stocks tumbling.

“The biggest gamble the government has is how to regain credibility,” Papaconstantinou said in a speech in Athens today. “The initiatives will be faster and more dynamic. We don’t have the luxury to wait. We will speed up everything, we owe it to the citizens of Greece.”

Greek bonds plunged to their lowest in seven months on Dec. 9 and stocks slumped after Fitch Ratings cut Greece one step to BBB+, saying Prime Minister George Papandreou’s two-month-old Pasok government isn’t doing enough to tame a deficit of 12.7 percent of output, the highest in the European Union. A day earlier, Standard & Poor’s put its A- rating on watch for downgrade.

European Central Bank Vice President Lucas Papademos today characterized Greece’s fiscal situation as “extremely serious,” in comments to reporters in Berlin.

“Greece should take decisive action and in a timely manner,” Papademos said.

Papaconstantinou said the government will begin talks next week on crafting a new tax system that will be fairer and more effective. An audit of government spending will begin next year with the assistance of international companies, he said Online payday loans.

Debt

The year will close with 300 billion euros ($438.5 billion) in debt and “we must stop the rising dynamic of it,” Papaconstantinou said. The stability plan the government will submit in January needs to include a plan for the “gradual reduction” of Greece’s debt, he said.

Nobel laureate Robert Mundell said in an interview with Bloomberg Television in Berlin today that a debt default by Greeece “would send shockwaves through the system.” He predicted the country would “handle the problem by itself,” although neighboring economies may eventually provide resources.

“This is a good occasion to set up a fund which is available for bailout, a kind of security fund,” he said. “Even if it won’t be used, there might be other occasions to come up at some point in the future.”

ECB President Jean-Claude Trichet said yesterday that “courageous” action is needed to close the budget gap. Greece’s 2010 budget projects the deficit will be reduced to 9.1 percent of gross domestic product.

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As the debate over pension reform in Canada heats up, the financial and investment industry is warning the government against a one-size-fits-all approach and urging politicians to improve the existing system.

The Investment Funds Institute of Canada (IFIC), the Canadian Bankers Association, and the Financial Advisors Association of Canada, dubbed Advocis, are among the groups that would like to see improvements in employer-sponsored pension plans and RRSPs (registered retirement savings plans.)

Multi-employer pension plans could be another solution for the challenges facing Canada’s retirement savings and income system, Dean Connor, president of Sun Life Financial Canada, said Thursday.

Pension laws should be amended to allow non-affiliated employers and the self-employed to take part in large multi-employer plans, Connor said. Employees could be automatically enrolled, with an opt-out provision made available.

"Getting it right will ensure that future generations of Canadian retirees can spend their golden years in security, comfort and dignity," Connor said in his address to the Economic Club of Canada.

Federal Finance Minister Jim Flaherty will meet with his provincial counterparts in Whitehorse next week to talk about pensions.

The financial industry is also awaiting a report by a federal-provincial task force on pension reform. The group consists of officials from B.C., Alberta, Manitoba, Ontario and Nova Scotia.

Meanwhile, Ontario is in the midst of its own pension reform. Finance Minister Dwight Duncan tabled draft amendments Wednesday, the first of two pieces of legislation meant to modernize the province’s pension laws.

Studies show that only one-third of Canadian employees are in an employer-sponsored pension plan. That has some calling for improvements to private plans, while others argue that the public system needs to be more robust easy payday loans. Federal Liberal Leader Michael Ignatieff has been touting the idea of a supplemental Canada Pension Plan fund.

"The CBA believes that the savings system in Canada is not broken and there is not a pressing need for a new one-size-fits-all retirement savings program that would duplicate systems and infrastructure that are already in place," the Canadian Bankers Association wrote in a research paper issued last month.

While more research is needed, "some conclusions are already clear," the CBA said. "Canada has a strong private sector retirement system that, with some targeted fixes, could be even more effective in helping Canadians plan and save for retirement."

The CBA recommends making RRSPs more attractive, enhancing financial literacy and updating rules for employer-sponsored plans.

Defined-benefit pension plans promise employees a specific monthly benefit upon retirement, whereas defined-contribution plans give assurances only on the amount of money that companies and employees will invest upfront. These are becoming more popular as employers look to cut costs and shift the investment risk of running a retirement plan to workers.

"We think there are improvements that could be made to defined-benefit programs, defined-contribution programs, and RRSPs. Whether you have a supplementary plan or not, those changes should be considered and moved on," said Barbara Amsden, IFIC’s director of strategy and research.

Advocis argues that making defined contribution plans or group RRSPs more accessible would help Canadians save for retirement, said president and chief executive Greg Pollock. As for a supplemental CCP fund, "it may be that we need both."

