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The European Central Bank will announce changes to the rules governing its money-market auctions in coming weeks to head off the risk of abuse by financial institutions, council member Yves Mersch said.

“At the margins there can still be cases where you see dangers of gaming the system,'' Mersch said in an interview on Aug. 23 in Jackson Hole, Wyoming. “The Governing Council has been discussing the whole issue'' and has agreed on a “certain amount'' of refinement to the existing rules, he said.

ECB officials have become increasingly concerned that banks are taking advantage of collateral rules that are broader than those used by the Federal Reserve and the Bank of England. The danger is that banks struggling to sell securities damaged by the credit-market turmoil will dump them on the ECB and become overly reliant on central-bank funds.

Dutch policy maker Nout Wellink said in an interview with the Het Financieele Dagblad newspaper published Aug. 21 that banks shouldn't become too dependent on the ECB for funding.

“It's not a broad-based revolution,'' said Mersch, who is attending a meeting of central bankers and financial officials organized by the Fed. “We are satisfied with our framework. But since there are always on the margins evolutions, we have to adjust our framework regularly to market practices.''

“The precisions'' planned by the ECB “concern some instruments,'' Mersch said, declining to elaborate. Unlike the Fed and the Bank of England, the ECB hasn't had to change its operation rules since the credit crisis began.

Lender of Last Resort

“The ECB is in an unenviable situation,'' said Paul McCulley, a fund manager at Pacific Investment Management Co, in an interview at Jackson Hole. “The lender of last resort should be just that, a last resort, and not a permanent provider of funds to the private sector.''

Central bankers including Federal Reserve Chairman Ben S. Bernanke met in the Teton Mountain retreat at the weekend to discuss ways to address the past year's credit rout. ECB President Jean-Claude Trichet said “we are still in a market correction'' and Bank of Israel Governor Stanley Fischer said the crisis has yet to run its course.

Spain's banks in particular are struggling to attract investors as a decade-long property boom ends and mortgage delinquencies soar to the highest in at least six years. Investors demand higher rewards to buy bonds backed by Spanish mortgages than any other home loans in Europe. The ECB lent Spanish banks a record 49.4 billion euros ($73.1 billion) in July.

Demand From Outside

The ECB's money-market system is also attracting demand from outside the euro region. The Frankfurt-based central bank said in June it will accept asset-backed bonds sold by Macquarie Group Ltd., Australia's biggest securities firm, and backed by Australian consumer loans as collateral.

U.K. mortgage lender Nationwide Building Society said Aug. 18 it's planning to expand into Ireland, a member of the euro region, to take advantage of “funding opportunities.''

Banks with operations in the countries sharing the euro can raise funding from the ECB by pledging certain types of collateral including asset-backed securities. Bonds backed by mortgages and other assets accounted for 18 percent of the ECB's loan collateral at the end of 2007, up from 4 percent in 2004, Fitch Ratings data show.

Taking Advantage?

“It has been suspected for some time that banks could be taking advantage of the broad collateral framework since they no longer publicly place asset-backed securities and these securities now only serve as collateral in central bank funding,'' Michael Schubert, an economist at Commerzbank AG in Frankfurt, wrote in a note to investors today. “This means that a necessary market correction in the ABS segment is being put off.''

The ECB lends to banks mostly through the main refinancing operations maturing in one week. Longer-term auctions provide financing to banks during three- and six-month periods.

Mersch said the central bank prefers to tackle any individual instances of abuse with “moral suasion.''

“Our framework is complex, and if we can warn people that this is not acceptable beforehand, and they adjust in due time, we would be satisfied,'' Mersch said. While the ECB hasn't yet taken “specific action,'' the central bank plans to strengthen its powers. He didn't say what that action might be.

Mersch said the ECB's response to any abuse case “would not necessarily be a question to be discussed publicly.''

The financial crisis is taking its toll on Europe's economy, which contracted in the second quarter.

