NEW YORK (CNNMoney.com) — Great. The global economy finally starts to show signs of emerging from the recession and now a possible trade war between the U.S. and China is throwing a monkey wrench into the recovery.

The U.S. just slapped a 35% tariff on tires imported from China, beginning Sept. 26.

And in a move that doesn’t look like mere coincidence, the Chinese government announced Sunday that it is launching a probe into possibility of the U.S. dumping auto parts and chickens on the Chinese market.

This is not good news. This spat could have a major impact on more than just Goodyear Tire & Rubber (GT, Fortune 500), Cooper Tire & Rubber (CTB) and poultry producer Tyson Foods (TSN, Fortune 500).

If the tension between the U.S. and China escalates into a full-blown bout of global protectionism, we might need to kiss the notion of an economic recovery goodbye. This could be the start of that much-feared double dip into another recession.

Or as Michael Corleone said in an often parodied line from the “The Godfather: Part III”: “Just when I thought I was out … they pull me back in!”

On the one hand, it makes sense for the White House to try and enforce existing trade laws so that U.S. tire makers can compete more effectively with cheaper tires imported from China.

The trade deficit with China has soared in recent years, hitting a record high in 2008. This is a concern for obvious reasons: If we continue to buy a lot more from China than we sell to them, more U.S.-based manufacturing jobs could be lost.

“It’s not uncommon for the government to side with certain industries to protect American workers,” said Keith Hembre, chief economist with First American Funds in Minneapolis. “These tariffs wouldn’t be happening if the unemployment rate was substantially lower.”

But we’ve been down this road before. The launching of tariffs during a severe economic slowdown has done more than harm than good in the past.

Many historians blame the Smoot-Hawley Tariff Act of 1930, which raised tariffs to their highest levels ever, for making the Great Depression worse.

Protectionism is a bad idea. In this increasingly globalized economy, it just doesn’t make sense to alienate trading partners.

“One would hope we can avoid more of this. There is no positive side to raising tariffs,” said Kurt Karl, chief U.S. economist with Swiss Re. “In this global crisis, you want global cooperation. This doesn’t help.”

And that’s especially true with China since it is also the largest foreign holder of U.S. Treasury debt, owning about $776 billion of Treasurys as of June.

If the Chinese stopped buying Treasurys — or worse started selling them en masse — it could have a catastrophic effect on the dollar and the nation’s fiscal state as a whole.

“A trade war would be very detrimental to the U.S. and the global economy,” said Michael Pento, chief economist with Delta Global Advisors, Inc., a money management firm. “We should have fair, open trade. But our banker right now is the Chinese, and it’s best not to bite your banker’s hand.”

Karl isn’t too concerned that China would dump Treasurys. He argues that would be the equivalent of China shooting itself in the foot since it would further erode the value of its holdings.

Nonetheless, Karl does worry that China could retaliate against the tire tariff with tariffs of its own and even more government subsidies of Chinese manufacturers. That could make the trade deficit worse.

But at least one economist thinks cooler heads will eventually prevail and that the brouhaha over tires won’t lead to the China and U.S. levying more tariffs on other goods.

Michael Strauss, chief economist with Commonfund, a money management firm based in Wilton, Conn. said there is not going to be a repeat of the mistakes of Smoot-Hawley.

Strauss said both the U.S. and Chinese are smart enough students of economic history to know that the last thing the world needs now is for arguably the two most important economic powers to turn a spat over tires and chickens into something that could derail a global rebound.

“This is not that big of a deal. You get these battles once in a while and they pass. This is not reminiscent of what happened 80 years ago,” he said. “Deep down, the U.S. and China know that they need one another. There’s going to be more negotiation than retaliation.”

Here’s hoping that he’s right.

Talkback: Would a trade war between the U.S. and China be a bad thing? Or should the U.S. be more protectionist to try and save jobs? Share your comments below.

Timothy Geithner at his swearing-in on Monday. The new Treasury secretary took steps Tuesday to block lobbying on the bailout program by its beneficiaries.

Mr. Geithner, who was confirmed on Monday, also said he would set new limits intended to prevent political interference with decisions about which companies received bailout money.

Among other steps, the Treasury department said it would make public a log of all contacts by public officials and bank officials regarding specific financial institutions.

The log will be posted on the department’s Web site and updated weekly, it said.

The announcement followed several recent news reports about attempts by corporate lobbyists and members of Congress to influence the bailout program, including decisions about which banks should receive taxpayer funds.

“American taxpayers deserve to know that their money is spent in the most effective way to stabilize the financial system,” Mr. Geithner said in a statement. “Today’s actions reaffirm our commitment toward that goal.”

The details of the new rules, whose text has not been completed, were not released. But in a press release, the Treasury Department outlined the Obama administration’s intent to restrict corporate and political lobbying to influence the bailout program.

Among the changes will be rules to “combat lobbyist influence” over the bailout program, including by “restricting contacts with lobbyists in connection with applications for, or disbursements of” bailout funds, the department said.

A Treasury spokeswoman said the department’s lawyers were developing rules to adopt such a restriction to the extent allowed by law and would make the procedures public. The changes will not require legislation by Congress or regulations, she said.

Eugene Volokh, a constitutional law professor at the University of California, Los Angeles, said there was no legal impediment to barring Treasury officials from talking about specific matters with lobbyists, although the First Amendment would not permit the government to forbid people from trying to lobby it.

The New York Times reported on Jan. 24 that at least a dozen companies that received taxpayer funds from the bailout program lobbied the government about the program in the final months of 2008, according to their lobbying disclosure forms.

The new rules will also “ensure that political influence does not interfere” with bailout “decision making, using as a model for these protections the limits on political influence over tax matters,” the Treasury said.

The tax investigation safeguards include rules to keep executive branch officials, including those at the White House, from ordering the Internal Revenue Service to conduct or terminate an audit of a particular taxpayer. If copied for the bailout program, the rule would prevent such officials from intervening in particular decisions about which banks get which funds.

The Treasury spokeswoman also said the department would disclose communications with members of Congress, along with bank executives, as part of its plan to make public all contacts about the bailout program.

The Wall Street Journal reported on Jan. 22 that several members of Congress, including lawmakers from Ohio and Alabama, had tried to ensure that regulators would steer bailout funds to banks in their states.

The article focused in particular on efforts by the chairman of the House Financial Services Committee, Barney Frank of Massachusetts, to help a troubled minority-owned bank in Boston. It later received $12 million in bailout money.

In a phone interview, Mr. Frank said he had no problem with Treasury posting a log of communications with members of Congress. He said he had been very public about his support for the Boston bank, and said lawmakers wanted their constituents to know of such efforts.

The Treasury said letters and calls from Congress played no role in its decisions about which banks received money. Mr. Geithner also declared that the Office of Financial Stability at Treasury, in making reports to Congress about how it was disbursing the bailout funds, would certify that each decision was based only on “investment criteria and the facts of the case.”

The department said it would soon publish a detailed description of its investment review process. And it said that only banks recommended by their primary bank regulator would be eligible for bailout funds.

The announcement on Tuesday represented the latest step by the Obama administration to make the bailout program more open and accountable as it moved to disburse the second $350 billion, following criticism of the Bush administration’s handling of the first $350 billion of the program.

Another set of rules on lobbyists imposed by President Obama will affect Mr. Geithner’s chief of staff, Mark Patterson, who lobbied for Goldman Sachs as recently as last April. Under the new rules, Mr. Patterson cannot be involved in dealing with any issues involving Goldman or other issues on which he lobbied.

The Obama administration has already said it will step up monitoring of lending patterns by financial institutions that have received bailout money. It also said it would seek to limit executive pay at banks that received taxpayer help in the future.

During his confirmation hearings, Mr. Geithner said the bailout needed “serious reform” and pledged that the administration would impose “tough conditions” to protect taxpayers.

Residents of Columbia, S.C., visiting the employment security commission to seek jobs or file for unemployment benefits.

Four months had passed since he lost his job as a maintenance worker at a chain of convenience stores, trading a paycheck of $370 a week for an unemployment check of $180 a week. With those benefits about to expire, Mr. Lewis arrived to fill out the paperwork for an extension, weary and uncertain about the future.

A new president is about to take responsibility for the American economy — the first black president, which has a particular resonance for Mr. Lewis, 52, an African-American. That Barack Obama is promising to devote hundreds of billions of dollars toward creating jobs is interesting, too. Yet none of this gave Mr. Lewis comfort.

“I haven’t seen the change,” Mr. Lewis said. “Until he does something, he’s just like all the rest of them to me. He ain’t done nothing for me. Everybody’s making promises.”

Mr. Lewis’s job search has amounted to an in-depth tour of shrinking prospects in one of the worst economic downturns since the Depression. He has applied at warehouses, at a moving company, at a concrete plant. So far, nothing. The next stop: a poultry slaughterhouse on the outskirts of Columbia.

Variations on his story echoed through the employment office in downtown Columbia, whose economic experience traces the national trajectory of the last decade more than any other metropolitan area. The people who passed through on this recent morning provided a snapshot of the extraordinary economic challenges inherited by the new president, as well as the mixture of hope and skepticism that greets his arrival.

Hope, because Mr. Obama represents a distinct break from the past, armed with a mandate to unleash government largess toward putting millions of people back to work. Skepticism, because Washington seems a long way from where most Americans live, geographically and figuratively. At the employment office, sounds of frustration created the running soundtrack. “This is the issue …” “I never got the call.” “The store has closed …” “I just need this paper signed, showing that I been here.”

A lot of people have been here. In December, 23,029 people passed through here to arrange job training, seek a new job or arrange unemployment benefits, said Keith Lucas, area director of the Midlands Workforce center, the official name for the place. That was far more than the 13,698 who came in the final month of 2007.

Nationally, some 2.6 million jobs have disappeared since December 2007, when the recession began. Last week, 524,000 more Americans filed for unemployment benefits, amid forecasts that the number could spike as high as 750,000 by late this year.

The economy that Mr. Obama is supposed to somehow fix is gripped by fear and the deepening realization that, for many people, recovery will be an exercise in making do with less than they had before.

A year ago, people let go by area factories that had paid as much as $18 and $20 an hour generally balked at the idea of retraining for a job installing heating and air-conditioning gear at half that pay. Now, those training programs are packed.

“There was a lot of resistance before,” said Abby Linden, who oversees such programs. “People now seem to expect that they’re going to have to start over.”

Mr. Obama’s inauguration is like a palpable marker of a new beginning for many, an inarguable sign of change, she said. “There’s a lot of excitement and hope,” Ms. Linden said. “People have a lot of faith in him, and faith that he’s going to be able to turn it around.”

