Fed policy makers favor keeping interest rates near zero for a long time to nurture the recovery from the worst recession since the 1930’s. The consumer-price report showing consumer prices rising 0.2 per cent in September, after a 0.4 per cent gain in August supports this policy decision.

Mark Vitner, a senior economist at Wells Fargo Securities LLC, North Carolina said “the economy still has a tremendous amount of slack and the low inflation numbers we are likely to see will give policy makers the flexibility to take their time in raising rates.”

Fed Vice Chairman Donald Kohn this week said that inflation and growth will probably stay below the central bank’s objectives for some time, warranting low interest rates for an “extended period.” New York Fed President William Dudley echoed the same opinion.

With a different view are Kansas City Fed President Thomas Hoenig and Fed Governor Kevin Marsh, who have both been among those saying that rate increases may happen sooner, or with more force, than some investors anticipate.

The next big task facing these central bankers will be how to unwind the vast emergency measures that were put in place to fight the crisis. After the anxiety and tension that permeated their retreat one year ago the mood of relief and cautious confidence was almost palpable.

Housing news provided an additional lift, as the National Association of Realtors reported that sales of existing homes jumped 7.2 per cent in July. Bernanke did temper the mood by warning that the economic recovery was very likely to be slow and arduous, and that unemployment would remain high for another year. A growing number of economists and some Fed officials say that the shift to tighter monetary policies and higher interest rates will have to be much more abrupt than normal to prevent inflation in two or three years.

Mr. Bernanke did caution that strains persist in many financial markets across the globe, and he acknowledged that the banking system’s problems were far from over. This was echoed by Jean-Claude Trichet, president of the European Central Bank, who said “We still have a lot of work to do,” adding that “it would be a catastrophe if governments failed to heed the lessons of the crisis and financial regulation.”

The Federal Reserve is to have certain of its functions taken over by a new consumer protection agency, while The Fed is, by turn, to have a larger role in overseeing large institutions that could pose systemic risks if they became troubled.

The plan is being challenged by the financial services industry and its allies in Congress. There are lawmakers baffled by this dispute with the Obama adminstration, and Mr. Geitner sees this dissension as regulators protecting their powers.

For more please see today’s New York Times for an up to date.

Decades of bad decisions, from expensive compromises with their unions, ignoring the need to manufacture fuel efficient cars, and consistently bad design decisions, along with strong competition from Japanese, Korean and other foreign automobile manufacturers, have badly wounded their ability to compete in today’s market place.

Government assistance is needed for them to not only get viable again, but to actually stay in business, and they have no choice but to have to play under the government’s new rules. Climate change legislation is on the horizon, and President Obama is fully committed to force the American car makers to join the new reality. They must produce fuel efficient cars for the American consumer.

For an in depth look at the new reality facing Detroit read John M.Broder and Micheline Maynard’s article in Wednesday’s New York Times.

Insurance companies are not regulated by the federal government, but rather by the states, and in Wilson’s opinion the states do not have the expertise, that a federal regulator would, in recognizing and dealing with possible future risks to the financial markets.

It is most probably reassuring to the American public to have the CEO of one of the county’s major insurance companies providing an insight into a problem that needs fixing, so as to prevent a repeat of mistakes that lead up to our current crisis.

The article was originally published in April and it created plenty of criticism, as one can read in this article in the Chicago Tribune.

This latest government employment report, along with some positives from the Treasury stress test on American Banks was reason enough for investors to send the stock market upwards on Friday.

But, is the worst really over? When will the economy regain its vigor? There are too many of our fellow Americans out there without jobs, suffering through this recession, receiving mixed messages from economists and others who are supposed to have the answers, but just spread confusion with their pronouncements.

We suggest reading Peter S. Goodman and Jack Healy’s
article in Saturday’s NY Times for the latest perspective on the nation’s ongoing financial situation.

The President stated that the unions have made enormous sacrifices, and potential concessions that they can live with.  Regarding  GM, Obama said that they’re still in the process of presenting their plans. He also said that GM  has always created lots of good products, and if they are able to get through these difficult times and engage in some of the very difficult choices that they’ve already made, they can emerge a strong, competitive, viable company.

