Newton’s centuries old theory of “what goes up must come down” still applies…..really? Talk about a false sense of euphoria or a classic “head-fake.” What we are talking about is the stock-market roller-coaster ride that we have experienced of late. One moment, we are flying towards the sun, moon and the stars and the next we have lost our trajectory and are crashing down to earth with an almighty bump and a rude awakening. Talk about mood swings! It is really hard to understand sometimes! Do you feel like it loves you one minute and then turns against you the next? Does it give you the classic “cold shoulder” when you least want or expect it? Does it sometimes leave you confused and frustrated such that you feel like screaming out loud? Does it often leave you feeling lonely and longing the one minute and then completely satisfied the next? Does it feel like your best friend the one moment only to turn tide against you the next? Does it sometimes feel like you could certainly live without it only to be sucked back into realizing that you could never live without it? Oh, my tortured soul! “All I need is love!” (Beatles). What we are talking about here, of course, is the classic up and down relationship that leaves us all at one time or another scratching our heads, searching our souls and mending our collective egos and broken hearts…..not to mention, wallets! Where is Dr. Siggie Freud, when we need him?

That “temptress”, the Dow, gave all of us a curtsey, a nod and a wink and just as we began to be enchanted by her spell and her lure, she cast us into the abyss last week where we began the free-fall to below the magical 10,000 point level. In fact, she showed us the 9,835 level on Friday before tossing us a life-ring and allowing us to crawl back into the lifeboat. As if to tease us, she hoisted us up to just above that 10,000 level in the final hour of Friday trading and left us the weekend to ponder about the fate that lies before us. We have effectively given up all of those steady gains over the last 3 months. Concerns are spreading that the world has yet to still to feel more of the resultant pain from the global economic rout. Thursday’s one-day 268 point drop was a stark reminder of just that. Commodities, including gold and crude oil, were slammed hard too as expectations of continued troubles in the European bond markets created a sense of a further drag on any semblance of a global economic recovery. Interestingly, in these times, gold is typically viewed as a safe-haven but rather than buy the precious metal, investors turned their attention to the greenback (U.S. dollar). That other safety line, the 10-year Treasury note also benefited, hugely, with the yield dropping to 3.61%.

In tandem with all of this and as another measure of investors’ worst fears, the CBOT’s (Chicago Board of Trade) volatility index spiked 21% on Thursday. This type of move signals a growing amount of nervousness and uncertainty amongst stock investors. The release of worse than anticipated U.S. jobless claims erased the optimism surrounding the strong housing and manufacturing data released earlier last week. Even the fact that the economy grew at its fastest pace in six years, in the last quarter of 2009, expanding at a 5.7% yearly rate over the prior quarter, was not sufficient to stem the panic that sent investors “running for the hills.”

At the “World Economic Forum” which took place recently in Davos, Switzerland, all ire and blame for the global meltdown and its continuance was directed at, you guessed it, bankers. What transpired was clear evidence of a mounting international backlash against the financial sector. Whatever happened to the chant that “banking was a boring profession”? It’s about as boring these days as paddling around in a Great White shark infested breeding ground, with the main difference being that a shark can pick up a scent from miles away whereas a banker can, apparently, be isolated, identified and detected from just about any point on the globe.

There is always a little bit of good news amongst all the bad. The nations January jobless rate actually edged down to 9.7% (10.0% in December). This is significant because this is the first time since last September that the rate is actually being reflected in “single” digit terms. The bleakness in all of this is that the country lost 8.4 million jobs over the last two years. Still staggering, however, is the broader measure of both unemployment and underemployment which includes involuntary part-time workers and discouraged workers — this index is at 16.5%, a slight improvement from 17.3% in the period prior.