And yet, out in the lobby, where dozens of people sat quietly in plastic-backed chairs arrayed across the linoleum floor, waiting to apply for unemployment benefits, weariness and resignation carried as much weight as faith and hope.

“It’s got to be better, it can’t be worse,” said Charles English, 62, who lost his job at an asphalt plant two years ago and has not worked since, living on the good graces of his grown son. “Just to listen to Obama talk and see those kids of his, it just makes you stand up and feel proud.”

But the talk of big spending on public works projects to generate jobs seemed to exclude him. “I ain’t able to go out and get this construction work,” he said. “I’m too old for that. So what happens to me?”

As John Arnette sat beneath the pale glow of the fluorescent lights, waiting to inquire why his check had suddenly stopped, he worried that Mr. Obama was promising to spend money the country did not really have, adding to long-term debts.

“You’ve got all the money that’s been given to the financial sector, plus all the money that’s going to the Big Three auto companies,” he said. “Where’s the money going to come from?”

It was the same question being asked with increasing frequency in his own household: Despite his college degree, Mr. Arnette, 36, has been out of work since May, when he lost his job as a midlevel manager at a convenience store chain.

Looking for work has been a humiliating process of discovery. Fresh college graduates are working as waiters or stocking the shelves at Lowe’s, the home improvement store. Management positions there seem increasingly filled by people with graduate degrees.

His wife still works, at a Verizon Wireless call center, but their household income has dropped from $150,000 a year to about $65,000.

“I’m blessed that my wife has a good job,” Mr. Arnette said. “Without that, I’d be homeless.”

Robert Rubin joined Citigroup in 1999 as an adviser to its senior executives.

The new chapter of wrenching change came as former Treasury Secretary Robert E. Rubin, who came under fire for his strong support of that model in an advisory role that helped fuel the bank’s troubles, said he would resign.

The developments highlight how badly Citigroup has been damaged by the global financial crisis. Deepening losses, declining confidence in its leadership and a desperate need to raise capital have forced the bank to rethink the strategy it has clung to for years.

“This is either a one-off or the first inkling of a dismantlement of the company, taking apart of what John Reed and Sandy Weill did,” a senior executive with ties to the company said, referring to the two leaders who forged the landmark deal to bind Citicorp and Travelers Group in 1998.

With pressure mounting on Vikram S. Pandit, Citigroup’s chief executive, the company’s executives say the decision to split off Smith Barney, the “crown jewel” brokerage business he said he loved a few months ago, suggests the bank’s troubles are so deep that he is looking to reshape the company in a former image of itself.

While a deal is not yet final, such a change would position Citigroup to look more like Citicorp — a global franchise with strengths in trading, corporate and investment banking, and international consumer banking — than the bloated and unwieldy company it has become.

It also could lead to yet another shift in power on Wall Street. A joint venture with Morgan Stanley would create the nation’s largest brokerage network of 20,000 advisers, edging out Merrill Lynch’s thundering herd of brokers that Bank of America snapped up in September. Citigroup and Morgan Stanley had been in preliminary talks about a joint venture with Smith Barney as early as summer, according to people briefed on the talks.

As Citigroup braced for devastating fourth-quarter losses, with the government pressuring it to raise capital, Mr. Pandit restarted the discussions last month to shore up the bank’s financial condition. Both firms signed exclusivity agreements precluding either from discussing rival transactions with others. A deal could be announced as early as the middle of next week.

Citigroup is likely to undertake further changes, including a possible shake-up of its board, according to a person briefed on the situation. Although directors have been impressed by Mr. Pandit’s financial acumen, they continue to question his leadership ability. And Citigroup directors are considering replacing its chairman, Winfried F. W. Bischoff, with Richard D. Parsons, its lead director and the former Time Warner chairman, as early as next week, this person added. A Citigroup spokesman declined to comment.

For Mr. Rubin, his resignation is a sobering turn in a sterling career in Washington and on Wall Street. Since joining Citigroup in 1999 as an adviser to the bank’s senior executives, Mr. Rubin, 70, who is an economic adviser on the transition team of President-elect Barack Obama, has sat atop a bank that has made one misstep after another.

When he was Treasury secretary during the Clinton administration, Mr. Rubin helped loosen Depression-era banking regulations that made the creation of Citigroup possible. During the same period, he helped beat back tighter oversight of exotic financial products, a development he had previously said he was helpless to prevent.

In his capacity as a senior adviser to Citigroup’s top executives and board, he pushed hard for the bank to step up its trading of risky mortgage-related securities and other complex investments as long as it improved oversight — a strategy critics say sowed the seeds of the bank’s current troubles. Mr. Rubin, whose contract specifically absolved him from daily operational responsibilities, has maintained that he could not have foreseen the current mess.

“This is not a decision that I have come to lightly,” Mr. Rubin said in a statement released by the bank. “But as I enter my 70s and with all that is now in place at Citi, I believe the time has come for me to make these changes.”

“My great regret,” he added, “is that I and so many of us who have been involved in this industry for so long did not recognize the serious possibility of the extreme circumstances that the financial system faces today.”

Mr. Rubin, who has no severance contract and has turned down a bonus for the last two years, will still leave the bank with millions of dollars in accumulated pay. He has been awarded more than $126 million in cash and stock over the past decade, and has already withdrawn virtually all of his deferred compensation for estate planning purposes, said a person with knowledge of Mr. Rubin’s pay.

Mr. Rubin plans to deepen his involvement in public policy initiatives, charitable projects and personal hobbies like fly-fishing.

Mr. Rubin’s other role has been to serve as a sounding board and supporter for Citigroup’s senior leaders — including Mr. Pandit and Mr. Pandit’s predecessor, Charles O. Prince III. But Mr. Rubin’s influence in urging the bank to ramp up risk-taking, while failing to properly supervise the big bets taken on mortgages and other complex investments, put him under fire.

Citigroup has already posted more than $65 billion in losses and is likely to post its fifth consecutive quarterly loss this month. Every Wall Street firm has suffered from the financial crisis. But the scale and scope of Citigroup’s losses, from its investment banking to its credit card and retail franchises, has been particularly pronounced.

Mr. Rubin began backing away from his senior advisory role last summer when he started counseling Mr. Obama, according to several Citigroup executives who have spoken to him recently. Still, he held discussions with Treasury Secretary Henry M. Paulson Jr. as Citigroup negotiators orchestrated the bank’s bailout in late November. The government injected more than $45 billion into Citigroup and agreed to guarantee about $269 billion of illiquid mortgage-related assets.

Although Mr. Rubin had been contemplating leaving Citigroup for several months, he may have hastened his departure to try to get ahead of the criticism facing the bank’s board, said two people at Citigroup with knowledge of the situation. Mr. Rubin is fiercely protective of his reputation, and though he most likely would have been re-elected, he faced the potential embarrassment of a public struggle with investors who have been critical of his tenure and lucrative pay.

The Smith Barney joint venture will open a new chapter of wrenching change at Citigroup. Under the proposed deal, Morgan Stanley will pay Citigroup around $2.5 billion to bring itself up to 51 percent ownership of the brokerage business. That values Smith Barney at roughly $12 billion, people with knowledge of the matter said. Morgan would also retain the right to purchase the rest of the business in three to five years.

If the business produces strong revenue, both banks would benefit, and as the market improves, Citigroup stands to see the price it will be paid for its share increase.

Both Citigroup and Morgan Stanley would also reap sizable cost savings from combining their back-office systems and cutting back pay packages to retain and lure brokers from other firms. Both banks, as well as UBS, have been dangling huge sums in front of brokers at other firms because the brokerage business provides steady returns.

Henry Burton will never know whether the snow that blanketed Seattle during the holiday season was a blessing or a curse.

The unusually heavy snowfall and cold temperatures left many Seattleites snowbound for days right around Christmas and Hanukkah. That meant Burton, owner of Fremont Place Book Co., may have lost customers who would normally have driven to his independent bookstore. But he also gained some who were left to do their holiday shopping on foot and discovered his shop, in Seattle’s Fremont neighborhood, for the first time.

Some of those people have since returned to his store, leaving Burton hopeful that he has gained some new regulars. In the end, Burton saw business fall by 6.5 percent for December from a year ago, although he was able to bring in enough money to pay his bills and even start the year with a bit of savings. Still, he’s not yet sure whether he’ll be writing himself a paycheck this year.

“I may get a little bit, but not as much as I had hoped to,” he said this week.

Like a lot of small retailers, Burton depends heavily on the holiday season to ring up sales — and, like a lot of smaller retailers, this past holiday season proved especially challenging.

Fremont Place Book Co. was one of three small stores featured in a December article about how independent retailers were faring during the 2008 holiday season. This month, msnbc.com is checking back with those retailers — a bookstore, a gift shop and a consignment store — to find out how the season turned out.

Buying cheaper books
For Burton, the weather added another curveball to the already uncertain season, bringing the Seattle area to a virtual standstill and delaying deliveries of special orders for many of his customers.

On the plus side, Burton thinks the weather forced some people to stop and enjoy the holiday season more, and made them more forgiving of things like the delayed orders.

“People just seemed a lot more relaxed about the whole thing,” He said.

Overall, Burton said the shop was as busy as it ever is around the holidays, but people’s shopping habits were different. Burton sold more paperbacks as customers balked at big cookbooks and coffee table books, and calendars weren’t as popular as he had hoped.

“People were buying as many books. They were just buying a lot cheaper books,” he said.

This month, Burton has been paring down his inventory by returning books to distributors and publishers, in order to save money. He’s also working with his landlord in the hopes of keeping his rent from being raised. And he’s already wondering about how things will go this summer, when he typically benefits from tourism traffic.

“We’ll see what happens,” he said. “If there aren’t many tourists around, that could be a problem.”

Weather and economic woes
As soon as business started dropping off last fall, workers at the Artisan Center in Denver refined their holiday strategy in the hopes of appealing to more cost-conscious shoppers. A stronger-than-expected start initially left them hopeful, but then a spate of cold weather combined with the economic woes made them fearful that business could be down as much as 18 percent in December.

But the 32-year-old gift shop, located in the city’s upscale Cherry Creek neighborhood, got an early Christmas present when business picked up significantly in the final days before the holiday. Manager Julie Hayward said the staff also was surprised by a business uptick in the week following Christmas as shoppers who came in to exchange items ended up spending more.

“They would bring back a $20 necklace and get something that was $60,” Hayward said.

The two strong weeks left the shop with a slightly less dour 14 percent drop in business for the month, compared with a year ago. Overall, the store saw a 7 percent drop for the year.

Sonja Kohn of Bank Medici.

Now, she has even fewer. Mrs. Kohn has dropped out of sight, leaving the firm she founded, Bank Medici, in the hands of Austrian regulators, who took it over last week.

