NEW YORK (CNNMoney.com) -- Congress and the Federal Reserve missed their chance to keep the country from falling into recession by acting too slowly, according to a well-respected economist.

Lakshman Achuthan, the managing director of the Economic Cycle Research Institute, said the economy has now fallen into what he calls "a recession of choice."

He argues that the economic stimulus package passed by Congress this year is too late to help many consumers and businesses and that the Federal Reserve was too timid when it started trimming interest rates last fall.

Since then the Fed has aggressively cut rates, most recently lowering them by three-quarters of a percentage point at its meeting Tuesday.

"If they had done all this in the fourth quarter, I think we'd be having a different discussion," he said. "We might not have had Bear," he added, referring to the fire sale purchase of brokerage firm Bear Stearns (BSC, Fortune 500) by JPMorgan Chase (JPM, Fortune 500) that the Fed helped arrange over the weekend to avoid a collapse of Bear Stearns.

The ECRI, which forecasts a number of key economic readings such as employment, inflation and production from various business sectors, had been reluctant to join the rising tide of economists arguing that the economy has fallen into a recession. But it changed its call Thursday.

Achuthan said the tipping point for his firm's recession call was when its leading index for non-financial services, a sector of the economy that accounts for 62% of jobs, turned negative.

Although Achuthan said he saw weakness in the U.S. economy last fall, he did not make a recession forecast at that time because he thought it was possible the government could have done something then to prevent a recession.

He said low business inventories at the end of last year gave policymakers a chance to avoid the recession, because any spur to spending by businesses or consumers would have resulted in a quick pick-up in production.

"There was an opportunity that was wasted by policymakers because they didn't understand those dynamics," he said. "That is one aspect of how the policymakers have goofed and why this recession is a choice, not something that happened by bad luck and chance."

He added that the more decisive action taken so far this year by Congress and the Fed has come too late to stop the economy from falling into recession.

Congress passed a $190 billion economic stimulus package, but the biggest part of that legislation - tax refunds of about $600 per taxpayer, won't be in the hands of consumers until May at the earliest.

"It was a good idea that was horribly executed," he said. "Policymakers said time was of the essence. Unfortunately, they didn't understand what that really meant. They just do not understand how the business cycle works; it is not going to wait around for stimulus some months down the road.

And while the Fed has slashed interest rates by a total of two full percentage points at meetings in January and March, its initial cuts in September, October and December last year totaled only one percentage point.

Achuthan's forecast comes on a day that some other readings show the economy possibly heading into recession.

The Conference Board's index of leading economic indicators fell 0.3% in February, and its January reading was revised lower. The latest report is the fifth straight month the indicator has fallen, the first time that has happened since 2001, the year of the last recession. A prolonged decline in this index typically signals a recession.

In addition, the latest weekly reading on initial jobless claims rose sharply, pointing to an increased likelihood that March will be the third straight month of job losses for the U.S. economy.

Issue #1 - America's Money: All this week at 12 pm ET, CNN explains how the weakening economy affects you. Full coverage.

Have you lost your job, your business or your home? Are you raiding retirement accounts to pay the bills? We want to hear from you. Tell us how you're being affected by the weakening economy and you could be profiled in an upcoming story. Send emails to realstories@cnnmoney.com. 

NEW YORK (CNNMoney.com) -- Tax rebates are the centerpiece of the government's plan to stimulate the economy, but many Americans are planning to put the money in the bank or use it to pay off debt, according to a survey released Monday.

A CNN/Opinion Research Corp. poll found that 41% of respondents plan to use their rebates to pay off bills, and 32% will put the money in savings. Just 21% of those polled intend to spend the money, while 3% said they will donate the extra money to charity.

The rebate checks are part of a $170 billion economic stimulus package passed by Congress last month that also includes tax rebates for small businesses, as well as payments to disabled veterans and some senior citizens.

The package will pay $600 to most individual taxpayers who earn less than $75,000, and $1,200 for married taxpayers filing joint returns who together earn less than $150,000. There is also a $300-per-child tax credit.

Overall, the rebates will put $120 billion in the hands of individuals, with the aim to get them spending in order to boost the faltering U.S. economy.

Jared Bernstein, an Economic Policy Institute senior economist, notes that taxpayers have in the past spent half to two-thirds of their rebate checks. However, he points out that the current economic conditions are unique.

"We've never done this in a period when American households are so deeply indebted," he said. "While [saving the rebate] is a valiant thing to do, what you want them to do is spend it."