Mersch said “the question is whether the slowdown will last a little bit longer'' and Bundesbank President Axel Weber, who was also in Jackson Hole, said Aug. 22 the current quarter may show “some weakness.'' The economy may expand below its potential rate of 2 percent “into next year,'' he said.

At the same time, “you shouldn't be getting too hung up about the volatility in quarter-to-quarter GDP readings,'' Weber said. Weber and Mersch both said inflation will exceed the ECB's 2 percent limit next year, with Weber saying there's a “substantial risk' that price pressures will persist. The ECB will publish revised projections next month.

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Venezuelan President Hugo Chavez is set to tighten his government's grip on the economy by taking over his first bank, the local unit of Spain's Banco Santander SA.

Plans to nationalize the country's third-largest bank, announced yesterday, will give the state access to Banco de Venezuela SA Grupo Universal's 285 offices and $9.46 billion in deposits. It follows nationalizations in the oil, steel, cement, electricity and telecommunications industries.

Chavez is using a surge in oil revenue to increase his control of the economy and move the South American country closer to his goal of “21st-century socialism,'' even as government takeovers scare off investors. The economy expanded at its slowest pace in more than four years in the first quarter as private investment contracted.

“With this price of oil, the government has the capacity to buy, and it seems they're upsizing to control new sectors of everyday life,'' said Alejandro Grisanti, an economist at Barclays Capital Inc. in New York.

Chavez said he will pay fair compensation for Banco de Venezuela, which Santander bought from the government in 1996. He said he has been in touch with the bank's local president, and that he is interested in seeking a “friendly agreement.''

“I want to get it back because it's the bank of Venezuela — that's its name,'' Chavez said yesterday in comments on state television. “We'll put it at the service of Venezuela, because the bank was very profitable.''

Politically, the takeover may be less popular than Chavez's other nationalizations, said Miguel Carpio an economist at Banco Federal CA in Caracas. Quickening inflation and rising crime have hurt the president's approval rating since he was re- elected in 2006. In December voters handed Chavez his first electoral defeat when they rejected his plan to rewrite the constitution.

“The government's taking over a company where people keep there money, so it's more delicate,'' Carpio said. “Certainly there's going to be doubts about the state's capacity to manage a big financial entity.''

Economists forecast the government will have to pay $1.2 billion to $1.9 billion to take control of the local Santander unit.

Negotiations

“I don't think the government is going to be irrational here,'' Carpio said.

Last year, Venezuela paid $1.32 billion to take over the country's biggest telephone company and $739 million to buy the main electricity company from Arlington, Virginia-based AES Corp.

Chavez is still in negotiations with Luxembourg-based Ternium SA over compensation for its stake in the country's biggest steelmaker, and has yet to announce agreements with cement companies Cemex SAB of Mexico, France's Lafarge SA, and Switzerland's Holcim Ltd.

Venezuela, the biggest oil exporter in the Western Hemisphere, is benefiting from a more than 60 percent increase in crude prices on international markets during the past 12 months. Venezuela is the fourth-biggest oil supplier to the U.S.

A spokesman for Banco Santander in Spain and a spokeswoman at the bank's Caracas office declined to comment when contacted by telephone.

Profit Contribution

Banco de Venezuela, founded in 1890, was nationalized in 1994 and then sold to Banco Santander two years later. The Spanish bank paid $351.5 million for a 93.4 percent stake at the time, according to its Web site.

The Venezuelan bank contributed 109 million euros ($170 million) to its parent company's income in the first half of 2008, 2 percent of the Santander, Spain-based bank's profit.

Chavez said he decided to nationalize the bank after blocking Santander's bid to sell the subsidiary to private investors in Venezuela.

Banco de Venezuela holds 11.8 percent of all outstanding loans in the South American country and 10.7 percent of deposits, according to Banco Santander's first-half earnings report. The Venezuelan unit has 3 million clients nationwide.

Banesco Banco Universal is the largest bank in Venezuela, with a 14.2 percent share of deposits. Banco Mercantil is the second largest, with an 11.5 percent market share.