Embarrassment from investing heavily with Mr. Madoff could explain wanting to disappear from public view. But another theory widely repeated by those who know Mrs. Kohn is that she may be afraid of some particularly displeased investors: Russian oligarchs whose money made up a chunk of the $2.1 billion that Bank Medici invested with Mr. Madoff.

“With Russian oligarchs as clients,” said a Viennese banker who knew Mrs. Kohn and her husband socially, “she might have reason to be afraid.”

It was a view shared in interviews with Mrs. Kohn’s fellow bankers, former employees and other associates — from Vienna to London to Geneva to Monsey, N.Y.

Few of those who know her were willing to be quoted by name because they feared being linked to the scandal surrounding Mr. Madoff as well as the investigations into his alleged fraud. But several people with knowledge of her personal and professional dealings say she became concerned about retribution by Russian investors after Mr. Madoff’s arrest last month. (Russia’s richest men have been especially strapped as commodity prices and their stock market have collapsed.)

A spokeswoman for Bank Medici, Nicole Back-Knäpp of the public relations firm Ecker & Partner in Vienna, said Mrs. Kohn did not want to speak to the press.

“She is a victim and the Bank Medici as well,” Ms. Back-Knäpp said. She declined to comment on whether Mrs. Kohn was in hiding.

It is a stunning reversal for the 60-year-old Mrs. Kohn. The daughter of Jewish refugees from Eastern Europe who moved to Vienna after World War II, she came to New York in the 1980s and was one of the rare women to found and head a small brokerage firm. At that time, she started a decades-long friendship with Mr. Madoff. Once known here as “Austria’s woman on Wall Street,” she became one of Mr. Madoff’s international conduits for securing billions of dollars from the global rich.

With her husband, Erwin, a former banker, Mrs. Kohn was able to draw interest from wealthy Russians, Ukrainians and Israelis. And though she migrated from a more traditional Jewish background to ultra-Orthodox practice — which is why she covered her hair with the wig — Mrs. Kohn and her husband even managed to secure meetings with deep-pocketed Arab investors.

“He was the door opener, she was the go-getter,” said the Viennese acquaintance of the Kohns who insisted on anonymity because of the publicity surrounding the Madoff case, both in Europe and the United States. “She’s not somebody for small talk.”

Curtis J. Hoxter, a veteran New York-based communications adviser who has worked with Bank Austria and met Mrs. Kohn frequently in Manhattan said, “She has a very aggressive personality and wouldn’t take no for an answer.”

He added, “She was overwhelming.”

Mrs. Kohn owns 75 percent of Bank Medici, with Bank Austria holding the rest.

Mrs. Kohn’s background could not have been more different than that of Rene-Thierry Magon de la Villehuchet, the French aristocrat who committed suicide in New York last month after his firm, Access International, lost $1.4 billion.

While Mr. Villehuchet attracted elite investors like Philippe Junot, the former husband of Princess Caroline of Monaco, and Liliane Bettencourt, daughter of the founder of the French cosmetics giant L’Oréal, Mrs. Kohn’s Madoff-linked funds were more often marketed to individuals through banks like UniCredit and its subsidiary, Pioneer Alternative Investments.

In other cases, Mrs. Kohn appealed directly to investors during her frequent trips around Europe. Like Mr. Madoff himself, she used the promise of entree to an otherwise unavailable investment as her key selling point. “She said she was a very close friend of Bernie, and had good connections,” said one top Geneva banker who met with her in Vienna several years ago. “She said it was hard to get into, but she could give me access.”

There is no indication that either Mr. Villehuchet or Mrs. Kohn knew of the Ponzi scheme Mr. Madoff is accused of running.

While Mrs. Kohn and her husband were hardly fixtures of the European scene, friends say they patronized charities in Italy and elsewhere on the Continent that enabled them to rub elbows with wealthy potential clients.

Mrs. Kohn also granted occasional interviews to local newspapers and talked up her bank’s prospects. In June 2008, she told The Voice of Russia “our history is a very conservative one.”

Mrs. Kohn owned a home until about a year ago in Monsey, N.Y., an ultra-orthodox community about an hour north of Manhattan, but has recently spent more time in Europe.

One associate in Monsey said the Kohns’ lifestyle was modest.

With just 16 employees, Bank Medici was hardly a powerhouse, based in a fourth-floor office in a nondescript building overlooking the Vienna Opera House. But it had a lucrative model.

In 2007, Madoff-linked investments produced the bulk of Medici’s fees of 9.7 million euros, or about $13.7 million, and net income of 472,300 euros, or $665,000. But Mr. Madoff’s name does not appear in the bank’s 2007 annual report, its most recent statement.

Instead, Mrs. Kohn presented herself as the gatekeeper to the Madoff funds, and made it clear to her employees that only she could contact Mr. Madoff.

Although its headquarters are in Vienna, Bank Medici focused on marketing and distributing the Madoff-linked investment vehicles through other banks and asset managers in Europe and beyond. Nearly all of Bank Medici’s $2.1 billion exposure to Mr. Madoff comes from clients outside Austria.

In recent years, Sonja Kohn traveled constantly to Milan, Zurich, London, Israel and New York, returning from time to time to an apartment in an upscale neighborhood of Vienna near the Parliament building. She also maintains a villa outside Zurich.

But she maintained close ties to the Viennese banking and government elite.

“The Austrian banking market is relatively small, and many banks get their growth from Eastern Europe,” said Christopher Kummer, a professor of mergers and acquisitions at the Vienna-based Webster University. “The industry’s ties with the government are strong and the environment is one where most people know each other or of each other.”

Indeed, two former government ministers, Hannes Farnleitner and Ferdinand Lacina, sit on Bank Medici’s supervisory board.

Former employees say Mrs. Kohn was always dreaming up potential new products, like a credit card allowing rich Russians to arrange private jet service or a Liechtenstein-based life insurance package.

In Britain, one London banker recalled how Mrs. Kohn would always stay at Claridge’s, a five-star Mayfair hotel, and receive clients in a suite there.

The banker described Mrs. Kohn as generous with employees and clients, frequently bestowing small gifts, like pens as well as Sachertortes, the classic Viennese chocolate cake.

While some bankers were put off by what they described as her aggressive style and occasional name-dropping, he said Mrs. Kohn could also be charming, displaying flashes of the “gemutlichkeit,” or coziness, her hometown is famous for. “She could be hard to say no to,” he recalled.

Mrs. Kohn is fluent in a host of languages, including English, German, Hebrew and Italian.

Gerhard Altenberger, the government-appointed commissioner in charge of securing the interests of Bank Medici’s creditors, said the bank had been cooperating fully, and that he had been able to interview Mrs. Kohn in Vienna.

But friends of the couple say they have not seen them since shortly after Mr. Madoff was arrested on Dec. 11. A fellow banker said when he last saw Erwin Kohn in Vienna, on Dec. 13, “he looked shattered and nervous. He couldn’t believe it.”

Bank Medici is now effectively being managed by Mr. Altenberger, the government-appointed commissioner.

Restriction on Funds Extended

A judge extended an order Tuesday barring the hedge fund founder J. Ezra Merkin from shutting down funds that had invested with Bernard L. Madoff or withdrawing money from them.

Justice Richard Lowe of New York State Supreme Court issued the extension in a lawsuit brought on Dec. 23 by New York University, which says it lost $24 million when funds run by Mr. Merkin invested money with Mr. Madoff without its consent.

The initial order expired Tuesday.

The developer Sean Dunne and his wife, Gayle Killilea, at home in Dublin. It is not known whether Mr. Dunne will fall victim to the global financial crisis, but there is no doubt Ireland has.

One would think that Mr. Dunne, Ireland’s best-known building developer, would be in bed at this hour. It’s a weeknight, after all, and he has meetings that begin before first light.

What’s more, the Irish economy, pummeled by the most severe housing bust in Europe, has collapsed. And the gossip around town is that Mr. Dunne, whose brazen deal-making and Donald Trump-like lifestyle epitomized the country’s euphoric boom, might be going bankrupt.

But, no matter, a penny is a penny.

“I am never, never too proud to pick a penny up from the floor,” Mr. Dunne said. He is on perhaps his fifth pint of Guinness, capping a rollicking night of Champagne cocktails, followed by a wine-soaked dinner — yet his thick brogue is clear of even the faintest slurring.

“I grew up with nothing and I know the value of money,” he adds. “The Celtic Tiger may be dead and if the banking crisis continues I could be considered insolvent. But the one thing that I have is my wife and children — that they can’t take away from me.”

It is not known whether Mr. Dunne will fall victim to today’s world financial catastrophe, but there is no doubt that his country has.

Everything, it seems, has grown worse here. The recession started earlier and its bite has been deeper. Housing prices have fallen by as much as 50 percent. Bank shares have plummeted by more than 90 percent. Unemployment is approaching 10 percent.

The roots of Ireland’s fall date to more than 20 years ago, when a clutch of economists, politicians and civil servants put their heads together in this very pub and planted the philosophical seeds for the Irish economic miracle.

Known widely as the “Doheny & Nesbitt School of Economics,” these beery musings soon became government policy that chopped taxes in half, sharply reduced import duties and embraced foreign investment — a radical transformation that gave birth to the Celtic Tiger and perhaps the most open and vibrant economy in Europe.

But beyond the glow of this sudden efflorescence that made Ireland the fourth most-affluent country in the Organization for Economic Cooperation and Development, a housing bubble had begun to form. Low interest rates, a wave of inward immigration and a bank lending spree drove housing’s share of the economy to 14 percent, the highest in Europe, from 5 percent.

Developers like Mr. Dunne became multimillionaires and — much like the hedge fund and private-equity elite in America — became visible public and cultural figures. They were living large in a country just coming to grips with its ability to show a little swagger.

Ireland’s policy makers, like their counterparts in the United States and Britain, were seduced by record tax inflows and a full-employment economy. They paid little heed to the lonely voices that warned of the crash that finally came over the summer, when interest rates in Europe began to rise. Banks that had steered more than 60 percent of their loans toward property stopped lending, and asset values plummeted.

“We have repeatedly warned that the government’s housing policy was extremely dangerous,” said John Fitz Gerald, an economist at the Economic and Social Research Institute, a leading policy center in Dublin, who has long urged that the government stanch housing demand by raising taxes. “You will now see unemployment going to 10 percent and we will experience a sharp drop in output.”

He shakes his head and sighs: “This was predictable, but the government just did not deal with it.”

BY wide consensus here, two events have come to define — both culturally and financially — the sweep and excess of the Irish property boom. Both revolve around Sean Dunne.

In July 2005, Mr. Dunne paid 379 million euros for a seven-acre plot in the exclusive Ballsbridge neighborhood of Dublin and promptly announced that he would tear down the two luxury hotels on the site to build a high-end commercial and residential development.

