December 11, 2008 / 4:35 AM / 11 years ago

EU grinds toward stimulus

NEW YORK (Reuters) - Senate Republicans threatened to torpedo the $14 billion bailout of U.S. automakers and EU member nations feuded over how to rescue their own economies on Thursday, exposing cracks in global efforts to reverse the credit crisis and recession.

A resident pushes a bicycle toward a market in Beijing December 11, 2008. China's consumer price inflation fell to a 22-month low of 2.4 percent in November, giving the central bank free rein to cut interest rates further to offset an abrupt slump in the world's fourth-largest economy. REUTERS/Jason Lee

U.S. jobless claims hit a 26-year high, the trade deficit widened and the dollar entered rocky territory following a report that mortgage foreclosure activity jumped 28 percent year-on-year in November, when one in every 488 U.S. households received a foreclosure filing.

Elsewhere, China’s consumer price inflation in November fell to its lowest in 22 months, raising concerns about deflation in the world’s fourth-largest economy.

U.S. Senate Majority Leader Harry Reid, a Democrat who favors a bailout of carmakers, said there was a “possibility” of a vote on Thursday night and that “good faith negotiations” were under way searching for a breakthrough.

The White House was pressing skeptical Republicans in the Senate to back the $14 billion bill to prop up Detroit’s Big Three carmakers.

But with Republican President George W. Bush’s influence waning ahead of his January 20 handover to Democrat Barack Obama, “no one cares what the White House thinks,” a senior Republican aide said, and a rescue seemed dead unless all sides could agree on an alternative.

Failure of any of the so-called Big Three carmakers — Ford Motor Co, General Motors Corp or Chrysler LLC — would threaten countless jobs and send shock waves through the global supply chain.

Confidence was further eroded when JPMorgan Chase Chief Executive Jaime Dimon said the bank has had a “terrible” November and December so far, due to mortgages, credit, and high yield bonds and loans.

“It will be a tough quarter,” Dimon told CNBC television. He said U.S. housing prices could fall another 20 percent and that “if we’re lucky,” the market could start to recover after two more quarters.

That helped turn a flat stock market lower with a 10 percent fall in JPMorgan driving down the Dow 2.2 percent. Anxiety over the financial sector and the auto bailout drove the Dow to close nearly 200 points lower at 8,565. The broader S&P 500 lost 2.85 percent.

After the market close, another leading U.S. bank, Bank of America, announced it planned to cut up to 35,000 jobs over the next three years once it completes its roughly $20.5 billion purchase of Merrill Lynch.

DOLLAR TAKES A DIVE

The dollar showed long-anticipated signs of weakness that analysts expected, considering low U.S. interest rates and the deficit spending that will come with economic bailouts. Technical factors also weighed on the U.S. currency.

It fell to a seven-week low versus the yen and euro after a rally since July that had been aided by rapid deleveraging, repatriation and relative weakness in Asian and European economies.

“The dollar is a terribly flawed currency, and perhaps a doomed currency. I’ve driven around the world looking for a sound currency. There aren’t any ... but the yen is the only thing that’s going to go up for a while,” said Jim Rogers, co-founder with George Soros of the Quantum Fund, at the Reuters Investment Outlook Summit 2009.

Rogers also slammed the approach to bailouts, calling them morally and economically outrageous.

“The government is taking the assets from the competent people and giving them to the incompetent people and saying, now you can compete with the competent people. It is horrible economics,” Rogers said.

A similar debate took place across the Atlantic with European Union leaders meeting in Brussels to discuss a 200 billion euro (177.6 billion pound) stimulus package and Germany criticizing other member states for rushing into debt with untested bailout plans.

Slideshow (3 Images)

“The speed at which proposals are put together under pressure that don’t even pass an economic test is breathtaking and depressing,” German Finance Minister Peer Steinbrueck said in an interview with Newsweek magazine.

But European leaders appeared to be moving toward agreement after German Chancellor Angela Merkel said she backed a stimulus package that amounted to some 1.5 percent of GDP.

Reporting by Reuters bureaus worldwide; Editing by Steve Orlofsky, Brian Moss, Gary Hill

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