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The Obama administration expects the cost of the Troubled Asset Relief Program to be $200 billion less than projected, helping to reduce the size of the budget deficit, a Treasury Department official said yesterday.

The administration forecast in August that the TARP would ultimately cost $341 billion, once banks had repaid the government for capital injections and other investments. Congress authorized $700 billion for the program in October 2008.

Banks have paid back $71 billion so far, and a planned repayment by Bank of America Corp. would bring that figure to $116 billion. Treasury Secretary Timothy Geithner said in an interview last week that he expects the TARP to get as much as $175 billion in repayments from banks by the end of 2010.

“The fact that they are spending less TARP money means that recovery is better and stronger than expected, and that’s all positive for growth,” said Mitul Kotecha, Hong Kong-based head of global foreign-exchange strategy at Calyon, the investment banking unit of France’s Credit Agricole SA. “It shows that things are progressing in the right direction.”

The financial bailout program, begun under President George W. Bush, has drawn fire from critics in Congress who say the government has done more to help Wall Street banks than average Americans. Last month Republican Representative Kevin Brady of Texas told Geithner he should resign during a hearing of the Congress’ Joint Economic Committee.

Create Jobs

House Speaker Nancy Pelosi, a California Democrat, said last week that legislation is being written to use some TARP funds to help local communities and small businesses.

Pelosi said TARP funds would be “appropriately used” to pay for new jobs promotion programs because “the more jobs we create the more money comes back into the public till” as tax revenue that will “reduce the deficit.”

House Republican Leader John Boehner said Geithner should shut down the financial bailout program and use money left in the fund to reduce government debt.

The U.S. budget deficit reached a record $1.42 trillion in the 2009 fiscal year that ended Sept. 30 as the government spent money on stimulus programs to pull the nation out of the worst recession since the 1930s and tax revenue declined.

“The deficit is definitely a concern that’s overhanging the dollar, there’s no doubt,” said Calyon’s Kotecha. “But there is a long way to go before the deficit improves to a point where concerns completely recede. On the margin, it’s good news for the dollar but I don’t think we will see a huge impact off this news.”

Turning a Profit

The yield on the benchmark 10-year Treasury note was little changed at 3.47 percent as of 7:50 a.m. in London, according to BGCantor Market Data.

The trade-weighted Dollar Index fell 0.4 percent to 75.604 as of 7:55 a.m. in London from 75.911 in New York late last week. The index tracks the U.S. currency against the euro, yen, U.K. pound, Canadian dollar, Swiss franc and Swedish krona.

The Treasury invested about $245 billion last fiscal year into U.S. banks to shore up the financial system. In the long run, those investments are expected to turn a profit of $19 billion, compared with a previous estimate of a $76 billion cost, the Treasury official said yesterday.

The government’s net cost for its investments in banks, auto companies and insurers came to $42 billion last fiscal year, the official said, about $110 billion less than projected in August.

‘Not Good Enough’

The Treasury official said the TARP should be judged on the basis of its effects on the financial system, and not its cost.

The U.S. economy expanded for the first time in a year in the third quarter, growing at a 2.8 percent annual rate. The Standard and Poor’s 500 Financials Index has jumped 140 percent since March 6, and the cost of three-month dollar loans in London between banks fell to 0.257 percent on Dec. 4 from 1.41 percent at the beginning of the year.

Employers cut 7.2 million jobs since the recession began in December 2007. Payrolls fell by 11,000 workers in November, the smallest decline in 23 months, figures from the Labor Department showed last week. The jobless rate declined to 10 percent, from a 26-year high of 10.2 percent in October.

Geithner, in last week’s interview, said the decline in job losses was “progress, but not good enough.”

As banks repay their TARP funds, the Treasury is disposing of the stakes it acquired through the program. To exit TARP, and the additional oversight it brings, banks must buy back the government’s preferred shares and also agree on how to dispose of warrants the Treasury received as part of the deals.

Goldman Sachs Group Inc. redeemed its warrants for $1.1 billion, while JPMorgan Chase & Co., Capital One Financial Corp. and TCF Financial Corp. have opted to let the Treasury auction their warrants. That process is now under way.

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Federal Reserve Chairman Ben Bernanke got a rough going over from both his supporters and detractors at his Senate confirmation hearing Thursday.

Even some of those who praised his actions during the financial troubles of the last two years, such as Senate Banking Committee Chairman Chris Dodd, balanced that support with arguments that the central bank should be stripped of some of its bank regulation powers due to its past failures of oversight.

While many Democrats on the banking panel joined Dodd in saying they would vote for another four-year term for Bernanke, some of the Republicans questioned whether they could support the chairman who was first appointed by President George W. Bush.