Banking Industry

The takeover may be a blow to the banking sector at a time when Venezuela's economy is slowing, Carpio said. The government may move more of its cash into the public banking sector, resulting in a loss of deposits for private banks.

The financial services sector contracted 6.4 percent in the first quarter, after expanding 29 percent in the same period a year earlier, according to the central bank. Policy makers have raised interest rates twice this year in a bid to cool a consumption boom that's fueled the fastest inflation in Latin America.

“If they nationalize Banco de Venezuela, it will give the government a greater possibility of regulating the rest of the sector,'' said Cesar Aristimuno, an analyst at Caracas-based Aristimuno, Herrera y Asociados.

– With reporting by Charles Penty in Barcelona. Editor: Brendan Walsh, Andrew Barden

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Airline stocks on Wednesday traded higher as oil prices - the industry’s greatest burden - plunged.

AirTran Holdings (AAI), the parent company of AirTran Airways, led the pack as its stock surged 25.7%. Shares for other airlines, such as United Airlines’ parent UAL Corp. (UAUA, Fortune 500), JetBlue Airways Corp. (JBLU) and US Airways Group (LCC, Fortune 500), also closed more than 10% higher.

The stock for Northwest Airlines Corp. (NWA, Fortune 500), which reported a net loss for the second quarter, traded 15.2% higher.

The price of oil fell as investors became less concerned that Hurricane Dolly, which crashed into the Texas-Mexico border on Wednesday, would disrupt oil production. Light, sweet crude for September delivery fell $3.98 to $124.44 a barrel, after an inventory report showed higher-than-expected stockpiles of crude and gasoline.

Ray Neidl, analyst for Calyon Securities, said the drop in oil prices was largely responsible for gains in airline stocks over the past two days. When oil prices fell on Tuesday, the Amex Airline Index (XAL) shot up 22%.

Northwest Airlines on Wednesday reported a net loss for the second quarter, joining other airlines in blaming the rising price of jet fuel for sending it into the red. Despite the loss, Northwest managed to beat analyst projections.

Northwest - which has agreed to merge with Delta Air Lines Inc. - reported a second-quarter net loss of $377 million, or $1.43 per share. That reflected an impairment charge of $547 million, as well as a gain of $250 million from the successful hedging of fuel prices.

The loss was much worse than Northwest’s performance in the second quarter of 2007, when the airline emerged from bankruptcy and reported net income of $2.1 billion. This included $1.9 billion related to reorganization.

Without the impairment charge, the airline said it would have had income of $170 million in the recent quarter.

Northwest did not report its non-charge income in terms of cents per share. But in reporting a gain, Northwest beat the analyst consensus projection from Thomson/First Call, which expected a net loss of 54 cents per share, without charges.

Northwest also said that its operating revenue totaled $3.6 billion in the second quarter, a 12% jump from the same period in 2007. That beat the analyst consensus projection from Thomson/First Call, which expected an 8% gain in revenue to $3.4 billion for the second quarter.

Northwest said the rising cost of fuel was largely responsible for its financial hardships. The airline said fuel costs increased by $637 million, compared to the year before and not counting the savings from fuel hedging.

The carrier said it paid $3.45 per gallon of jet fuel in the second quarter, compared to $2.04 per gallon in the same period last year.

Rising fuel prices have hit the airline industry hard. The Air Transport Association expects the industry’s fuel costs to total $61.2 billion this year, up from $41.2 billion in 2007.

Many airlines are raising their fares to offset the rising fuel costs. Fares increased 4.4% industrywide in the first quarter, compared with the same period a year ago, according to the Department of Transportation’s Bureau of Transportation Statistics on Wednesday. This is the largest year-to-year increase in nearly two years.

Airlines are cutting costs wherever they can. Northwest, which has lost more than one-third of its stock value so far this year, said July 9 that it was cutting 2,500, or 7%, of its total workforce, and will begin charging a $15 fee for the first checked bag.

Like many other airlines, Northwest is also eliminating its least fuel-efficient flights. By the fourth quarter, the airline plans to reduce capacity by 8.5% to 9.5%.