President Obama went on to say that he would love to get the U.S. government out of the auto business as quickly as possible, noting that there are circumstance in which a bad recession compounded some great weaknesses that already existed in the auto industry. He also said that he considers it his obligation to make sure that any taxpayer dollars that are in place to support the auto industry are aimed not at short-term fixes that continue these companies as wards of the state, but rather institutes the kind of restructuring that allows them to be strongly competitive in the future.

Getting back to the Chrysler bankruptcy scenario Obama mentioned that it was the prudent and appropriate thing for Chrysler  to engage in the filings, because they had to prepare for possible contingencies. It’s not yet clear that they’re going to have to use them. The fact that the major debt-holders appear ready to make concessions means that even if they ended up having to go through some sort of bankruptcy, it would be a very quick type of bankruptcy. They would then be able to continue operating and emerge on the other side, in a much stronger position.

The president reiterated that his goal was to make sure that there is  a strong, viable, competitive auto industry in place, and for that to happen some tough choices are being made. He noted that there will be significant hardships involved, particularly for the workers and the families in these communities.

One of the questions asked to the president, at the news conference, referred to the fact that he is currently the chief shareholder of a couple of very large mortgage giants, and about to become the chief shareholder of a car company, probably two. The questioner asked the president what kind of shareholder will he be, and what is the government’s role as the keeper of public trusts and bonds in companies that will hopefully revert eventually to public companies.

Obama answered by saying that our first role should be “shareholders that are looking to get out,” and he further stated that “he did not want to run auto companies, mortgage companies or banks.” He reminded that he has two wars to run already and more than enough to do, and the sooner we can give up ownership of those companies the better off we’re gonna be. Good news to hear!

Regulators have stress tested the 19 largest U.S. banks to determine their capital needs should economic conditions deteriorate further. Officials have said that they will release the results in some form this week. The markets are anxiously awaiting the results as investors try to figure out which banks are on the path to recovery and which might face pressure to raise more capital, possibly through government funds.

Investors have embarked on their own guesswork, crafting their own results of the governments’ tests. Some banks’ shares have already been punished following early leaked reports that they will need more capital. Citigroup may have to raise more capital, according to preliminary results of its stress test, people familiar with the matter said on Tuesday, and Bank of America Corp may need billions of dollars more, the Wall Street Journal has reported.

Most experts agree that the idea of the stress tests has changed since Treasury announced the exercise in February. The original intention was to use the tests to determine which banks might need to participate in a new government capital infusion program, but market appetite for information on banks’ health has expanded its significance. Officials have said that the public disclosures will likely allow outside analysts to test their own assumptions of the banks’ health against regulators’ assessments.

However, a document the Federal Reserve released last Friday revealing the underlying assumptions of the stress tests did not include many specifics. The government has to decide whether to release the results of individual banks next week, or just disclose summary information for all the tested banks. Regarding whether banks themselves self disclose, bank examination findings are generally exempt from U.S. Securities and Exchange Commission disclosure requirements. Some experts have argued that the stress test process has risen to the level of a material event that investors should be informed about.

The Fed met with 19 of the top financial institutions to go over the stress test results. In some cases, some of the tests with each party took less than 30 minutes.  In addition, several of the banks, when tested, mentioned a need for more capital, but no one yet knows who those banks are.  In fact, not all of the identities of the 19 financial institutions that were subjected to federal stress tests have yet been learned. Analysts believe that they likely include regional banks with large exposures to commercial real estate in the Midwest and Southeast. Those few that are familiar with the matter said at least three banks are in this position.

Government officials believe most banks, in need, can improve their capital footing without taking money from the government bailout fund. This could be done by raising funds from private investors or converting the government’s existing investments in banks into a new type of equity that would better cover banks in case of future losses. In another scenario the U.S. could end up owning large chunks of banks, raising the specter of something akin to nationalization. Federal officials have said any such move would be temporary.

Some banks could end up requiring a cash infusion from the U.S. Treasury. For those banks  it will become very difficult to obtain private funding.  The word from the Fed from all of their meetings was to zip up about the results of the test. However, as this is Washington, we should  know just about everything by Monday or Tuesday.