One long-time Bernanke critic Jim Bunning, R-Ky., said he was ready to do everything he could to block or delay the confirmation, joining a similar threat made late Wednesday by Sen. Bernie Sanders, the Socialist senator from Vermont who is among the 60 members of the Democratic caucus.

The threat of a filibuster by Sanders and Bunning, two senators with diametrically opposed views on most issues, shows the breadth of anger faced by Bernanke sparked by the Wall Street bailouts of the 15 months. A filibuster would mean that Bernanke would need to get at least 60 votes, rather than the simple majority of 51, in order to be confirmed.

And the questions by Dodd and others about the Fed’s continued role as a bank regulator raised questions about how Bernanke will be able to do his job if he is confirmed for another term, which is still widely expected.

Dodd said Bernanke and the Fed deserved credit for the steps taken in the financial crisis of a year earlier to stop the economic crisis from becoming significantly worse than it did.

"I believe you are the right leader for this moment in the nation’s economic history and I believe your reappointment sends the right signal to markets," Dodd said during his opening statement.

But the committee’s ranking Republican, Sen. Richard Shelby of Alabama, was far more critical of Bernanke in his opening statement, telling Bernanke "I fear now our trust and confidence (in the Federal Reserve) was misplaced."

"Not everything that went wrong depends on the system because that system also depends on the people who run it," he told Bernanke. "It’s those individuals who need to be accountable for their actions or their failure to act."

Still, despite the implication that he couldn’t support confirmation, Shelby did not say how he intended to vote.

Two of the Republicans on the committee, Judd Gregg of New Hampshire and Bob Corker of Tennessee, did praise Bernanke and said they would vote for his confirmation.

"The simple fact is if you hadn’t been there and been willing to take extraordinary action last fall and last winter and in early spring…it’s very likely we would be experiencing a depression or if not a depression then certainly a recession that is radically more severe," said Gregg.

The next step in Bernanke’s confirmation would be a vote by the committee, which has not yet been scheduled.

Corker said he is certain Bernanke will be confirmed, although he held out the possiblity that the full Senate might not vote on confirmation until it was done with debate about reforming financial regulation. But he said that under law, Bernanke would stay in the top job at the Fed, even if the confirmation vote did not occur before the end of his term as chairman on Jan. 31.

Fight over Fed’s future powers

But there was a lot of talk even from Bernanke’s supporters on the committee, both Democrat and Republican, about the need to limit the Fed’s role as part of an overhaul of financial regulation.

Dodd has proposed legislation that would strip much of the bank supervisory duties from the Fed, giving them instead to a newly created authority. He said it might be better if the Fed simply focuses on using monetary policy to support economic growth and fight inflation while maintaining a stable financial system.

Dodd also said the financial crisis is at least partly due to poor supervision of the banking sector by the Fed.

"I admire what you’ve done over the last two years," he said. "But we shouldn’t have had to go through what we did for the last two years had there been cops on the street, doing their jobs, telling us what was going on and allowing us to avoid the problems in the first place."

"Why should I give an institution that failed in that responsibility the kind of exclusive authority we’re talking about here?," Dodd asked no faxing payday loans.

Bernanke responded that the Fed could not have taken the steps that Dodd had praised to stabilize the financial system if it were stripped of its role as banking regulator.

"There’s no way we could have been as involved and effective in this crisis if we did not have that knowledge and expertise," he said.

Bernanke also opposed a proposal that recently passed the House Financial Services Committee to give the General Accountability Office power to audit the Fed’s monetary decisions, saying that it would be seen by investors as giving Congress the power to pressure the Fed to reverse or delay unpopular rate hikes.

He said if there are increased worries about Congressional interference in Fed activity, the central bank would not be able to stop real rates from rising because investors would demand higher yields on bonds.

Questioned by Sen. Robert Bennett, R-Utah, about the risk of a return of soaring inflation of the late 1970’s, and whether the Fed would have to raise rates to the record highs of that era to once again to conquer such runaway prices, Bernanke said he was confident there is not a risk of a return of such inflation.

But he added that the ability of the Fed to beat inflation at that time was a "case study" of why Congress should not audit monetary decisions of the Fed.

Mistakes were made

Bernanke admitted that the Fed made mistakes in supervising the banking system ahead of the financial crisis, and promised to do better. But he said that supervision is already improving, and that it would be a bad idea to strip the Fed of its powers.

"If you fight a battle and lose the battle, does that mean you never use the army again? You have to improve and fix the situation. You don’t have to necessarily eliminate the institution," he said in response to one of Shelby’s question. "We didn’t do a perfect job by any means, but I don’t think we stand out as having done a worst job than other regulators."