That deal amounted to 54 million euros an acre, one of the highest amounts ever paid for land in Europe. His subsequent architectural plan featured a soaring Dubai-like office tower cut in the shape of a diamond that anchored a futuristic community of expensive houses and glamorous shops, and the price tag of one billion euros shocked Dubliners with its gall and ambition.

Hobbled by delays and vocal neighborhood opposition, the project sits before a local planning board that on Jan. 30 will either approve or scrap the plan.

The second moment occurred in 2004 when Mr. Dunne, who is now 54, celebrated his second marriage, to Gayle Killilea, a former gossip columnist 20 years his junior, by inviting 44 of his friends on a two-week Mediterranean wedding cruise on the yacht Christina O, on which Aristotle Onassis and Jacqueline Kennedy married. Much as the $3 million birthday party for Stephen A. Schwarzman, the Blackstone Group founder, came to be seen as a crass display of private equity’s manifold riches, the Dunne wedding was viewed similarly in Ireland: as a conspicuous and garish expression of the man and his business.

That a billion euro property plan and a gaudy wedding celebration should be held up as cautionary exemplars of Ireland’s pursuit of money angers Mr. Dunne. In his view, it speaks to what some call the Irish disease.

“Jealousy and begrudgery are still alive and well in Ireland, and whoever eradicates them should be prime minister for life,” he says as he tucks into a heaping plate of gravy-drenched turkey and mashed potatoes in the restaurant of one of the two hotels he owns — and is hoping to raze. “It’s part of the Irish psyche and it is the result of 800 years of being controlled by other people, of watching everything the master or landlord is doing.”

Mr. Dunne’s compact paunch, reddish cheeks and mischievous grin — which he occasionally deploys with a wink of his eye — can give him the air of a department store Santa. But his business methods are far from jolly: he is notorious for taking legal action against all who cross him, from local newspapers to rival property developers.

He defends his purchase of the Ballsbridge site as responsible, not reckless, as his critics have deemed it. He points out, too, that his winning bid was just slightly more than the second-highest offer and that subsequent property sales had far exceeded his submission of 54 million euros an acre.

Still, he recognizes that times have changed. Just recently, he pruned staff at his development company, and some of his senior executives agreed to take 50 percent pay cuts.

Asked where he will find the 600 million euros that he needs to tear down the two hotels, dig a massive hole in the ground and erect his vision of a new Dublin, he ruefully remarks: “It is fair to say that there is not a queue of bankers lining up to lend to me right now.”

But he says the project will be completed, assuming that it wins approval of the planning board. “If anyone wants to bet I can’t do this, I will take that bet,” he says, citing, without specifics, talks with Asian banks and a sovereign wealth fund. “You have to have steel in a certain part of your body to do this job, and as one of my bankers recently said to me, ‘Sean, the only thing that will take you out is a stray bullet.’ ”

IN many ways, the ups and downs of Mr. Dunne’s life and career mirror the Irish economy’s own rise and fall. Born into a house without electricity or running water in the small provincial town of Tullow, outside Dublin, Mr. Dunne studied construction economics at a technical college in the 1970s.

Along with many of his countrymen, he forsook the stagnant Irish economy — in his case, choosing bartending in New York City and working on an oil rig in Canada.

With the Irish economy still afflicted by an unemployment rate of about 20 percent in the 1980s, and a punitive overall tax rate, he began his real estate career in London. He moved back to Ireland in 1990 and began a string of property deals.

He initially focused on government-sponsored housing projects. But as the Irish economy began its true take-off, demand came from the growing corps of newly wealthy Irish, many of whom were returning to Ireland from abroad. They were joined by a wave of foreign workers.

After years of emigration and economic stagnation, Ireland’s housing stock was depleted, precipitating a housing euphoria. Capital gains taxes were low, as were interest rates. Banks stood ready to lend, offering mortgages with no money down to a house-hungry population.

The projects of Mr. Dunne and a small circle of developers grew in size and scope until the skyline of Dublin, never known for its tall buildings, began to fill with cranes and great shiny towers.

Signs of a bubble were everywhere: a family home in Dublin cost as much as a similar abode in Beverly Hills; house prices more than doubled over a 10-year period; and household debt as a percentage of G.D.P. jumped to 160 percent from 60 percent during the same period.

Irish banks, unlike those in the United States, didn’t dole out that many subprime loans. Rather, they lent furiously to big property developers who themselves were liberated to build pell-mell by government-imposed tax breaks. Mr. Dunne, who says he put 35 percent cash down — or about 125 million euros — for the Ballsbridge project, says that even with the drop in asset values, he still has hope that the project can be completed.

“This is the way God made me, with heavy shoulders and an ability to carry a great load,” he says, forcefully rejecting the rumors of his financial demise buzzing around Dublin. (One of the more fantastic claims was that his financial troubles had forced him to take a month’s recuperation in a mental institution.)

“Failure is not an option for me,” he says. But others aren’t so sure.

The Irish government recently announced a $7.5 billion bank bailout and took majority stakes in the country’s largest banks, a move that followed the government’s earlier promise to guarantee all bank deposits.

Analysts are uncertain that the government will allow the banks to continue to support the type of high-risk, high-reward projects that have become the bane of their financial existence.

“The banks in Ireland did not lend recklessly to individuals; they lent recklessly to developers,” says Ronan Lyons, an economist at Daft, Ireland’s largest property Web site. As for the Ballsbridge project, he may well take Mr. Dunne’s bet.

“I would be surprised if it gets built,” Mr. Lyons says. “The migrants are going home, there is a surplus of properties for sale, and even though this is a landmark project there is just not an appetite for large projects now.”

WHILE the pain is acute in Dublin, at least the city has the small comfort of having enjoyed the full benefit of the boom.

Such is not the case in the city of Limerick. Traditionally one of Ireland’s more depressed cities, Limerick was a latecomer to the property party. While there were some good times, the downturn has had a more wrenching effect there, with unemployment over 14 percent — among the highest rates in Ireland.

The layoffs have picked up speed around Limerick in the last month, as construction companies have stopped work, seemingly on a dime, sending such a procession of jobless to seek assistance that the local unemployment office became the second busiest in the country.

The waiting room in the office is dank and gloomy, and Dale McNamara, 20, wonders how a professional life once so charmed came to be so hopeless. Since graduating from high school as an electrician, flourishing building work in the area kept him more than busy and flush enough to buy a new car, start a family and consider buying a house.

Then, without warning on Dec. 5, he was told that it would be his last day of work, just six months before he would have received his certificate as an independent electrician.

Since then, he has been frantically knocking on doors, but to no avail. Now, as rent, heating bills and car payments pile up, he is beginning to feel desperate, unable to afford a night out or a Christmas present for his 20-month-old baby.

“If I don’t get a job in the next two weeks, I am worried about losing my house,” he says. “We have no money.”

He looks at his number in the unemployment lines and grimaces — he has been waiting four hours now and his name has still not been called.

“My grandfather says this reminds him of the 1930s when everyone left for America and Australia,” he adds. “There is just no work here.”

More dire, however, is the condition of the permanently unemployed in Limerick’s festering ghettoes, where experts say the unemployment rate touches 70 percent. During the early years of the economic revival, the government did its best to spread money to such areas, which are a feature of urban life all over Ireland.

IN fact, it was through social housing projects like these that Mr. Dunne got his start as a developer. But as the investment returns in the private sector became quite obviously more lucrative, the attention paid to so-called social estates like Moyross, on the northern outskirts of Limerick, wavered.

Crime, gangland disputes and a sense of anomie flourished as Moyross and other similar projects evolved as cocoons of poverty and hopelessness amid the riches and celebration of the Irish miracle.

“This place missed out entirely on the moment,” says Stephen Kinsella, an economist at the University of Limerick. “There has been no accumulation of wealth here.”

Walking through the garbage-strewn, empty roads on a cold, misty afternoon, Mr. Kinsella points to the shuttered houses and the mothers still dressed in pajamas taking their children home from school. Social workers in Moyross refer to the “pajama index”: the more men and women one sees who do not take the time and care to dress for the day, the worse the economic situation tends to be.

The Irish government has recently begun a regeneration project in Moyross that would result in large new investments in housing and infrastructure, but the going so far has been slow.

For Brother Shawn O’Connor, a Franciscan monk who has been living and working with the poor in Moyross for more than a year now, the vicissitudes of the Irish property market are a notion as distant as is his hometown, Red Hook, a village in the Hudson Valley of New York.

Brother O’Connor is the local superior of the community of Franciscan Friars, who do their work in some of the world’s most destitute communities. He and his fellow monks extend day-care assistance and spiritual counseling to the needy. They survive themselves on four hours of daily prayer and food handouts from neighbors — as Franciscans, they take a vow of chastity, poverty and obedience and thus do not spend money on any personal items, including food.

He recognizes that the deprivation of his community is severe, but suggests that it may be an easier hardship than the experiences of many Irish who have seen their riches disappear.

“There was this one story of a guy who shot his wife, son and daughter,” he says. “He had overextended himself. There is this desperation for wealth and people go after it — only to find out that it is not enough.”

At the close, the Dow Jones industrial average was 258.30 points, or 2.9 percent, higher, at 9,034.69, and the broader Standard & Poor’s 500-stock index was at a two-month high, rising 28.55 points, or 3.1 percent, to 931.80. The technology heavy Nasdaq was up 3.5 percent, to 1,632.21. The last time that the Dow closed above 9,000 was Nov. 5, the day after Barack Obama was elected president.

“You’re going to have to call this a trading rally that’s part of the larger bear market complex,” said William Rhodes, chief investment strategist of Rhodes Analytics. “At least it’s a good way to start out.”

The surge followed jumps on Tuesday and Wednesday of more than 384 points combined, which put an optimistic cap to a year in which the Dow plunged 4,488.43 points, its most punishing loss since 1931.

On Friday, investors seemed to shrug off a disappointing economic report on manufacturing. The Institute for Supply Management, a trade group of purchasing executives, said its manufacturing index was 32.4 in December, down from 36.2 in November. A number below 50 indicates a contraction.

“Manufacturing activity continued to decline at a rapid rate during the month of December,” said Norbert J. Ore, chairman of the Institute for Supply Management Manufacturing Business Survey Committee. The index was at the lowest reading since June 1980, when it was 30.3 percent.

“This report indicates that the U.S. economy was on even weaker footing than commonly believed as 2008 came to a close,” said Joshua Shapiro, chief United States economist at MFR, a research group.

Still, Friday’s surge led many to think optimistically. Among Wall Street’s many proverbs, traders say one stands above the others: “As goes January, so goes the year.”