Mark Zandi, chief economist at Moodys.com, thinks it is important to distinguish between what people say they plan to do, and what they actually end up doing.

Zandi thinks taxpayers will end up spending two-thirds of their rebate checks, which he estimates could add up to $70 billion flowing into the economy.

"I think that matters," he said. "If it's spent between May and Christmas it will add at least a percentage point to GDP by the end of the year."

Separately, the CNN/Opinion Research poll also found that 54% of respondents are in favor of making permanent the federal income tax cuts passed into law since George W. Bush became president.

The so-called Bush tax cuts, which are set to expire within the next few years, have become a contentious political issue. Some Democratic lawmakers have argued that the cuts favor higher-income taxpayers, while some Republican legislators say the cuts are important for economic growth.  

Wall Street fears for next Great Depression

By Margareta Pagano, Business Editor
Sunday, 16 March 2008

(Fortune Magazine) -- What in the world is going on here? Why is Washington spending billions to bail out Wall Street titans while leaving struggling homeowners to fend for themselves? Why are the Federal Reserve and the Treasury acting as if they're afraid the world may come to an end, while the stock market seems much less concerned? And finally, what does all this mean to those of us who aren't financial professionals?

Okay, take a few breaths, pour yourself a beverage of your choice, and I'll tell you what's happening - and what I think is going to happen. Although I expect these problems will resolve themselves without a catastrophic meltdown, I'll also tell you why I'm more nervous about the world financial system now than I've ever been in my 40 years of covering business and markets.

Finally, I'll tell you why I fear that the Wall Street enablers of the biggest financial mess of my lifetime will escape with relatively light damage, leaving the rest of us - and our children and grandchildren - to pay for their misdeeds.

We're suffering the aftereffects of the collapse of a Tinker Bell financial market, one that depended heavily on borrowed money that has now vanished like pixie dust. Like Tink, the famous fairy from Peter Pan, this market could exist only as long as everyone agreed to believe in it.

So because it was convenient - and oh, so profitable! - players embraced fantasies like U.S. house prices never falling and cheap short-term money always being available. They created, bought, and sold, for huge profits, securities that almost no one understood. And they goosed their returns by borrowing vast amounts of money.

The fantasies began to fade last June when Bear Stearns (BSC, Fortune 500) let two of its hedge funds collapse because of mortgage-backed-securities problems. Debt market - both here and abroad - went sour big-time. That, in turn, became a huge drag on the U.S. economy, bringing on the current economic slowdown.

And before you ask: It's irrelevant whether or not we're in a recession, which National Bureau of Economic Research experts define as "a significant decline in economic activity spread across the economy, lasting more than a few months." What matters is that we're in a dangerous and messy situation that has produced an economic slowdown unlike those we're used to seeing.

How is this slowdown different from other slowdowns? Normally the economy goes bad first, creating financial problems. In this slowdown the markets are dragging down the economy - a crucial distinction, because markets are harder to fix than the economy.

A leading political economist, Allan Meltzer of Carnegie Mellon, calls it "an unusual situation, but not unprecedented." When was the last time it happened in the U.S.? "In 1929," he says. And it touched off the Great Depression.

No, Meltzer isn't saying that a Great Depression - 25% unemployment, social unrest, mass hunger, millions of people's savings wiped out in bank collapses - is upon us. Nor, for that matter, am I. But the precedent is unsettling, to say the least. You can only imagine how unsettling it is to Federal Reserve chairman Ben Bernanke, a former economics professor who made his academic bones writing about the Great Depression.

Academics now feel that the 1929 slowdown morphed into a Great Depression in large part because the Fed tightened credit rather than loosening it. With that precedent in mind, you can see why Bernanke's Fed is cutting rates rapidly and throwing everything but the kitchen sink at today's problems. (Bernanke will probably throw that in too, if the Fed's plumbers can unbolt it.) None of this Alan Greenspan (remember him?) quarter-point-at-a-time stuff for him.

So why hasn't the cure worked? The problem is that vital markets that most people never see - the constant borrowing and lending and trading among huge institutions - have been paralyzed by losses, fear, and uncertainty. And you can't get rid of losses, fear, and uncertainty by cutting rates.

Giant institutions are, to use the technical term, scared to death. They've had to come back time after time and report additional losses on their securities holdings after telling the market that they had cleaned everything up. It's whack-a-mole finance - the problems keep appearing in unexpected places. Since the Tink market began tanking, so many shoes have dropped that it looks like Imelda Marcos's closet.