Bunning, the only member of the Senate to vote against Bernanke when he was first nominated to head the central bank four years ago, was again his harshest critic.

Bunning said Bernanke and previous chairman Alan Greenspan were responsible for helping to inflate the housing bubble whose bursting caused the housing crisis, and that the Fed continues to create more problems by pumping too much cheap money into the system.

At one point Bunning even slipped and referred to Bernanke as "Greenspan," prompting chuckles from both the chairman and his critic.

"You put the printing presses into overdrive to fund the government spending and hand out cheap money to your masters on Wall Street, which they used to rake in record profits while ordinary Americans and small businesses can’t get loans for their everyday needs," Bunning said. "Where I come from we punish failure, we don’t reward it."

He attacked Bernanke for the bailout of American International Group (AIG, Fortune 500) and a recent report from an inspector general that the Fed should not have paid 100% of the money owed by AIG to leading financial firms.

"The AIG bailout alone is reason enough to send you back to Princeton," Bunning said, referring to where Bernanke taught before entering government.

Dodd joined Bunning in his criticism of the Fed’s handling of those payments in the AIG bailout. Bernanke answered that he did not have the leverage to force those banks to accept lower payments, known as a "haircut," during those negotiations.

"The only way to get the haircut is to have a credible threat that if you don’t take the haircut they’re going to go bankrupt and you’re going to lose everything," he said in response to a question later in the hearing. "And since we had intervened to prevent AIG from going bankrupt, it just wasn’t credible."

Bernanke insisted that what was done to bailout Wall Street was done because of the impact further failures would have had on Main Street.

"I’m not a Wall Street person. I’m an academic. I come from a small town," he said. "I did it because I knew from my studies that the collapse of the financial system would have extraordinarily bad consequences for Main Street. And I firmly believe we did the right thing." 

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South Korea’s economy expanded at a faster pace than initially estimated in the third quarter, boosted by rising overseas orders for cars and semiconductors plus local spending by consumers and companies.

Gross domestic product increased 3.2 percent in the three months ended Sept. 30, compared with the 2.9 percent gain reported in October, the central bank said in Seoul today. The economy grew 0.9 percent in the third quarter from a year earlier, compared with the previous estimate of 0.6 percent.

“South Korea’s economy has benefited from relatively better exports as well as the effects of expansionary policies,” said Ryu Seung Sun, an economist at HMC Investment Securities Co. in Seoul. “Economic growth will remain relatively strong, even though the pace may weaken somewhat in coming quarters.”

South Korea has led a regional rebound with China and Singapore as companies including Samsung Electronics Co. and LG Electronics Inc. reported a jump in profits. The nation is projected to be one of the first in Asia to boost interest rates as it helps lead the region out of a slowdown caused by the global financial crisis.

LG Electronics Inc., the world’s second-largest maker of liquid-crystal-display televisions, reported third-quarter profit that beat analysts’ estimates, driven by record shipments of televisions and higher sales of appliances.

Government Spending

The central bank and the government have raised their economic forecasts for this year. Finance Minister Yoon Jeung Hyun said the economy will probably post zero growth, reversing an earlier forecast for a contraction, and President Lee Myung Bak said last month GDP may expand 5 percent in 2010.

To help prevent the economy from sliding into a recession, the central bank cut the benchmark interest rate by 3.25 percentage points between October and February to a record-low 2 percent and the government increased spending payday loans for bad credit. The benchmark Kospi stock index has risen 44 percent this year and sales at the nation’s main department stores gained the most in 14 months in October.

Exports, which account for about half of the $929 billion economy, rose for the first time in 13 months in November, a government report showed Dec. 1. Overseas shipments will increase 13 percent to $410 billion next year, boosted by demand for semiconductors, cars and display panels, the government said.

South Korea’s exports of goods gained 5.2 percent in the third quarter from the previous three months, compared with the initial 5.1 percent gain estimated in October, today’s report showed. Corporate investment in factories and equipment climbed 10.4 percent in the quarter, up from the 8.9 percent initial estimate.

Private Consumption

Private consumption rose 1.5 from the second quarter, up from the 1.4 percent earlier estimated. Manufacturing rose 9.8 percent from the second quarter compared with the initial estimate of 8.7 percent, while construction investment dropped 2 percent.

Still, there are signs economic growth may slow in coming months. Manufacturers’ confidence has slipped to the lowest level in four months due to uncertainty about the outlook for domestic demand. Consumer confidence also fell in November for the first time in eight months and factory production unexpectedly declined 3.8 percent in October from September.

South Korea’s corporate earnings may fall short of analyst estimates in 2010 as costs climb and the benefits from stimulus measures fade, according to Samsung Securities Co., the nation’s top-ranked brokerage.

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