Though it has been trotted out at the start of virtually every year since it was first coined in the 1970s, the saying has a special resonance given the brutal, 38 percent drop in the stock market in 2008. Its appeal is probably all the more powerful now because investors remember that last year’s rout was presaged by a 6.1 percent drop in the Standard & Poor’s 500 last January.

“Most of that is nonsense,” Jim Paulsen, chief investment strategist for Wells Capital Management, said about Wall Street aphorisms . “The only one that I might throw in a different category is the January deal.”

In fact, in 60 of the last 80 years, the performance of the S.&P. 500 index has accurately predicted whether stocks would end higher or lower for the year, according to calculations by Howard Silverblatt, an index analyst for S.& P.

One variation of the proverb has it that the first five days of trading are the best predictor of the year to come. Others look at the last five days of trading in December and the first five days of trading in January.

Academics who have confirmed the existence of the so-called January barometer effect say they have no good explanation. Investment specialists like Mr. Paulsen and Mr. Silverblatt offer several explanations: investors often make annual contributions to individual retirement accounts at the start of the year and mutual fund managers sell poorly performing stocks in December to “pretty up” their year-end statements and reinvest the money early in the new year.

Shares on Friday shares moved higher in a broad rally, led by energy and media, as well as the automobile sector. Shares of both Ford and General Motors rose, still riding investor optimism about the bailout of the automobile sector and news earlier this week that GMAC, the lending arm of G.M., was easing its lending restrictions somewhat.

Ford was up 5.2 percent, to $2.41 and G.M. was up 14.3 percent, to $3.66.

Shares of Exxon Mobil rose 2.2 percent, to $81.84 while Chevron rose 3.4 percent, to $76.52.

Friday’s big move came amid light trading. Volume should return to more normal levels on Monday, the first full week of the year. Next week, investors will need to absorb a number of economic reports, including year-end auto sales, retail sales and the latest unemployment report.

World stock markets also rose, though trading volumes remained light.

In London, the FTSE 100 closed up 2.8 percent, while the DAX in Frankfurt rose 3.3 percent and the CAC-40 in Paris 4 percent.

Earlier, Hong Kong’s Hang Seng Index led what Asian markets were open higher, vaulting 4.6 percent . Many of Asia’s markets, including Japan’s Nikkei, were closed.

In the oil markets, crude moved up $1.74, to $46.34. The increase, also in light trading, came a day after the OPEC cartel had pledged to begin cut its production by 2.2 million barrels a day as a way to shore up prices.

Much of the EU's gas from Russia arrives via Ukraine

Russia’s gas giant Gazprom said it turned off the taps at 0700 GMT, when its contract to supply Ukraine ended.

Ukraine insists it has paid off its debts to Gazprom, but Russia contests this. The two countries have also failed to agree on a price for 2009.

The EU urged Russia and Ukraine to resume negotiations and not to let the dispute disrupt supplies to Europe.

A similar row between Gazprom and Ukraine at the beginning of 2006 led to gas shortages in several EU countries.

Pipes across Ukraine carry about a fifth of the EU’s gas needs.

The new holders of the EU presidency, the Czech Republic, urged the parties to “rapidly reach a successful outcome” to their dispute.

“All existing commitments to supply and transit must be honoured,” it added.

Both Russia and Ukraine insist that gas supplies transported via Ukraine to the European Union will continue as normal.

An official at Gazprom’s headquarters in Moscow said: “We have fully cut off supplies to Ukraine as of 10am (0700 GMT) today.”

“Usually we supply 390 million cubic metres per day, of which 300 million is transit gas for Europe. Today supplies are running at 300 million cubic metres. We continue supplying Europe in full,” Reuters quoted him as saying.

Ukraine’s state energy firm Naftogaz confirmed that supplies had dropped off steadily, and said it would start pumping gas from its reserves.

Ukraine says it has built up enough reserves to see it through the next few months.

‘Eager for conflict’

“The debt to Gazprom for gas supplied earlier was not paid. Despite verbal statements from Kiev, Gazprom did not see any money in its account,” said Gazprom’s chief executive Alexei Miller said.

He criticised Ukraine’s stance during the negotiations as “unconstructive”, and said Gazprom had no legal reason to continue supplying gas to Ukraine.

Mr Miller said the contract to supply gas depended on the full settlement of £2bn in gas bills and late-payment fines levied by Gazprom.

He also suggested that Kiev was seeking to provoke a wider dispute, saying he was “forming the impression that there are political forces in Ukraine which are very eager to see a gas conflict between our two countries”.

Naftogaz said it has paid $1.5bn (£1bn) in outstanding bills to RosUkrEnergo – a Switzerland-registered gas trading company which is acting as an intermediary – but not the fines imposed by Gazprom.

Gazprom is the world’s largest gas producer and supplies a quarter of the European Union’s gas needs – and 42% of its imports. Most of that is transported via Ukraine.

Russia’s Vladimir Putin had earlier warned Ukraine not to disrupt the transit of gas to Europe.

He warned of “very severe consequences” for Ukraine in terms of its relations with both Russia and European countries.

Mr Putin said Gazprom had been generous in offering Ukraine a price of $250 per 1,000 cubic metres of gas in 2009, given that the price in Europe was currently more than $500.

He said he understood that Ukraine was in “a difficult economic situation” which was worse than Russia’s, but put the dispute down to a “war of the clans” between the Ukrainian Prime Minister, Yulia Tymoshenko, and President Viktor Yushchenko.

Now shoppers are expecting even better deals, as they do every year, in the post-Christmas clearance sales.

The Virgin Megastore in New York's Times Square on Friday. U.S. retailers were deeply discounting prices on the day after Christmas to try to bolster slow sales.

Industry analysts say consumers will not be disappointed, though the deals will most likely come with a twist. Rather than seeing merchandise marked down even more from the 75 percent-off stickers, shoppers should expect more combined discounts — or “bundling,” as it is known in the industry.

“Buy a laptop, get a free printer, ink cartridges — and paper,” explains Marshal Cohen, chief industry analyst for the NPD Group, a retailing industry consulting company.

Retailers have no choice but to find creative ways to clear their store shelves, because they have to make room for spring merchandise. And persuading consumers to take their goods off their hands is increasingly their only option, since other avenues, like discount Web sites, already have full inventories of their own.

After all, retailers had one of the worst holiday shopping seasons in decades, with sales falling by double digits in nearly all categories, including apparel, luxury goods, furniture and electronics and appliances, according to SpendingPulse, a report by MasterCard Advisors that estimates retail sales from all forms of payment, including checks and cash.

Even worse for retailers, consumers bought fewer gift cards than last year — 10 to 40 percent fewer, according to various estimates. Gift cards provide an added bonus for retailers; they tend to drive sales in January, with shoppers buying other things once they are in the store.

As a result, retailers will have to work that much harder to clear Christmas inventory, which many stores were unable to trim enough ahead of the quickly softening economy. Mr. Cohen and other analysts said retailers would need popular brands and unique fashions to lure traffic in the future, not just low prices.

For example, Wal-Mart, which had a 3.4 percent sales increase in November and has been bucking grim retailing trends, said Friday it would sell slightly discounted iPhone 3Gs at nearly 2,500 stores beginning Sunday. A black 8-gigabyte model is $197; the 16-gigabyte black or white model will go for $297, with a two-year service agreement from AT&T or an upgrade. Both those prices are $2 off the regular sticker (more of a nick than the price-slashing Wal-Mart brags about).

“Our electronics associates have been preparing for many weeks for the arrival of iPhone 3G,” said Gary Severson, a senior vice president for entertainment at Wal-Mart.

Toys “R” Us said it would continue offering after-Christmas deals on brand names at least into January. On Friday the chain had buy-one-get-one-free deals on electronic learning software cartridges, and all video games selling for $19.99 or less carried offers of buying a second one for half off.

Many chains bundled products on the first day of their after-Christmas sales, a tactic that worked for them on Black Friday, the blockbuster shopping day after Thanksgiving. At J. C. Penney, a $988 leather sofa (reduced from $2,858) came with a free wing chair, normally $899. At Old Navy, T-shirts were $10.50, or $6 each if you bought two or more. At Bath and Body Works, the company’s signature collection of creams, gels and scents carried buy-two-get-one-free deals.

But all this sustained discounting has industry professionals worried not only about erosion of profits — in general, discounting merchandise more than 50 percent is a losing proposition for retailers — but also about consumer spending habits.

“Many of the senior executives we’ve talked to are worried about how we retrain the customer to pay full price,” said Joseph Feldman, a retailing analyst with Telsey Advisory Group, an equity research and consulting company.

Indeed, on Friday, Phyllis Gagliardi, 56, of Trumbull, Conn., was unimpressed with the $29.99 price tag on a cashmere sweater at the Ann Taylor Loft in Times Square. “They should be lower than this,” she said.

Matthew F. Katz, a managing director in the retail practice of AlixPartners, a restructuring firm, estimated that it would be “several quarters, at best, before consumers go back to a more normal shopping psyche.”

Consumers are becoming so accustomed to stunning discounts that even liquidators are rethinking their pricing strategy.

“We’re going to have to be extremely aggressive in terms of our discounting because we’re going to have to beat every other retailer that’s already been offering 70, 80 percent off,” said Jim Schaye, chief executive and president of Hudson Capital Partners, which has run liquidation sales for bankrupt retailers like Linens ’n Things, Mervyns and Whitehall Jewelers.

Retailers will most likely try to wean shoppers off such deep discounting in February and March, when they begin introducing their spring merchandise. But if their attempts to sell at full price fail, then consumers will once again feel they have the upper hand, and will wait to see prices fall.

Hana Ben-Shabat, a partner in the retail practice of the A. T. Kearney consulting company, said the storewide discounting that took place this holiday season was a result of retailers’ being blindsided by an economy that was far worse than they had anticipated. Come spring, she said, they will be more selective when choosing which products and categories to offer at lower prices.

“It’s just not sustainable to keep selling everything at a 50, 60, 70 percent discount,” she said.

In their most recent earnings calls, retailers like Saks and Neiman Marcus admitted their profit margins were taking a beating.

“It’s not anything we like,” Burton M. Tansky, president and chief executive of the Neiman Marcus Group, said of all the promotions. “It’s a necessity.”

Typically, retailers wait about eight weeks before putting merchandise on sale, but analysts said that given the economy, this spring they may wait only about two or three weeks.

“There is no more patience,” Mr. Cohen of the NPD Group said. “The rules have changed.”

Those two trends are guiding the company as it continues to transform itself, reorganizing its divisions and jettisoning product lines while picking up others.

Long known in this country — when it’s not confused with the company that makes Phillips Milk of Magnesia — as a manufacturer of Magnavox televisions, Norelco shavers and Philips incandescent light bulbs, Royal Philips wants to get away from home electronics and instead sell hospital scanning and monitoring equipment and high-tech light bulbs made with light-emitting diodes.