Can you imagine that while all of this economic carnage is transpiring, someone has the audacity to pay $104.3 million dollars for a single bronze sculpture created by Alberto Giacometti, titled “Walking Man I”? We most certainly know that the buyer couldn’t have been either one of Bernie Madoff’s sons who are reportedly legally prohibited from incurring debt beyond $1,000. Could the buyer possibly be that young, mega-wealthy, “flying to the rim” basketball player, LeBron James, who over the last week added the “McDonald’s” restaurant emblem to his already long list of enriching and lucrative endorsement deals? Clearly, the buyer of this piece is not squeezed fiscally the way many entire industrialized nations are these days. This is all happening while most of the rest of us are excitedly waiting for “$1 dog day” at the park.

Home-mortgage fixed rates for 30-year terms rose slightly to 5.01% this past week, edging back to above 5%, according to Freddie Mac’s weekly survey of mortgage loans. This was up from the prior week’s average of 4.98%. The 5-year adjustable-rate Treasury- indexed hybrid mortgage averaged 4.27%. More significant is that mortgage applications for home purchases jumped 10% according to numbers released from the Mortgage Bankers Association. This welcome news comes at a good time in light of the fact that the percentage of Americans who own their own homes fell, at the end of 2009, to the lowest point in nearly a decade. The homeownership rate reached a high of 69% in 2004 and has since ebbed down to 67.3%.

The week’s headliners include the following :

• D.C. “held captive” by storm, more looms

• Rising U.S. job worries add to upheaval

• Toyota’s U.S. sales skid; Ford gains

• “Avatar” (the movie) passes $2 billion in global receipts

• U.S. deficit forecast to hit all-time high

• More stress is path forward for new bank rules

• Who Dat? It’s the Super Bowl champ Saints

• Risk of double-dip recession low, Geithner says

• Tiger’s wife reportedly stays at Favre’s ranch (…..hmmmmm!)

This week’s economic news activity releases are fairly light and include the Trade Balance, Retail Sales and University of Michigan Confidence numbers.

Much of the focus last week was on President Obama’s visit to the Asian countries of China, Japan and Korea. Extending that focus, this week, Mr. Manmohan Singh, the Prime Minister of India will be visiting the White House. The President will surely emphasize the need for stronger U.S. trade relations with these countries. With a combined population of 2.5 billion people, increased U.S. exports to these Asian giants will surely help to sustain our economy and ease the unemployment situation to a large extent. Still in Asia, the purchasing power seems to have taken off with a “have money, will spend” attitude and in what could be a telling example, a buyer from Hong Kong recently purchased the late pop legend Michael Jackson’s famous white glove for the measly sum of $350,000. That perhaps represents as good a “hand-in-hand” export as any!

Back home, as per our Commerce Department’s latest report, consumer incomes have increased by 0.2 percent, which in itself is the biggest gain in five months. At the same time, in October, we seem to have loosened our purse strings, perhaps in anticipation of the forthcoming holiday season. Purchases of new clothes, eating out and obtaining a new car with or without the trade-in of a clunker, all led to a 0.5 percent increase in consumer-led purchases in October. Likewise, it is anticipated that the purchase of existing homes may increase by 2.3 percent in October, to an annual rate of 5.7 million units. The extended tax credit may indeed have served as an incentive for some home buyers. However, the high unemployment rate is casting its shadow of doubt about the sustainability of recovery related to both consumer spending and home ownership. Last week’s report that housing starts fell by 10.6 percent in October reflects some of this weakness.

Initial jobless claims remain high at 505,000. Seeking to find solutions to create jobs, President Obama has invited business leaders to provide their input at a White House job summit. Meanwhile, the Fed has indicated that it will continue to keep its funds rate at record low levels. Efforts are being taken to ascertain that banks aren’t yet taking too many risks since safe avenues for investments like Treasury bonds are yielding very low returns. Low cost funding has resulted in a huge inflow of capital in some emerging markets countries. Asset prices in these countries have soared as a result. Hence, there is an emerging concern as to whether the Fed’s policy of providing low cost funds is laying the seeds for the next financial bubble that could arguably have a more significant global impact. We will just have to wait and see.