"The unprecedented rise in fuel prices has had an adverse effect on our second-quarter results," said Northwest Chief Executive Doug Steenland in a teleconference with reporters. But Steenland said that Northwest is now "very well positioned" to face the challenge of higher fuel prices, considering that its pending merger with Delta is expected to close in the fourth quarter of this year.

Steenland said the imminent merger with larger airline Delta "positions Northwest to not only survive, but to prosper in this environment."

Northwest is the fifth-largest U.S.-based airline in terms of annual sales, behind American Airlines’ parent AMR Corp. (AMR, Fortune 500), United Airlines, Delta (DAL, Fortune 500) and Continental Airlines (CAL, Fortune 500). 

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The number of private sector jobs fell by 79,000 in June, according to a payroll report released Wednesday, with the decline exceeding economists’ forecasts.

The National Employment Report from Automatic Data Processing showed a 76,000-job drop for goods-producing businesses, the 19th monthly decline in a row, coupled with a 3,000 job decline in the services sector.

A majority of the production job losses came from the manufacturing sector, which lost 44,000.

Economists polled by Briefing.com had expected jobs to decline by 20,000 in June.

The ADP report measures non-farming private employment based on payroll data. 

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Pleasanton supermarket giant Safeway Inc. slipped from 10th to 11th in the annual Top 100 Retailers List compiled by Stores magazine.

The ranking is based on annual sales by major retail companies, and Safeway recorded fiscal 2007 sales of $42.3 billion. But that wasn't enough to hold onto a spot in the top 10.

Perennial retail powerhouse Wal-Mart Stores Inc. again finished in the top spot with fiscal 2007 sales of $379 billion. The top 10 was rounded out by The Home Depot Inc., CVS Caremark, The Kroger Co. — a Safeway rival in the grocery business that owns Ralphs stores in Southern California — Costco Wholesale Corp., Target Corp., Walgreen Co., Sears Holdings Co., Lowe's Cos. Inc. and another supermarket company, SuperValu Inc.

Stores magazine is published by the National Retail Federation of Washington, D.C., the world's largest trade association representing more than 1.6 million retail businesses nationwide.

dgoll@bizjournals.com | 925-598-1436

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John McCain and Barack Obama have starkly different philosophies about tax policy - how to raise the revenue needed to support government programs, spur growth and ensure economic fairness.

But voters really want to know one thing: How would the presidential candidates’ views trickle down to their tax bills? A report released Wednesday by a nonpartisan policy group in Washington, D.C., takes a big first step toward answering that question.

According to the Tax Policy Center’s findings, the common assumptions most people make about the plans of McCain, the presumptive Republican nominee, and Obama, the Democrats’ pick, are not wildly off-base.

McCain: The average taxpayer in every income group would see a lower tax bill, but high-income taxpayers would benefit more than everyone else.

Obama: High-income taxpayers would pay more in taxes, while everyone else’s tax bill would be reduced. Those who benefit the most - in terms of reducing their taxes as a percentage of after-tax income - are in the lowest income groups.

Under both plans, all American taxpayers could pay a price for their tax cuts: a bigger deficit. The Tax Policy Center estimates that over 10 years, McCain’s tax proposals could increase the national debt by as much as $4.5 trillion with interest, while Obama’s could add as much as $3.3 trillion.

The reason: neither plan would raise the amount of revenue expected under current tax policy - which assumes all the 2001 and 2003 tax cuts expire by 2011. And neither plan would raise enough to cover expected government costs during those 10 years.

"Distributionally, they’re markedly different. But in terms of their impact on revenue, the two plans are not terribly different," said Roberton Williams, principal research associate at the Tax Policy Center and the former deputy assistant director for tax analysis at the Congressional Budget Office.

In addition to making the 2001 and 2003 tax cuts permanent, McCain says he would double the exemption for dependents, lower the corporate tax rate, make expensing rules more generous for small businesses and lessen the bite of the estate tax and Alternative Minimum tax.