“We were a technology-driven company,” said Gerard J. Kleisterlee, the chief executive of Philips. “But that is only one element. Now we are focusing on care cycles. ‘Health and well-being’ is a common theme that everyone works on.”

The company’s chief financial officer, Pierre-Jean Sivignon, put it another way: “An uptick in world aging and chronic diseases will drive our business.”

Getting rid of divisions and rehabilitating others is nothing new to Philips. The company has shrunk, in terms of annual gross sales, by 30 percent over the last seven years, to 26.8 billion euros, or about $37.5 billion.

It continues to sell off businesses. In 2006, it sold 80.1 percent of its semiconductor business. It reduced its share in L.G.Philips LCD, a joint venture with LG Electronics of South Korea to make TV displays.

Philips never made any headway in the low-margin, increasingly commoditized television business. It announced last April that it would cast off its American and Canadian TV operations and license the Philips brand to Funai in exchange for a royalty on sets sold. It has also ended TV sales in Australia and New Zealand.

It did not do much better with other home entertainment products. On Jan. 1, it will discontinue selling DVD, Blu-ray and home theater surround-sound devices in the American market. Funai, a Japanese company, will make and market the products with the Philips name. The company will continue to sell TVs in some markets, and it will also keep selling MP3 players, shavers, toothbrushes, baby care products, home appliances and portable music accessories. Only two years ago, half its revenue came from consumer electronics, but now it is less than 43 percent.

“I could see the day when they get out of TV in Europe,” said Simon Smith, director and equity analyst at Credit Suisse in London. Mr. Smith noted that in this low-margin business, Philips “innovates around the edges,” to maintain profits.

Yet even though the world is simultaneously aging and becoming more environmentally conscious, the sudden economic downturn could change Philips’s short-term fortunes. Last month, Philips said it would lay off 1,600 health care division employees, 5 percent of its work force, because of the recession. And it is unlikely that an LED light bulb that costs more than $50 will find many eager buyers as companies and households cut back.

Mr. Kleisterlee wants to get Philips back to the size it was in 2000. “In five years, I want to grow Philips to a 30 billion euro ($37.9 billion) business,” he said.

To get there, Philips has gone on a buying spree. In the last two years it has picked up 16 companies, 11 of them in the United States, including some that specialize in health care and lighting.

Philips bought Lifeline, a home health care monitoring system, and Respironics, which makes equipment to treat sleep apnea and other sleep disorders. The division already specializes in medical imaging, competing against General Electric and Siemens in advanced CT, MRI and x-ray machines, and claims a 40 percent global market share (50 percent in the United States) for in-patient monitoring, including ultrasound and other pregnancy-monitoring equipment.

Philips also sells cardiac home monitors that transmit data to a doctor’s office, home defibrillators and a variety of out-patient monitoring systems for assisted living operations.

Its new Lifeline division extends the reach beyond the hospital by monitoring 720,000 elderly or infirm at-home customers in the United States and Canada. It is also working with an intriguing business model. “I don’t want to sell blood pressure cuffs and defibrillators,” said Ronald Feinstein, Philips Lifeline’s president. “I want to give them away and charge a monthly fee.”

Customers, who pay $35 to $45 a month, are given a pendant or a TV set-top box that connects to Lifeline. If they experience a medical problem, they push a button on the device to summon help.

The company loses about 35 percent of its subscribers each year, mostly because of death. Nevertheless, the subscriber base has been growing about 10 percent a year. The company says it has 60 percent of the home-monitoring market in the United States.

The final addition to the revenue stream: the 250 installers who show the subscribers how to use the devices also sell them other products, like fall detectors and automatic pill dispensers.

The second part of its shopping spree secured Philips a leading position in the market for the next generation of light bulbs that may eventually replace compact fluorescent bulbs. It bought Color Kinetics, a developer of advanced LED lighting products, and Genlyte, a lighting fixtures maker best known for its Lightolier brand.

Lighting is also expected to make important gains in emerging markets as consumers there gain more income. “One of the very first things people buy in emerging markets is light,” Mr. Sivignon said.

Most of the lighting will use LEDs, or what the industry calls solid-state lighting. Philips is spending heavily on the technology. The bulk of its research and development budget, about 5.2 percent of global lighting revenue, is used for LED research.

Philips expects that in two years, 20 percent of its lighting sales for commercial use will come from LEDs. The company is using demonstration projects to promote its vision of lighting’s future. The London Eye Ferris wheel has been retrofitted with Philips LED products. Dean Kamen, inventor of the Segway, plans to use Philips LED lights exclusively on an island he owns near Connecticut to cut his power consumption. Philips has also bid on a project to light the Empire State Building.

LED bulbs typically use one-tenth the power of traditional light bulbs and last up to 20 times as long. But their prices remain high — an LED that could replace a $1 incandescent light bulb or a $2 compact fluorescent bulb now costs about $60. So until volumes go up and prices fall, the bulbs will mostly be used in commercial settings, not residential.

Mr. Kleisterlee said, “Without it, we would have had a dying business. The world wants more lighting and more efficient lighting.”

For five months, Ms. Okoli-Owube, 31, alternated her work establishing a preschool for learning-disabled children in Lagos, Nigeria, with weeklong stints at the Lagos Business School, joining a class of two dozen women to earn a certificate in entrepreneurial management.

“I have a university degree, but I did not have the training in how to run a business,” said Ms. Okoli-Owube, who had been struggling to get enough students to enroll at her “Start Right” school. “I have to learn to keep the books, how to market and to get advice from women who’ve come out the other side.”

When she saw a local newspaper advertisement last spring for 10,000 Women, a global entrepreneurship program run by Goldman Sachs, she and about 100 other women jumped at the chance to apply.

The welfare of girls and women has long been on the agenda of international agencies. The World Bank, for example, announced steps earlier this year to increase support for women entrepreneurs by channeling some $100 million in commercial credit lines to them by 2012.

But corporations have also begun to take their economic power more seriously, especially in emerging markets.

Many corporate programs employ microloans, grants or gifts to promote business education. Goldman decided to take a different approach after its research showed that per-capita income in Brazil, China, India, Russia and other emerging markets could rise by as much as 14 percent if women had better management and entrepreneurial skills.

“It’s not only philanthropy they’re after,” said Geeta Rao Gupta, president of the International Center for Research on Women. Goldman “had the idea that investment in women means a return on the gross national product of the country, and on household income.”

The company set aside $100 million over five years to bring business education to 10,000 qualified women business owners in developing countries, a commitment that remains unchanged despite banking industry turmoil.

Ms. Rao Gupta said the long-term view that Goldman and others were taking in emerging markets might help form a new economic stratum in societies where women’s participation in business traditionally had been restricted. Laws and customs in some countries, for example, bar women from opening bank accounts or require a husband’s permission to set up a company.

“This is the next step for women because it’s investing long term in business skills,” said Ms. Rao Gupta, whose institute researches and provides technical assistance for women in developing countries.

The hurdles can be high. Few women in Africa pursue a business education, often the preserve of well-to-do students heading for corporate jobs. In 50 major business schools in Africa — a continent of 900 million people — only 2,600 women were enrolled in local M.B.A. programs, Goldman’s research found.

To foster entrepreneurship and management education, business schools in developing countries are being paired with 50 universities and organizations in Europe and the United States.

Earlier this month, for example, 10,000 Women announced that the Yale School of Public Health would work with Tsinghua University to provide management and leadership education to Chinese women working in public health. Women remain at their jobs, allowing them to be with their families and apply their new skills on the spot.

“Women often don’t have two years to get an M.B.A.” said Dina H. Powell, who oversees Goldman’s initiative. Family considerations as well as cultural differences make it difficult for many women to leave their home country for study abroad.

In Cairo, about 100 women annually can earn a business certificate by participating in the program, where they learn accounting, market research, e-commerce, fund-raising and how to structure a business plan.

In countries where attending school can be dangerous for women, a different tack is taken. The Thunderbird School of Management, using Goldman funds, brings Afghan women to its Phoenix campus for five weeks of training. The bank is also financing the training of local professors to teach business courses to women in Kabul.

AT&T donated $125,000 through a foundation this year to bring women entrepreneurs from developing countries to the United States for a three-week college-level business course and a week of mentorship with American women business owners.

“This is still a small part of what we do,” said Laura Sanford, the foundation’s president. “But it’s an area that’s going to grow as it becomes more recognized that women are part of the economic landscape, and as business owners, they contribute to the economic welfare of their country.”

Toyota’s president, Katsuaki Watanabe, center, and other executives at a news conference in Nagoya, Japan, on Monday

On Monday, Toyota said it expected an operating loss in its auto operations of 150 billion yen, or $1.7 billion, for the fiscal year ending March 31. That would be the company’s first annual operating loss since 1938, a year after the company was founded, and a huge reversal from the 2.3 trillion yen, or $28 billion, in operating profit earned last year.

Analysts said Toyota’s downward revision, its second in two months, showed that the worst financial crisis since the Depression was threatening not just the Big Three but also even relatively healthy automakers in Japan, South Korea and Europe. Many other companies will also soon be reporting losses.

Worse, analysts said that they expected next year to be even more painful, amid forecasts that the global economy would continue to slide until at least the summer. This could cause a significant shakeout, driving smaller and weaker companies into the arms of a smaller number of bigger, richer players.

“It is just a matter of time before all major automakers are losing money,” an auto analyst in Tokyo for Credit Suisse Securities, Koji Endo, said. “And things will just get worse next year, when companies start losing money for the second consecutive year.”

Toyota, which just a few months ago seemed unstoppable after eight years of record profits, said it suffered from plunging vehicle sales not only in North America but also in once-promising markets like India and China, which many had hoped would prove immune to the United States malaise. Toyota’s group includes the automaker Daihatsu and the truck builder Hino.

“The change in the world economy is of a magnitude that comes once every hundred years,” Toyota’s president, Katsuaki Watanabe, told a news conference in Nagoya, Japan, near the company’s Toyota City headquarters. “We are facing an unprecedented emergency.”

Mr. Watanabe said the company would respond by suspending investment in new plants, including last week’s announced postponement in the start of a factory in Mississippi, and moving some production lines to single shifts. The company has even unplugged electric hand dryers at some offices in an effort to cut costs.

Yet Toyota said it still expected to report a small net profit, helped by interest and dividend income as well as tax-related savings of 50 billion yen, or $560 million.

With some $18.5 billion in cash, and relatively little debt, Toyota is still in far better shape to weather the downturn than General Motors and Chrysler, which on Friday received $17.4 billion in emergency loans from Washington.

