The verdict is in. The Fed's emergency rate cuts in January have failed to halt the downward spiral towards a full-blown debt deflation. Much more drastic action will be needed. 

Yields on two-year US Treasuries plummeted to 1.63pc on Friday in a flight to safety, foretelling financial winter. 

The debt markets are freezing ever deeper, a full eight months into the crunch. Contagion is spreading into the safest pockets of the US credit universe. 

It is hard to imagine a more plain-vanilla outfit than the Port Authority of New York and New Jersey, which manages bridges, bus terminals, and airports. 

The authority is a public body, backed by the two states. Yet it had to pay 20pc rates in February after the near closure of the $330bn (£166m) "term-auction" market. It had originally expected to pay 4.3pc, but that was aeons ago in financial time. 

"I never thought I would see anything like this in my life," said James Steele, an HSBC economist in New York. 

No sane mortal needs to know what term-auction means, except that it too became a tool of the US credit alchemists. Banks briefly used the market as laboratory for conjuring long-term loans at Alan Greenspan's giveaway short-term rates. It has come unstuck. Next in line is the $45trillion derivatives market for credit default swaps (CDS). . . .  

Sub-prime debt is plumbing new depths. . . .  

Why won't it end? Because US house prices are in free fall. The Case-Shiller index for the 20 biggest cities dropped 9.1pc year-on-year in December. The annualised rate of fall was 18pc in the fourth quarter, and gathering speed. . . .  

Try $1trillion, says New York professor Nouriel Roubin. Contagion is moving up the ladder to prime mortgages, commercial property, home equity loans, car loans, credit cards and student loans. We have not even begun Wave Two: the British, Club Med, East European, and Antipodean house busts. 

As the once unthinkable unfolds, the leaders of global finance dither.  . . .

Federal Reserve Chairman Ben S. Bernanke urged lenders to forgive portions of some loans.  

Bernanke's call, in a speech yesterday to bankers in Orlando, Florida, went beyond a Paulson-backed plan that focuses on renegotiating interest rates. With his remarks, the Fed chief joined the heads of the Office of Thrift Supervision and Federal Deposit Insurance Corp. and congressional Democrats in proposing stronger actions than Paulson to alleviate the worst housing recession in a quarter century.

Senate Republicans on Thursday blocked efforts to give bankruptcy courts more power to stave off home foreclosures, a move the chamber's Democratic leader called "a big mistake." 

President Bush says the bill would have done more to bail out lenders and speculators than to help homeowners. 

 "The people on Wall Street are high-fiving. They just won again," Senate Majority Leader Harry Reid, D-Nevada, said after the vote. 

"The big banks just won again. The mortgage bankers won again. Oh, there are a few losers out there, like millions of consumers -- millions of people who are going into foreclosure or are about to go into foreclosure. They lost." 

The banking industry and President Bush opposed the bill, which would have allowed bankruptcy judges to reduce a filer's mortgage debt to the home's current market value.

U.S. Attorney General Michael Mukasey refused on Friday to pursue contempt citations issued by the House of Representatives against a current and a former White House aide for not cooperating in a probe of the firing of U.S. attorneys. 

Saying no crime was committed; Mukasey rejected a request by House Speaker Nancy Pelosi to refer the citations to a federal grand jury investigation of current White House chief of staff Josh Bolten and former White House counsel Harriet Miers. 

"The Department has determined that the non-compliance by Mr. Bolten and Ms. Miers with the Judiciary Committee subpoenas did not constitute a crime, and therefore the Department will not bring the congressional contempt citations before a grand jury or take any other action to prosecute Mr. Bolten or Ms. Miers," Mukasey said in a letter to Pelosi. 

The Democratic-led House of Representatives voted 223-32 earlier this month, with most of President George W. Bush's fellow Republicans abstaining, to pursue legal action against Bolten and Miers for failing to provide documents and appear at a hearing. 

In doing so, the House also authorized its Judiciary Committee to go to court to file suit to enforce the subpoenas.

House Speaker Nancy Pelosi correctly noted that the contempt citations are appropriate. Congress is imbued by the U.S. Constitution with oversight powers, to keep executive power (and abuses of executive power) in check. The Bush administration's radical and undemocratic theories about the "unitary" executive -- not truly constrained by Congress or the nation's laws -- flouts the Constitution. 

Miers and Bolten (at the behest of their bosses) have treated the democratic principle and the actual use of congressional oversight with mockery, derision and disregard. It is only fitting that they be held, officially, in contempt.