The weakness of dollar, which has been more marked in the past few weeks, has helped gold stabilize at around $1140 per ounce. As the global economic scenario plays out, it is possible for gold to climb still further. Ouch…out of the window goes the possibility of getting another gold crown fitted at a semi-reasonable cost.

Stock indices remained flat for the week — the S&P 500 lost 0.2 percent while the Dow added 0.5 percent. The calendar for this week includes economic reports on Existing Home Sales, Consumer Confidence & Consumer Sentiment. Regardless of what the economic reports suggest, it is exciting that the holiday season is just round the corner, so, let us begin our week with positive sentiment in anticipation of the Thanksgiving holiday.

The unemployment rate jumped over the moon to 10.2 percent during the month of October. Thus, sadly, an increasing number amongst us are denied the pleasure of crawling to work. Around 200,000 jobs were lost in the month of October alone as the Great Recession continues its march through the U.S. and the world economy. Interestingly, according to some news reports, companies are facing hard times in terms of finding and hiring the right person(s) for some job openings. Positions in sectors like health care and technology; and complex specialized jobs in several other sectors including finance and banking, remain unfilled. It is disheartening that such jobs are vacant due to a lack of candidates with the appropriate skills, particularly when there are millions of job-seekers in the market. Perhaps it is indicative of the talent drain from the U.S. that is ongoing as other countries around the world present more opportunities in today’s times. Oh, by the way, those of you who dream of becoming a CEO, you may try your luck at Bank of America which is yet to find a replacement for Mr. Kenneth Lewis. Good luck to you!

The good news, if one may call it that, for the unemployed is that the government, responding to this sober situation, has extended unemployment assistance for an additional 20 weeks. The Bill legislated last week also has a provision that allows companies to set off their current year losses against previous years’ income. This has the potential to make loss-making companies look good on paper without altering the company’s fundamentals. The government is betting that this provision will allow more time to nurse the economy back to health. One sincerely hopes that this bet pays off.

In a significant victory for the Obama administration, the House of Representatives, late Saturday night, narrowly approved a major overhaul of healthcare administration in the country. The issue has been championed by the Democrats for decades now and the President promised a bill addressing it during his election campaign. The passage of the healthcare Bill faced near-unanimous Republican ire, due to concerns about the long-term monetary costs and healthcare service levels. If this Bill becomes law, it would mark a paradigm shift in the social landscape of the U.S. — just as passage of the Social Security Act did in 1935 and the Medicare Act did in 1965.

Meanwhile, the stock market appeared resurgent with the Dow ending the week above 10,000 points. The non-farm business productivity in the third quarter surged 9.5 percent on an annualized basis, the biggest gain since the third quarter of 2003. Factory orders for September gained 0.9 percent versus a 0.8 percent fall in August, while total inventories fell 1 percent. Despite the weak job report, U.S. indices gained approximately 3 percent for the week.

On the commodity front, precious metals led by gold moved steadily north with gold touching a landmark $1,100 an ounce. The IMF sold around 280 tons from its coffers, to India, for about $6 billion to replenish its funds. India, on her part, maintained that she was diversifying her holdings across a broader range of assets. The price hike in gold obtained sympathetic support from other base metals such as copper, nickel, lead and aluminum, which also rose in unison. Oil has hardened at the $80 per barrel level even as gasoline consumption in U.S. dropped significantly last summer.

The major focus for this coming week will be the Treasury auction sales, international trade balance and consumer sentiment reports.

Knowing that the ancient Greeks were the wisest of philosophers, I naturally turned to them for insight. Writing for his son, Aristotle had this to say on the matter,

“For one swallow does not make a spring, nor does one day; and so too one day, or a short time, does not make a man blessed and happy.”