In Japan, the recession could force a realignment of the country’s eight automakers, which are globally competitive but have begun feeling increasing pain from the global downturn.

The biggest drops have come in the United States, traditionally the Japanese companies’ most profitable market. After years of increasing market share at Detroit’s expense, sales at Japanese companies are sharply lower. In November, Toyota’s sales dropped 33.9 percent and Honda Motor’s 31.6 percent, both faring slightly better than G.M., which had a 41 percent decline.

Sales are also down in their home market of Japan, both because of the financial crisis and because of longer-term demographics in this rapidly aging society. Last week, an industry group announced that new car sales in Japan would drop next year below five million vehicles for the first time in 31 years.

Japan’s automakers have responded by slashing production by 2.2 million vehicles in the current fiscal year. They have also cut profit forecasts, laid off nonstaff workers and delayed investment in new factories. Last week, Honda Motor, the nation’s second-largest carmaker, reduced its profit forecast by two-thirds for the current fiscal year.

The auto slowdown has helped worsen an increasingly nasty recession in Japan’s export-dependent economy, the world’s largest after the United States. On Monday, Japan finance ministry said exports dropped 26.7 percent in November, the largest drop since statistics started being kept in 1980, to push the nation into a rare trade deficit for the month.

The financial turmoil has also hurt carmakers by driving up the value of the Japanese yen, which has risen some 25 percent since summer. A higher yen makes Japanese autos and other products more expensive overseas.

On Monday, Toyota cited the currency as one reason for revising its forecast. Analysts say Toyota has been seen as the most vulnerable of Japan’s big automakers because it has been investing heavily in new products, including a full-size pickup truck for the United States market, just as auto sales started to fall.

“They’ve caught the same cold that Detroit has caught,” said Christopher J. Richter, senior analyst in Tokyo at Calyon Capital Markets Asia. “Everything is going wrong for Toyota this year.”

Toyota also lowered its worldwide vehicle sales forecast for the fiscal year to 7.54 million vehicles, far below the 8.9 million vehicles it sold last year. It said the decline would be particularly large in North America, where it forecast it would sell 2.17 million vehicles this fiscal year, down from 2.96 million last year.

THE BLUEPRINTS In June 2002, President Bush spoke in Atlanta to unveil a plan to increase minority homeownership.

WASHINGTON — The global financial system was teetering on the edge of collapse when President Bush and his economics team huddled in the Roosevelt Room of the White House for a briefing that, in the words of one participant, “scared the hell out of everybody.”

It was Sept. 18. Lehman Brothers had just gone belly-up, overwhelmed by toxic mortgages. Bank of America had swallowed Merrill Lynch in a hastily arranged sale. Two days earlier, Mr. Bush had agreed to pump $85 billion into the failing insurance giant American International Group.

The president listened as Ben S. Bernanke, chairman of the Federal Reserve, laid out the latest terrifying news: The credit markets, gripped by panic, had frozen overnight, and banks were refusing to lend money.

Then his Treasury secretary, Henry M. Paulson Jr., told him that to stave off disaster, he would have to sign off on the biggest government bailout in history.

Mr. Bush, according to several people in the room, paused for a single, stunned moment to take it all in.

“How,” he wondered aloud, “did we get here?”

Eight years after arriving in Washington vowing to spread the dream of homeownership, Mr. Bush is leaving office, as he himself said recently, “faced with the prospect of a global meltdown” with roots in the housing sector he so ardently championed.

There are plenty of culprits, like lenders who peddled easy credit, consumers who took on mortgages they could not afford and Wall Street chieftains who loaded up on mortgage-backed securities without regard to the risk.

But the story of how we got here is partly one of Mr. Bush’s own making, according to a review of his tenure that included interviews with dozens of current and former administration officials.

From his earliest days in office, Mr. Bush paired his belief that Americans do best when they own their own home with his conviction that markets do best when let alone.

He pushed hard to expand homeownership, especially among minorities, an initiative that dovetailed with his ambition to expand the Republican tent — and with the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards.

Mr. Bush did foresee the danger posed by Fannie Mae and Freddie Mac, the government-sponsored mortgage finance giants. The president spent years pushing a recalcitrant Congress to toughen regulation of the companies, but was unwilling to compromise when his former Treasury secretary wanted to cut a deal. And the regulator Mr. Bush chose to oversee them — an old prep school buddy — pronounced the companies sound even as they headed toward insolvency.

As early as 2006, top advisers to Mr. Bush dismissed warnings from people inside and outside the White House that housing prices were inflated and that a foreclosure crisis was looming. And when the economy deteriorated, Mr. Bush and his team misdiagnosed the reasons and scope of the downturn; as recently as February, for example, Mr. Bush was still calling it a “rough patch.”

The result was a series of piecemeal policy prescriptions that lagged behind the escalating crisis.

“There is no question we did not recognize the severity of the problems,” said Al Hubbard, Mr. Bush’s former chief economics adviser, who left the White House in December 2007. “Had we, we would have attacked them.”

Looking back, Keith B. Hennessey, Mr. Bush’s current chief economics adviser, says he and his colleagues did the best they could “with the information we had at the time.” But Mr. Hennessey did say he regretted that the administration did not pay more heed to the dangers of easy lending practices. And both Mr. Paulson and his predecessor, John W. Snow, say the housing push went too far.

“The Bush administration took a lot of pride that homeownership had reached historic highs,” Mr. Snow said in an interview. “But what we forgot in the process was that it has to be done in the context of people being able to afford their house. We now realize there was a high cost.”

For much of the Bush presidency, the White House was preoccupied by terrorism and war; on the economic front, its pressing concerns were cutting taxes and privatizing Social Security. The housing market was a bright spot: ever-rising home values kept the economy humming, as owners drew down on their equity to buy consumer goods and pack their children off to college.

Lawrence B. Lindsay, Mr. Bush’s first chief economics adviser, said there was little impetus to raise alarms about the proliferation of easy credit that was helping Mr. Bush meet housing goals.

“No one wanted to stop that bubble,” Mr. Lindsay said. “It would have conflicted with the president’s own policies.” Today, millions of Americans are facing foreclosure, homeownership rates are virtually no higher than when Mr. Bush took office, Fannie and Freddie are in a government conservatorship, and the bailout cost to taxpayers could run in the trillions.

As the economy has shed jobs — 533,000 last month alone — and his party has been punished by irate voters, the weakened president has granted his Treasury secretary extraordinary leeway in managing the crisis.

Never once, Mr. Paulson said in a recent interview, has Mr. Bush overruled him. “I’ve got a boss,” he explained, who “understands that when you’re dealing with something as unprecedented and fast-moving as this we need to have a different operating style.”

Mr. Paulson and other senior advisers to Mr. Bush say the administration has responded well to the turmoil, demonstrating flexibility under difficult circumstances. “There is not any playbook,” Mr. Paulson said.

The president declined to be interviewed for this article. But in recent weeks Mr. Bush has shared his views of how the nation came to the brink of economic disaster. He cites corporate greed and market excesses fueled by a flood of foreign cash — “Wall Street got drunk,” he has said — and the policies of past administrations. He blames Congress for failing to reform Fannie and Freddie. Last week, Fox News asked Mr. Bush if he was worried about being the Herbert Hoover of the 21st century.

“No,” Mr. Bush replied. “I will be known as somebody who saw a problem and put the chips on the table to prevent the economy from collapsing.”

But in private moments, aides say, the president is looking inward. During a recent ride aboard Marine One, the presidential helicopter, Mr. Bush sounded a reflective note.

“We absolutely wanted to increase homeownership,” Tony Fratto, his deputy press secretary, recalled him saying. “But we never wanted lenders to make bad decisions.”

A Policy Gone Awry

Darrin West could not believe it. The president of the United States was standing in his living room.

It was June 17, 2002, a day Mr. West recalls as “the highlight of my life.” Mr. Bush, in Atlanta to unveil a plan to increase the number of minority homeowners by 5.5 million, was touring Park Place South, a development of starter homes in a neighborhood once marked by blight and crime.

Mr. West had patrolled there as a police officer, and now he was the proud owner of a $130,000 town house, bought with an adjustable-rate mortgage and a $20,000 government loan as his down payment — just the sort of creative public-private financing Mr. Bush was promoting.

“Part of economic security,” Mr. Bush declared that day, “is owning your own home.”

A lot has changed since then. Mr. West, beset by personal problems, left Atlanta. Unable to sell his home for what he owed, he said, he gave it back to the bank last year. Like other communities across America, Park Place South has been hit with a foreclosure crisis affecting at least 10 percent of its 232 homes, according to Masharn Wilson, a developer who led Mr. Bush’s tour.

“I just don’t think what he envisioned was actually carried out,” she said.

Park Place South is, in microcosm, the story of a well-intentioned policy gone awry. Advocating homeownership is hardly novel; the Clinton administration did it, too. For Mr. Bush, it was part of his vision of an “ownership society,” in which Americans would rely less on the government for health care, retirement and shelter. It was also good politics, a way to court black and Hispanic voters.

But for much of Mr. Bush’s tenure, government statistics show, incomes for most families remained relatively stagnant while housing prices skyrocketed. That put homeownership increasingly out of reach for first-time buyers like Mr. West.

So Mr. Bush had to, in his words, “use the mighty muscle of the federal government” to meet his goal. He proposed affordable housing tax incentives. He insisted that Fannie Mae and Freddie Mac meet ambitious new goals for low-income lending.

Concerned that down payments were a barrier, Mr. Bush persuaded Congress to spend up to $200 million a year to help first-time buyers with down payments and closing costs.  And he pushed to allow first-time buyers to qualify for federally insured mortgages with no money down. Republican Congressional leaders and some housing advocates balked, arguing that homeowners with no stake in their investments would be more prone to walk away, as Mr. West did. Many economic experts, including some in the White House, now share that view.

The president also leaned on mortgage brokers and lenders to devise their own innovations. “Corporate America,” he said, “has a responsibility to work to make America a compassionate place.”

And corporate America, eyeing a lucrative market, delivered in ways Mr. Bush might not have expected, with a proliferation of too-good-to-be-true teaser rates and interest-only loans that were sold to investors in a loosely regulated environment.

“This administration made decisions that allowed the free market to operate as a barroom brawl instead of a prize fight,” said L. William Seidman, who advised Republican presidents and led the savings and loan bailout in the 1990s. “To make the market work well, you have to have a lot of rules.”

But Mr. Bush populated the financial system’s alphabet soup of oversight agencies with people who, like him, wanted fewer rules, not more.

Like Minds on Laissez-Faire

The president’s first chairman of the Securities and Exchange Commission promised a “kinder, gentler” agency. The second was pushed out amid industry complaints that he was too aggressive. Under its current leader, the agency failed to police the catastrophic decisions that toppled the investment bank Bear Stearns and contributed to the current crisis, according to a recent inspector general’s report.