We've had problems with mortgage-backed securities, collateralized debt obligations, collateralized loan obligations, financial insurers, structured investment vehicles, asset-backed commercial paper, auction rate securities, liquidity puts. By the time you read this, something else - my bet's on credit default swaps - may have become the disaster du jour.

To paraphrase what a top Fednik told me in a moment of candor last fall: You realize that you don't know what's in your own portfolio, so how can you know what's in the portfolio of people who want to borrow from you?

Combine that with the fact that big firms are short of capital because of their losses (some of which have to do with accounting rules I won't inflict on you today) and that they're afraid of not being able to borrow enough short-term money to fund their obligations, and you can see why credit has dried up.

The fear - a justifiable one - is that if one big financial firm fails, it will lead to cascading failures throughout the world. Big firms are so interlinked with one another and with other market players that the failure of one large counterparty, as they're called, can drag down counterparties all over the globe. And if the counterparties fail, it could drag down the counterparties' counterparties, and so on. Meltdown City.

In 1998 the Fed orchestrated a bailout of the Long-Term Capital Management hedge fund because it had $1.25 trillion in transactions with other institutions. These days that's almost small beer, because Wall Street has created a parallel banking system in which hedge funds, investment banks, and other essentially unregulated entities took over much of what regulated commercial banks used to do.

But there's a vital difference. Conventional banks have reason to take something of a long-term view: Mess up and you have no reputation, no bank, no job, no one talking to you at the country club.

In the parallel system a different ethos prevails. If you take big, even reckless, bets and win, you have a great year and you get a great bonus - or in the case of hedge funds, 20% of the profits. If you lose money the following year, you lose your investors' money rather than your own - and you don't have to give back last year's bonus. Heads, you win; tails, you lose someone else's money.

Bernanke and his point man on Wall Street, New York Fed president Tim Geithner, know everything I've said, of course. As does Treasury Secretary Hank Paulson, former head of Goldman Sachs (GS, Fortune 500).

They know a lot more too - such as which specific institutions are running out of the ability to borrow and have huge obligations they need to refinance day in and day out. Walk by Fed facilities in New York City or Washington, and you can feel the fear emanating from the building.

Because these aren't normal times, the Fed has tried to reassure the markets by inventing three new ways to inundate the financial system with staggering amounts of short-term money. This is in addition to the Fed's existing mechanisms, which are vast.

Citigroup’s Write-Downs Lead to $5.1 Billion Loss

Citigroup reported a $5.1 billion loss for its first quarter, its second consecutive quarterly loss, after the banking giant took a $15.2 billion charge as its mortgage and loan holdings declined in value and it prepared for higher consumer credit costs.

The loss, which amounts to $1.02 a share, is a stark change from the $5 billion in profit the firm earned at the same time last year. Analysts surveyed by Thomson had expected on average a loss of 95 cents a share. Revenues dropped 48 percent to $13.2 billion.

Citigroup’s news is the latest in a wave of dismal bank earnings reports over the past week. Both Wachovia and Merrill Lynch reported losses for the first three months of the year; even JPMorgan Chase, one of the few firms to avoid heavy losses amid the market turmoil, reported 50 percent lower earnings from the same time last year.

“Our financial results reflect the continuation of the unprecedented market and credit environment and its impact on our historical risk positions,” Vikram Pandit, Citigroup’s chief executive, said in a statement Friday.

He emphasized that the firm has been cutting costs and streamlining its operations, and promised that he will continue to sell assets as necessary.

Citigroup has been one of the hardest-hit firms in the wake of the turmoil in the markets and the economy. In January, the bank reported a $9.83 billion loss for the fourth quarter, the largest quarterly loss in the firm’s history, after it wrote down $18.1 billion of its subprime mortgage holdings. It was forced to raise more than $30 billion in capital in December and January, including from sovereign wealth funds, and cut its dividend by 41 percent.

Citigroup continued to write-down its various debt holdings and exposures for the first quarter. Its $9.2 billion in write-downs included a $6 billion charge related to its subprime holdings; a $3.1 billion write-down tied to leveraged loans, or those meant to finance private equity deals; and a $1.5 billion “downward credit adjustment” of its exposure to bond insurers, whose failing financial health has led to a reduction in the value of Citigroup’s mortgage holdings.

Virtually all of Citigroup’s businesses reported lower first-quarter earnings from last year, and in some cases reported losses. Most notable was that of its banking group, which reported a net loss of $5.7 billion on top of revenues losses of $4.5 billion. The unit bore the brunt of the write-downs in subprime and Alt-A mortgages and leveraged loans.