The net result: compared with their tax bill today, taxpayers on average would see their tax bill cut by nearly $1,200. That means their after-tax income would rise by 2%.

But those in the lowest income groups would only see their after-tax income rise by less than 1% (or between $19 and $319). By contrast, the highest-income households - those with incomes of at least $603,000 - would see a boost in after-tax income of 3.4%, or more than $40,000.

Obama’s plan would keep the 2001 and 2003 tax cuts in place for everyone except those making more than roughly $250,000, and he would increase the capital gains tax.

Obama would also introduce new tax breaks for lower and middle-income groups. Such breaks include expanding the earned income tax credit, giving those making less than $150,000 a $500 tax credit per person on the first $8,100 in income, giving those making under $75,000 a 50% federal match on the first $1,000 of savings, and exempting seniors making less than $50,000 from having to pay income tax.

Like McCain, Obama would lessen the bite of the estate tax and the Alternative Minimum Tax, but to a lesser degree.

The net result: compared with their tax bill today, taxpayers on average would see their tax bill cut by nearly $160 under Obama’s plan. That means their after-tax income would rise by 0.3%.

But those in the lowest-income groups would enjoy the biggest after-tax income rise as a percentage of income - between 2.4% and 5.5% (worth between $567 and $1,042). By contrast, the highest-income households - those with at least $603,000 in income - would see a dramatic decline in their after-tax income - a drop of 8.7%, or $116,000.

Jason Furman, a newly appointed senior economic adviser to Obama, said his preliminary response is that the report’s findings bear out what Obama’s campaign has been saying: that he’s for the middle class.

"Middle-class families get tax cuts that are three times larger from Obama than from McCain," Furman said. "And the McCain plan gives nearly one-quarter of its benefits to households making more than $2.8 million annually - the top 0.1%."

Douglas Holtz-Eakin, senior economic adviser to McCain, noted that the report does not take into account the spending reforms - such as eliminating earmarks - that are central to McCain’s strategy to support tax relief and help reduce the deficit.

One of the center’s co-directors, William Gale, conceded in a conference call that "if McCain succeeds (in achieving his proposed spending cuts), the fiscal cost of his plan does go down."

But spending cuts can be politically difficult to achieve, said Len Burman, the Tax Policy Center’s director.

Holtz-Eakin characterized McCain’s plan as one geared toward "reshaping federal bureaucracies and protecting taxpayers’ money. [His] plan is based on kicking down doors in Washington, and delivering tax dollars back to the American taxpayers who are struggling with record gas prices, soaring food costs and a down economy."

Williams said the Tax Policy Center analysis should be viewed as a work in progress. Researchers plan to update it as they get more information about the plans from the campaigns and if the candidates introduce new tax policies between now and Election Day.

The center will also incorporate the tax elements of McCain’s and Obama’s health care proposals when they update their findings.

How the candidates’ tax plans would affect economic growth is an open question. "It depends on how the deficits are closed," Burman said.

Tax studies have shown that when tax cuts are deficit funded and they’re paid for by raising taxes in the future, "the economy is worse off than if you didn’t cut at all," Burman said. 

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Chinese power plants are running out of coal, with less than a three-day supply in some areas, the government said Tuesday, adding to China’s logistical headaches following a devastating earthquake.

It is the second time in three months that Chinese power plants have run short of coal, an unintended effect of government-mandated price controls — a throwback to communist central planning — to shield the public from rising global energy costs.

Some 32 power plants have already shut down due to lack of fuel, the State Electricity Regulatory Commission said in a report. It said two were in Sichuan province, where last week’s magnitude 7.9 quake damaged the power supply grid.

In February, freak snowstorms caught power plants without adequate coal supplies, causing blackouts and factory shutdowns in a country that relies on coal for 70% of its electricity.

Utility companies have let coal stocks dwindle and are buying less fuel after Beijing froze power prices last year, while allowing the market-set costs that producers pay to rise.