Aristotle held that happiness isn’t a transitory feeling experienced over a limited period, but instead the cultivation of virtue and accomplishment over a lifetime. As such, he held that you couldn’t really know whether a person’s life was happy until some time after their death, because this judgment depends on whether their life’s works endure, how their children’s lives fare, and so forth.

In our day, the National Bureau of Economic Research (NBER) follows Aristotle’s approach in determining the beginning and end of an economic cycle. The economy peaked and the current recession officially began in December 2007, but the NBER didn’t judge this publicly until eleven months later. It may be that some time next spring, the NBER will declare 6/30/2009 to have been the end of the current recession, with the U.S. resuming a growth trajectory at that point. But in three of the previous four recessions, the economy experienced a quarterly blip of positive growth followed by at least one more negative reading before the recession was finally over. We won’t really know where we are now until the dust has settled in six to nine months.

Part of the discussion around third quarter GDP is that when economists break down the components of that +3.5 percent, nearly all of it was due to temporary government stimulus: the Cash-for-Clunkers program (which is now over), and the first time homebuyer tax credit expiring at the end of this month. Had it not been for large doses of government support, the economy probably would have shown net growth close to the zero mark in the quarter. The good news is that there is still a fair amount of spending to be done under the American Recovery and Reinvestment Act, Obama’s big stimulus package enacted in February. At the time the bill was being debated, it came under criticism on the grounds that the stimulus wasn’t front-loaded enough, with some of the spending being spread out over eighteen months to two years. Now the markets are hoping there’s still enough unspent money in the package to keep GDP in positive territory long enough for the economy’s underlying fundamentals to bob upward and sustain growth once the stimulus spending tapers off.

For the coming week, we have some more big economic news items on the calendar. On Tuesday and Wednesday, the Federal Reserve meets to deliberate monetary policy. All expectations are that the short term interest rate target will remain in the 0 percent to 0.25 percent range. The key question will be whether the phrase “extended period” remains in the Fed’s statement, describing how long it expects to maintain interest rates at such exceptionally low levels. On this phrase hinges the question of whether the Fed plans to begin tightening the money supply in early 2010.

Also this week, we will see the Employment Report. It is expected to show a reduction of 175,000 in non-farm payroll jobs for October, which would actually be an improvement over the loss of 263,000 in September. Although it’s dismal to think that October will mark the 22nd straight month of job losses, the good news is that the rate of job loss has been shrinking steadily since it peaked in January. The unemployment rate is expected to rise yet again to 9.9 percent, but keep in mind that employment is a lagging indicator on both the upside and the downside, so it’s normal for employment to keep skidding downward even as the rest of the economy is showing signs of early-stage recovery.

As recently as March, when all the economic indicators were pointing downhill, the stock market was in the limelight exhibiting free-fall at a breathtaking pace. Now, in a matter of a few months, new “green shoots” are emerging, bringing hope for a quicker economic revival. A relatively quiet bond market took over the center stage as the new “mover and shaker.” Treasury bonds and mortgage markets fell sharply last week, and the corresponding sharp rise in rates over a two-day period served as a reminder that even the private markets are able to shake up the Fed’s plan of keeping mortgage rates at modest levels. It wasn’t completely clear what sparked the rout, but there was speculation that a combination of unclear goals in Federal Reserve quantitative easing programs, floods of new government debt and renewed concerns on inflation all led to the sell-off. Another possible reason for the sell off could be that Chinese investors are moving away from buying treasuries and instead are moving their money into taking a stake in the Cleveland Cavaliers The announced move could be interpreted as yet another attempt to retain LeBron James in Cleveland… at the expense of treasuries. On the other hand, stock investors are enjoying the benefits of a global rally.