Q What's your advice to the average American who is hurting now, facing the prospect of $4 a gallon gasoline, a lot of people facing --  

THE PRESIDENT: Wait, what did you just say? You're predicting $4 a gallon gasoline?  

Q A number of analysts are predicting --  

THE PRESIDENT: Oh, yeah?  

Q -- $4 a gallon gasoline this spring when they reformulate.  

THE PRESIDENT: That's interesting. I hadn't heard that.

Motorists may face gasoline prices as high as $4 a gallon this summer as crude oil costs smash records, painting a bleak picture for consumers already feeling the pinch of an economic slowdown.

Crude oil, the main feedstock refiners use to make fuel, hit an all-time peak over $102 a barrel Thursday, nearly doubling prices from a year ago amid a surge in speculative investment.

"American consumers know these oil prices are an unpleasant omen of events likely to occur at the nation's gas pumps over the next few months," said Geoff Sundstrom, spokesman for travel and auto group AAA.

"If current oil prices hold, American drivers should expect to pay new record high prices for gasoline which could easily reach $3.50 per gallon or more by summer. In some regions of the country the average price could approach $4 per gallon," Sundstrom said.

Surging energy costs have stiffened the head winds on the U.S. economy, which is already slowing in the fallout of a housing slump and credit crisis.

THE PRESIDENT: I'm concerned about the economy because I'm concerned about working Americans, concerned about people who want to put money on the table and save for their kids' education. That's why I'm concerned about the economy. I want Americans working.

And there's no question the economy has slowed down. You just cited another example of slowdown. I don't think we're headed to a recession, but no question we're in a slowdown. And that's why we acted, and acted strongly, with over $150 billion worth of pro-growth economic incentives -- mainly money going into the hands of our consumers. And some money going to incent businesses to invest, which will create jobs.

In recent weeks, abundant evidence has pointed to a recession—a broad-based contraction of economic activity—from rising unemployment claims to the continued pain in housing. Wall Street economists, whose employers have been experiencing their own private recession since last summer, haven't shrunk from using the R word. But in certain quarters of Washington, euphemism and understatement, verging on outright denial, are par for the course. In an episode of the hit 1970s show Happy Days, Fonzie, laboring to concede error, repeatedly choked on the word wrong, unable to get past the "rrr" sound. (Trust me, it was funny.) In last year's hit comedy Knocked Up, a character, queasy about using the technical term for terminating a pregnancy, refers to a procedure that "rhymes with shmashmortion." Bernanke and the man who appointed him, President Bush, are clearly coping with similar verbal tics. Call it a slowdown, cite challenges, or insist the fundamentals are sound. But please don't call it a recession. Speaking at a press conference on Thursday, Bush said, "I don't think we're headed to recession, but no question we're in a slowdown."

More economists believe a recession is probable in 2008. A February survey of economists by the National Association for Business Economics shows that only a slim majority of those surveyed see the U.S. skirting an economic downturn this year. In February, 45% of the respondents believed the economy had already begun to contract or would do so this year. The number who believed a recession was imminent rose from 40% in November and 25% in September.

Christian Menegatti, lead analyst at RGE Monitor, said the firm predicted more homeowners would walk away from their homes if prices continued to drop, regardless of their financial circumstances. If home prices drop an additional 10 percent, Mr. Menegatti said, 20 million households will owe more than the value of their homes.

“Will everyone walk out?” he said. “No. But there’s been a cultural shift. Buying a house used to be like entering a marriage, a commitment for life. Now, if you see something better, you go back into the dating market.”

When homeowners see houses identical to their own selling for much less than they owe, Mr. Menegatti said, “I wouldn’t be surprised to see five or six million homeowners walk away.”

The recent slowdown in gross domestic product growth is only a symptom of recession, not the cause. While there are many things to blame for the current crisis — most notably the subprime mortgage mess — one factor that has received little attention is America’s low savings rate. In 2005, net private savings in the United States were negative. In other words, we were spending money that we didn’t have, chipping away at our national wealth.

The last time the savings rate dipped into the red was during the Great Depression. At that time, of course, it made sense not to save. Joblessness was high and money scarce; we needed to dip into our kitty to survive. But our negative savings during the Bush boom had a different cause. Evidently, we felt so flush with (paper) gains in the stock and housing markets that we spent money as if there were no tomorrow.