The SERC gave no indication as to how Beijing might respond to new shortages. An employee who answered the phone in its press office referred questions to the Cabinet’s National Development and Reform Commission. The NDRC did not respond to requests for comment.

The government created an agency this year to oversee energy policy, but it has yet to take any action.

Beijing has also frozen retail prices of gasoline and diesel. That helped farmers and the urban poor, but it has spurred sales of gas-guzzling luxury cars and propelled double-digit annual growth in fuel consumption.

Oil refiners say they are suffering heavy losses and some began cutting production last year, causing fuel shortages in parts of China’s south.

Power plants in the eastern province of Anhui have less than a three-day supply of coal, while those in Beijing have about a week supply, the electricity agency said. The recommended minimum is 15 days; a seven-day supply is considered dangerously low.

In Sichuan province, where the May 12 quake killed tens of thousands of people, power plants have only a seven-day supply of coal, according to the agency. It said two plants have none.

The quake’s effect on coal supply was not addressed in the report, but the NDRC says 200 coal mines in Sichuan were closed for inspection after the disaster.

China’s power use is growing at double-digit annual rates, driven by a boom that saw the economy expand by 10.6% in the first quarter of this year.

On Tuesday, a U.S. official urged Beijing to join the International Energy Agency — a group of major oil consumers that includes the United States and European governments — and aid its efforts to keep petroleum markets stable in times of crisis.

"I believe it is important for China and other key economies in the world, such as India, to prepare to eventually join the IEA as full members," Daniel S. Sullivan, an assistant U.S. secretary of state, said at a business conference.

China’s surging energy demand, and its potential impact on prices, has stirred unease abroad as state companies scour Africa, Central Asia and elsewhere for more.

The 27-nation IEA coordinates the release of petroleum from national stockpiles to stabilize prices if crises threaten to disrupt supplies, Sullivan said. He said that was last done in 2005 after Hurricane Katrina in the United States.

Sullivan, who is the U.S. envoy to the Paris-based IEA, said Beijing was invited to take part in an emergency response exercise next month. He urged the government to accept.

The Chinese Foreign Ministry referred questions about whether Beijing might join the IEA to the NDRC, which did not immediately respond to requests for comment. 

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Central bankers should strengthen regulation to avert a credit-fueled increase in asset prices and forgo raising interest rates in an attempt to reverse a future price surge, Federal Reserve Governor Frederic Mishkin said.

“It falls to regulatory policies and supervisory practices to help strengthen the financial system and reduce its vulnerability to both booms and busts in asset prices,'' Mishkin said yesterday in remarks at the Wharton School at the University of Pennsylvania in Philadelphia.

“Central banks should recognize that trying to prick asset bubbles using monetary policy is likely to do more harm than good,'' the Fed governor said.

The collapse of the U.S. subprime-mortgage market has led to a decline in global credit and the worst housing slump in 25 years. U.S. foreclosure filings increased 65 percent in April from a year earlier, RealtyTrac Inc., an Irvine, California- based seller of default data, reported this week, while financial institutions have reported writedowns and credit losses exceeding $333 billion since the beginning of 2007.

The central bank has aided financial institutions by creating ways to expand liquidity, including opening up loans to investment banks.

Funds provided to banks through the so-called discount window rose by $2.8 billion to a daily average of $14.4 billion in the week to May 14, the Fed said yesterday. Separately, the central bank's loans to Wall Street bond dealers rose by $75 million to $16.6 billion.

Market Turmoil

When expected market turmoil doesn't “happen, it's really tough to unwind monetary policy,'' said Robert Eisenbeis, chief monetary economist at Cumberland Advisors Inc. and former head of research at the Atlanta Fed.

“We are in a new world now,'' Mishkin said in the question and answer period regarding the use of an emergency power to loan to investment banks. “This is going to be an issue that involves a lot of discussion'' about Fed involvement in markets.

Mishkin, reiterating arguments used by former Fed chairman Alan Greenspan, 82, and current chairman Ben S. Bernanke, said central banks that use increases in the benchmark interest rate to deflate asset prices will hurt economic growth.