Who says that the bond market is boring? After remaining sidelined for a while under the government-supported lower rate regime, yields on the influential 10-year Treasury bond had risen by just more than a half a percentage point over the course of a few days, rising from the lower 3 percent range to the upper3 percent range and dragging mortgage rates along for the ride. Consequently, the benchmark Conforming 30-year fixed rate mortgage jumped from a low 5 percent on Tuesday, to the mid 5 percent’s later in the week. The Federal Reserve is buying MBS securities to keep rates lower, but the purchases proved inadequate to contain the significant increase in bond rates.. Fed gross purchases of MBS for the period May 21st through May 27th totaled $33.4 billion. Total purchases by the Fed to date total $507.1 billion, or 41 percent of the $1.25 trillion purchase planned for 2009. This run-up in mortgage rates has affected new locks, as lenders are locking less than half of their average volume.

Since March 2009, oil and the Indian stock market seem to be competing in the race for the biggest rally. The Indian stock market has had a run-up of almost 70 percent, while the oil price is still leading the race in excess of a 90 percent gain. Oil traders are betting on better economic times ahead as prices rose to nearly $68 a barrel on Monday, hitting a new high for the year. This is almost double March prices of just under $35 a barrel, as world stock markets rally and investors bank on hopes that the global recession is easing. It seems like only yesterday that oil had sunk to $30 a barrel (oil traded near $30 on Dec. 22.) But, with the temperatures heating up and the summer driving season upon us, crude oil prices are on the rise. Who knows, those who skipped hitting the road during the Memorial Day weekend may have to skip the 4th of July weekend, too. The reason attributed to the rally is the forward-looking nature of the markets, weakening dollar and the fall in crude inventory.

This recession has humbled many a big stalwart and in that series, another giant “bites the dust.” General Motors Corp., the world’s largest carmaker until its 77-year reign ended last year, filed for bankruptcy protection in the U.S. with a plan to create a 21st-century company that can compete in world markets. Detroit-based GM is the largest manufacturer to file for bankruptcy, surpassing Chrysler LLC. The carmaker plans to launch a new company in 60 to 90 days, armed with vehicles from its Cadillac, Chevrolet, Buick and GMC units for the U.S. market. Meanwhile, some of the weak brands such as Hummer, Saab, Saturn, and Pontiac would in all likelihood be liquidated and sold to the highest bidder. All of those brands are already for sale, except for Pontiac, which will be shut down.

Whether or not that optimism about the future is unfounded will be seen in the weeks and months ahead. As markets move further away from near panic emergency stances, and as brighter news of economic improvement appear, we could continue to see positive market reaction in the form of adjusted projections, however premature it may sound. One such bit of optimistic news — which may have fueled the bond market rout — was the Conference Board’s measure of Consumer Confidence. The Confidence index rose strongly in May, with a reading of 54.9, blowing well past forecasts. Perhaps the perception that the economy appears to have bottomed out is the cause for the sunnier outlook. The second revision, made to the first-quarter GDP, left us with a milder -5.7 percent decline in the nation’s output, a slight improvement over the 6.1 percent drop seen in the fourth quarter of 2008. The back-to-back contractions still rank among the steepest since the Great Depression. One bright spot seen in the revision was that corporate profits did in fact rebound, posting their first increase since Q2 07. Profitability is the key to getting us moving forward again.

This week the market will be focused on Friday’s unemployment report, expected to show payrolls continuing to fall sharply and the unemployment rate rising to a 26 year high of 9.2 percent. Another important indicator being released on Wednesday is Factory orders.

While our lawmakers were busy debating the AIG executive bonuses, at least the Fed understood that the financial markets need these kinds of appropriate moves to keep investors’ moods positive. This past week, AIG bonuses were the prime topic of discussion, both on cable news channels and Comedy Central. Lawmakers set aside more important discussion items — such as the Federal Budget and whether or not the President promised another bailout package — in favor of grilling AIG CEO Edward Liddy. Ultimately, the House approved a 90 percent tax on bonuses paid this year to firms that have accepted bailout funds greater than $5 billion. AIG bonuses shouldn’t be paid, but with the way lawmakers reacted, someday we will see them dictating how corporate bosses run their day-to-day operations, too.

A statement issued by the Federal Open Market Committee (FOMC) clearly indicated that there will be further declines in industrial production, housing and employment in the second quarter. However, they’re also expecting positive economic growth in the fourth quarter. Keeping a 0 - .25 percent target range for the funds rate, the Fed launched a new Term Asset-Backed Securities Loan Program to fight the credit crunch.

Inflation data also added to investor confidence. The core Producer Price Index (PPI) and Consumer Price Index (CPI) both came in better than expected. All the major indexes like the Dow Jones, S& P 500 and NASDAQ ended up by 1 to 1.8 percent compared to the week before. Usually, the financial sector drives the stock market, but investors are putting their weight behind the utility sector and technology companies. That’s why the utility sector ended up by 8 percent from last week, while the financial sector lost whatever ground it gained in the first half of the week to remain unchanged. A weaker dollar was another factor that was keeping the utility sector buoyant. The troubled housing sector was the winner among all sectors, as it got good news from the Fed as well as uplifting economic indicators. Housing starts, building permits and new construction indicators all rose from last month. Housing Starts increased 22.2 percent; included in that statistic would be an 80 percent increase in multi-unit, while single family units rose only 1.1 percent from last month. Building permits increased by 3 percent from last month. Mortgage rates fell to an all-time low last Wednesday when the Fed announced their intent to buy an additional $750 billion in Mortgage-Backed Securities. For the week ending March 13, as per the MBAA, loan application volume was up by 21 percent from the previous week and 30-year and 15-year fixed-rate mortgages were up around 4.9 percent and 4.5 percent respectively. For the week ending March 20, loan lock volume was expected to increase from the previous period, as 30-year and 15-year fixed-rate mortgage rates averaged 4.75 percent and 4.5 percent respectively.

Expecting housing interest rates to further reduce, investors will be looking for Existing Home Sales on Monday, Durable Goods orders on Wednesday, Quarterly GDP and Initial Jobless Claims on Thursday and Personal Income and Personal Spending on Friday. Lawmakers will be extracting testimony from Fed Chairman Bernanke on Tuesday in regard to the AIG rescue package.

Financial regulators will soon launch a series of “stress tests” to determine which of the largest U.S. banks should get bigger capital cushions in the event of a deeper recession, a person familiar with Obama administration plans said on Saturday. The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth. The government’s plans to spend hundreds of billions of dollars to jump-start the economy, plus hundreds of billions more for housing and mortgage markets, failed to produce much enthusiasm. Equity markets continued downhill this week to a pre-1997 level, as the Dow fell below the 7300 level. Meanwhile, gold returned to the $1,000-per-ounce level, and the president’s newly-announced plan to help “homeowners in trouble” generated as much controversy as his stimulus package.

Although the stock market has regressed to pre-1997 levels, that doesn’t mean that we haven’t learned a thing or two since then. U.S. businesses have become more nimble than in the past and are adjusting to sudden weaknesses in demand. Equipped with sophisticated real-time systems for monitoring sales, purchasing, and inventories, companies began trimming payrolls, adjusting inventories, and paring capital spending more than a year ago, when the economy began to slow. During the past year, output per hour has grown a solid 2.7 percent, a pace that offset most of the additional labor cost arising from the 3.5 percent increase in workers’ pay and benefits. As a result, the labor cost of producing a given item, on average, rose only 0.7 percent, while prices rose by a faster 1.8 percent. This trend suggests businesses are working hard to protect their margins. As the economy begins to recover, strong productivity growth could be a mixed blessing. As happened after the 2001 recession, businesses may try to squeeze whatever output they can from their slimmed-down payrolls before shoring them up again, a strategy that would send productivity growth even higher. That pattern is great for controlling costs and boosting profits, but, as in 2002, it might also result in a “jobless recovery.”