“Monetary policy should react to asset price bubbles by looking to the effects of asset prices on employment and inflation,'' said Mishkin, 57.

U.S. central bankers, when faced with asset price bubbles in technology stocks and housing during the past decade, chose not to intervene with the federal fund rate.

Internet Stocks

As investors began pushing Internet stocks higher in 1996, the Fed held the benchmark lending rate at 5.25 percent and raised it only once, by a quarter point, the following year.

The Nasdaq Composite Index from 1996 until 1999 rose almost fourfold. After hitting a record in March 2000, the index fell for almost two years. The U.S. economy slipped into an eight- month recession in March 2001.

“It has been pretty clear for a long period of time that there was a fear of a Japanese-type slowdown and unwanted deflation'' among policy makers, Eisenbeis said in an interview. “That led them to keep interest rates too low for too long.''

Similarly, low short- and long-term rates early this decade helped fuel the biggest mortgage boom in U.S. history. Mortgage lending between 2004 and 2006 totaled $2.9 trillion, and house prices rose 31 percent, according to an index tracked by the Office of Federal Housing Enterprise Oversight.

Market Collapse

After the collapse of the subprime-mortgage market, house prices fell during the final two quarters of 2007, OFHEO data shows. Home values will increase less than 1 percent during the first six months of this year, according to economists.

The Fed's hands-off approach to soaring asset prices is “a dangerous, reckless and irresponsible way to run the world's largest economy,'' Stephen Roach, chairman of Morgan Stanley Asia, said at the World Economic Forum in Davos in January.

Greenspan, Fed chairman from 1987 until January 2006, has defended the monetary policy that coincided with the surge in technology stocks and home prices, saying an increase in borrowing costs would harm employment and growth.

“The notion that a well-timed incremental tightening could have been calibrated to prevent the late 1990s bubble is almost surely an illusion,'' Greenspan said in an August 2002 speech in Jackson Hole, Wyoming.

Bernanke has long opposed using the federal funds rate to prick asset bubbles, said Mark Gertler, an economics professor at New York University who has researched the issue with the Fed Chairman.

“Our view is the best way to deal with this is through prudent regulatory structure,'' Gertler said in an interview.

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Facebook, the world’s second-largest social networking Web site, is adding more than 40 new safeguards to protect young users from sexual predators and cyberbullies, attorneys general from several states said Thursday.

The changes include banning convicted sex offenders from the site, limiting older users’ ability to search online for subscribers under 18 and joining an existing task force seeking ways to better verify users’ ages and identities.

"The agreement marks another watershed step toward social networking safety, protecting kids from online predators and inappropriate content," said Connecticut Attorney General Richard Blumenthal, who announced the agreement Thursday with his counterparts in several other states.

Officials from Washington, D.C., and 49 states have signed on.

Facebook, which has more than 70 million active users worldwide, already has enacted many of the changes and others are in the works, its officials said Thursday.

"Building a safe and trusted online experience has been part of Facebook from its outset," said Chris Kelly, Facebook’s chief privacy officer. "The attorneys general have shown great leadership in helping to address the critical issue of Internet safety, and we commend them for continuing to set high standards for all players in the online arena."

Texas has not endorsed this agreement or a similar one reached in January among the other states, the District of Columbia and News Corp.’s (NWS.A) social network, MySpace. Texas officials have said they want quicker action on verifying users’ ages and identities than the pacts guarantee.

Millions of users: The attorneys general have been negotiating for months with Facebook and MySpace, the world’s largest online social network with 200 million users around the world, for tighter controls.

"Social networks that encourage kids to come to their sites have a responsibility to keep those kids safe," North Carolina Attorney General Roy Cooper said. "We’ve now gotten the two largest social networking sites to agree to take significant steps to protect children from predators and pornography."

MySpace, Facebook and other online networks have created a new venue for sexual predators, who often lie about their age to lure young victims to chat, share images and sometimes meet in person. It also has spawned cyberbullies, who have sent threatening and anonymous messages to classmates, acquaintances and other users.