Billions of dollars have been earmarked to fix our ailing infrastructure — and reports indicate we plan to get smart about it. The vision — known as “smart” infrastructure — uses the latest advances in sensors, wireless communications and computing power together to create an intelligent infrastructure system that promises to make the nation more productive and competitive. Imagine, for example, highways that alert motorists of traffic congestion before it forms, bridges that report when they are at risk of collapse and an electric grid that fixes itself when blackouts hit.

The recession may not yet be as bad as the long, deep ones of the 70s and 80s, but even those who haven’t lost their jobs or homes are feeling all the poorer for it. That’s evident in the overall stunning decline in household wealth, which according to Federal Reserve data fell from a peak of $64 trillion in the third quarter of 2007 to $56 trillion in the third quarter of 2008. The real damage was done in the fourth quarter of 2008. The stock market fell off a cliff in the last few months of the year, with the S&P 500 losing half of its value. Meanwhile, the housing market has been a wealth-eraser for millions more, many of whom now have negative equity or are facing foreclosure. The median price of a single-family home went from $219,000 in 2007 to $180,000 in the fourth quarter of 2008, a 13.7 percent decline. U.S. motorists are also adjusting to the slowdown and reduced driving — by the most in 66 years — in 2008. In addition, auto dealerships closed in record numbers, reflecting a deepening recession that’s causing consumers to pull back on spending.

This week will be busy with economic activity as investors try to focus on economic news which includes continued banking sector concerns, Fed Chairman Ben Bernanke’s semi-annual testimony before Congress on Tuesday and Wednesday, a Treasury auction and a host of housing data including S&P Case Shiller index for Tuesday, Existing Home Sales on Wednesday, Durable Goods Orders on Thursday and GDP on Friday.

Charlotte, N.C.-based Bank of America said Monday it will modify troubled mortgages with up to $8.4 billion in interest rate and principal reductions for nearly 400,000 customers of Countrywide Financial Corp., the troubled mortgage lender it acquired last summer.

The announcement arrived after the Illinois attorney general’s office said Sunday that the bank was modifying loans for customers in 11 states.

Some borrowers stuck with Countrywide customers might qualify for having to pay nothing but interest for a decade. Even people who can’t afford to keep their homes with such changes will be able to get help moving to a new home.

“This is going to provide a tremendous amount of relief,” said Illinois Attorney General Lisa Madigan.

Her office and officials from California negotiated the settlement; Illinois and California sued Countrywide earlier this year. Nine other states have also joined the settlement, and other states could sign on, said Deborah Hagan, chief of Madigan’s Consumer Protection Division.

In California alone, the settlement will offer $3.5 billion in relief. For Illinois, that would translate to $190 million.

“Countrywide’s lending practices turned the American dream into a nightmare for tens of thousands of families by putting them into loans they couldn’t understand and ultimately couldn’t afford,” California Attorney General Jerry Brown Jr. said in a statement Sunday.

The other states joining the settlement are Arizona, Connecticut, Florida, Iowa, Michigan, North Carolina, Ohio, Texas and Washington.

Bank of America said it will launch the new mortgage aid program in December.

In a statement, Barbara Desoer, president of Bank of America’s mortgage, home equity and insurance services, called the plan “a comprehensive program that provides more solutions than ever before to assist troubled borrowers and put them back on the path to sustained home ownership.”

The mortgage aid includes revising customers’ payments so they don’t exceed 34 percent of income. Other options include reducing interest rates and adjusting principal so that borrowers don’t wind up actually losing equity under some payment plans.

Countrywide will not charge loan modification fees and will waive prepayment penalties.

Madigan said she hopes the settlement could serve as a model for steps that other lenders could take to make up for misleading mortgage practices. She stressed that the agreement involves no tax money but will help people keep their homes and keep money flowing to lenders

“This settlement will help homeowners stay in their homes, which ultimately helps investors and also helps communities,” said Madigan, a Chicago Democrat

Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

The downside risks to growth remain and the upside risks to inflation are also of significant concern to the Committee. The Committee will monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.