Among other changes, Facebook has agreed to:

• Ensure companies offering services on its site comply with its safety and privacy guidelines.
• Keep tobacco and alcohol ads from users too young to purchase those products.
• Remove groups whose comments or images suggest they involve incest, pedophilia, bullying or other inappropriate content.
• Send warning messages when a child is in danger of giving personal information to an adult.
• Review users’ profiles when they ask to change their age, ensuring the update is legitimate and not intended to let adults masquerade as children.

The protections included in the MySpace and Facebook pacts could be expanded to smaller services such as Friendster and Bebo, Blumenthal said.

"We’re entering a new era in social networking safety," Blumenthal said. "This agreement is open-ended in envisioning advances in technology that will permit even stronger steps in the future toward protecting kids’ safety." 

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U.K. consumer confidence fell to the lowest in at least four years in April as the weakening housing market and higher living costs depressed shoppers, Nationwide Building Society said.

An index of sentiment taken from the responses of 1,000 people declined seven points to 70, the lowest since the survey began in May 2004, Britain's fourth-biggest mortgage lender said today in an e-mailed statement.

Home values had the first annual decline since 1996 last month after banks curbed mortgage lending to the lowest in nine years, Nationwide's house-price index showed a week ago. The Bank of England, which has cut the benchmark interest rate three times since December to avert a recession, may leave it unchanged tomorrow to keep inflation under control, economists say.

“Food and fuel prices remain high and with house prices no longer rising, it is unlikely that consumer confidence will pick up very quickly,'' Fionnuala Earley, Nationwide's chief economist, said in a statement. “Inflationary pressures mean the Monetary Policy Committee will probably prefer to cut rates at a more gradual pace than many would prefer.''

An index of sentiment on consumers' present situation dropped nine points to 65, and the gauge of their future situation declined five points to 74. A measure of willingness to make a major purchase fell two points to 65.

House prices declined in April by 1 percent from a year earlier, Nationwide said April 30. Rival HBOS Plc, the nation's biggest mortgage lender, said May 2 that prices fell 0.9 percent on the year, which was also the first drop recorded since 1996.

Loan Approvals

Mortgage approvals fell in March to 64,000, the lowest level since records began in 1999 and half the level of 1 1/2 years ago, the central bank said April 29. The International Monetary Fund forecasts U.K. economic growth of 1.6 percent in 2008, the least since the end of the last recession 16 years ago.

The labor market deteriorated last month, accountancy firm KPMG and the Recruitment and Employment Confederation said today. An index measuring placements of permanent staff fell in April after rising in March, while hiring of temporary workers increased.

“Employers are shifting away from hiring permanent staff into a more temporary workforce as a way of dealing with the current economy uncertainty and financial crisis,'' Alan Nolan, director at KPMG, said in a statement.

Concern about inflation left the central bank's rate-setting committee with its first three-way split in almost two years last month. Timothy Besley and Andrew Sentance wanted no rate change, while David Blanchflower favored a bigger cut than the quarter- point approved by the majority.

Crude Oil

Crude oil rose to a record above $122 yesterday, and United Nations figures showed food was 57 percent more expensive globally in March than a year earlier. Inflation will accelerate from the current 2.5 percent to exceed the government's upper limit of 3 percent, Bank of England Governor Mervyn King said last week.

All but five of 61 analysts surveyed by Bloomberg News predict the central bank will leave the key rate unchanged tomorrow. The rest forecast a quarter-point cut. The bank announces the decision at noon in London.

George Buckley, chief U.K. economist at Deutsche Bank AG in London, changed his interest-rate forecast yesterday to predict a quarter-point reduction this week from the current 5 percent.

“Survey evidence suggests the economy isn't as resilient as we thought it might be,'' Buckley said in an interview on Bloomberg Television. “The housing market is weakening quite sharply, and that can be the catalyst for much weaker consumption than we've seen so far.''

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