As for Mr. Bush’s banking regulators, they once brandished a chain saw over a 9,000-page pile of regulations as they promised to ease burdens on the industry. When states tried to use consumer protection laws to crack down on predatory lending, the comptroller of the currency blocked the effort, asserting that states had no authority over national banks.

The administration won that fight at the Supreme Court. But Roy Cooper, North Carolina’s attorney general, said, “They took 50 sheriffs off the beat at a time when lending was becoming the Wild West.”

The president did push rules aimed at forcing lenders to more clearly explain loan terms. But the White House shelved them in 2004, after industry-friendly members of Congress threatened to block confirmation of his new housing secretary.

In the 2004 election cycle, mortgage bankers and brokers poured nearly $847,000 into Mr. Bush’s re-election campaign, more than triple their contributions in 2000, according to the nonpartisan Center for Responsive Politics. The administration did not finalize the new rules until last month.

Among the Republican Party’s top 10 donors in 2004 was Roland Arnall. He founded Ameriquest, then the nation’s largest lender in the subprime market, which focuses on less creditworthy borrowers. In July 2005, the company agreed to set aside $325 million to settle allegations in 30 states that it had preyed on borrowers with hidden fees and ballooning payments. It was an early signal that deceptive lending practices, which would later set off a wave of foreclosures, were widespread.

Andrew H. Card Jr., Mr. Bush’s former chief of staff, said White House aides discussed Ameriquest’s troubles, though not what they might portend for the economy. Mr. Bush had just nominated Mr. Arnall as his ambassador to the Netherlands, and the White House was primarily concerned with making sure he would be confirmed.

“Maybe I was asleep at the switch,” Mr. Card said in an interview.

Brian Montgomery, the Federal Housing Administration commissioner, understood the significance. His agency insures home loans, traditionally for the same low-income minority borrowers Mr. Bush wanted to help. When he arrived in June 2005, he was shocked to find those customers had been lured away by the “fool’s gold” of subprime loans. The Ameriquest settlement, he said, reinforced his concern that the industry was exploiting borrowers.

In December 2005, Mr. Montgomery drafted a memo and brought it to the White House. “I don’t think this is what the president had in mind here,” he recalled telling Ryan Streeter, then the president’s chief housing policy analyst.

It was an opportunity to address the risky subprime lending practices head on. But that was never seriously discussed. More senior aides, like Karl Rove, Mr. Bush’s chief political strategist, were wary of overly regulating an industry that, Mr. Rove said in an interview, provided “a valuable service to people who could not otherwise get credit.” While he had some concerns about the industry’s practices, he said, “it did provide an opportunity for people, a lot of whom are still in their houses today.” The White House pursued a narrower plan offered by Mr. Montgomery that would have allowed the F.H.A. to loosen standards so it could lure back subprime borrowers by insuring similar, but safer, loans. It passed the House but died in the Senate, where Republican senators feared that the agency would merely be mimicking the private sector’s risky practices — a view Mr. Rove said he shared.

Looking back at the episode, Mr. Montgomery broke down in tears. While he acknowledged that the bill did not get to the root of the problem, he said he would “go to my grave believing” that at least some homeowners might have been spared foreclosure.

Today, administration officials say it is fair to ask whether Mr. Bush’s ownership push backfired. Mr. Paulson said the administration, like others before it, “over-incented housing.” Mr. Hennessey put it this way: “I would not say too much emphasis on expanding homeownership. I would say not enough early focus on easy lending practices.”

‘We Told You So’

Armando Falcon Jr. was preparing to take on a couple of giants.

A soft-spoken Texan, Mr. Falcon ran the Office of Federal Housing Enterprise Oversight, a tiny government agency that oversaw Fannie Mae and Freddie Mac, two pillars of the American housing industry. In February 2003, he was finishing a blockbuster report that warned the pillars could crumble.

Created by Congress, Fannie and Freddie — called G.S.E.’s, for government-sponsored entities — bought trillions of dollars’ worth of mortgages to hold or sell to investors as guaranteed securities. The companies were also Washington powerhouses, stuffing lawmakers’ campaign coffers and hiring bare-knuckled lobbyists.

Mr. Falcon’s report outlined a worst-case situation in which Fannie and Freddie could default on debt, setting off “contagious illiquidity in the market” — in other words, a financial meltdown. He also raised red flags about the companies’ soaring use of derivatives, the complex financial instruments that economic experts now blame for spreading the housing collapse.

Today, the White House cites that report — and its subsequent effort to better regulate Fannie and Freddie — as evidence that it foresaw the crisis and tried to avert it. Bush officials recently wrote up a talking points memo headlined “G.S.E.’s — We Told You So.”

But the back story is more complicated. To begin with, on the day Mr. Falcon issued his report, the White House tried to fire him.

At the time, Fannie and Freddie were allies in the president’s quest to drive up homeownership rates; Franklin D. Raines, then Fannie’s chief executive, has fond memories of visiting Mr. Bush in the Oval Office and flying aboard Air Force One to a housing event. “They loved us,” he said.

So when Mr. Falcon refused to deep-six his report, Mr. Raines took his complaints to top Treasury officials and the White House. “I’m going to do what I need to do to defend my company and my position,” Mr. Raines told Mr. Falcon.

Days later, as Mr. Falcon was in New York preparing to deliver a speech about his findings, his cellphone rang. It was the White House personnel office, he said, telling him he was about to be unemployed.

His warnings were buried in the next day’s news coverage, trumped by the White House announcement that Mr. Bush would replace Mr. Falcon, a Democrat appointed by Bill Clinton, with Mark C. Brickell, a leader in the derivatives industry that Mr. Falcon’s report had flagged.

It was not until 2003, when Freddie became embroiled in an accounting scandal, that the White House took on the companies in earnest. Mr. Bush decided to quit the long-standing practice of rewarding supporters with high-paying appointments to the companies’ boards — “political plums,” in Mr. Rove’s words. He also withdrew Mr. Brickell’s nomination and threw his support behind Mr. Falcon, beginning an intense effort to give his little regulatory agency more power.

Mr. Falcon lacked explicit authority to limit the size of the companies’ mammoth investment portfolios, or tell them how much capital they needed to guard against losses. White House officials wanted that to change. They also wanted the power to put the companies into receivership, hoping that would end what Mr. Card, the former chief of staff, called “the myth of government backing,” which gave the companies a competitive edge because investors assumed the government would not let them fail.

By the spring of 2005 a deal with Congress seemed within reach, Mr. Snow, the former Treasury secretary, said in an interview. Michael G. Oxley, an Ohio Republican and then-chairman of the House Financial Services Committee, had produced what Mr. Snow viewed as “a pretty darned good bill,” a watered-down version of what the president sought. But at the urging of Mr. Card and the White House economics team, the president decided to hold out for a tougher bill in the Senate.

Mr. Card said he feared that Mr. Snow was “more interested in the deal than the result.” When the bill passed the House, the president issued a statement opposing it, effectively killing any chance of compromise. Mr. Oxley was furious.

“The problem with those guys at the White House, they had all the answers and they didn’t think they had to listen to anyone, including the Treasury secretary,” Mr. Oxley said in a recent interview. “They were driving the ideological train. He was in the caboose, and they were in the engine room.”

Mr. Card and Mr. Hennessey said they had no regrets. They are convinced, Mr. Hennessey said, that the Oxley bill would have produced “the worst of all possible outcomes,” the illusion of reform without the substance.

Still, some former White House and Treasury officials continue to debate whether Mr. Bush’s all-or-nothing approach scuttled a measure that, while imperfect, might have given an aggressive regulator enough power to keep the companies from failing.

Mr. Snow, for one, calls Mr. Oxley “a hero,” adding, “He saw the need to move. It didn’t get done. And it’s too bad, because I think if it had, I think we could well have avoided a big contributor to the current crisis.”

Unheeded Warnings

Jason Thomas had a nagging feeling.

The New Century Financial Corporation, a huge subprime lender whose mortgages were bundled into securities sold around the world, was headed for bankruptcy in March 2007. Mr. Thomas, an economic analyst for President Bush, was responsible for determining whether it was a hint of things to come.

At 29, Mr. Thomas had followed a fast-track career path that took him from a Buffalo meatpacking plant, where he worked as a statistician, to the White House. He was seen as a whiz kid, “a brilliant guy,” his former boss, Mr. Hubbard, says.

As Mr. Thomas began digging into New Century’s failure that spring, he became fixated on a particular statistic, the rent-to-own ratio.

Typically, as home prices increase, rental costs rise proportionally. But Mr. Thomas sent charts to top White House and Treasury officials showing that the monthly cost of owning far outpaced the cost to rent. To Mr. Thomas, it was a sign that housing prices were wildly inflated and bound to plunge, a condition that could set off a foreclosure crisis as conventional and subprime borrowers with little equity found they owed more than their houses were worth.

It was not the Bush team’s first warning. The previous year, Mr. Lindsay, the former chief economics adviser, returned to the White House to tell his old colleagues that housing prices were headed for a crash. But housing values are hard to evaluate, and Mr. Lindsay had a reputation as a market pessimist, said Mr. Hubbard, adding, “I thought, ‘He’s always a bear.’ ”

In retrospect, Mr. Hubbard said, Mr. Lindsay was “absolutely right,” and Mr. Thomas’s charts “should have been a signal.”

Instead, the prevailing view at the White House was that the problems in the housing market were limited to subprime borrowers unable to make their payments as their adjustable mortgages reset to higher rates. That belief was shared by Mr. Bush’s new Treasury secretary, Mr. Paulson.

Mr. Paulson, a former chairman of the Wall Street firm Goldman Sachs, had been given unusual power; he had accepted the job only after the president guaranteed him that Treasury, not the White House, would have the dominant role in shaping economic policy. That shift merely continued an imbalance of power that stifled robust policy debate, several former Bush aides say. Throughout the spring of 2007, Mr. Paulson declared that “the housing market is at or near the bottom,” with the problem “largely contained.” That position underscored nearly every action the Bush administration took in the ensuing months as it offered one limited response after another.

By that August, the problems had spread beyond New Century. Credit was tightening, amid questions about how heavily banks were invested in securities linked to mortgages. Still, Mr. Bush predicted that the turmoil would resolve itself with a “soft landing.”

The plan Mr. Bush announced on Aug. 31 reflected that belief. Called “F.H.A. Secure,” it aimed to help about 80,000 homeowners refinance their loans. Mr. Montgomery, the housing commissioner, said that he knew the modest program was not enough — the White House later expanded the agency’s rescue role — and that he would be “flying the plane and fixing it at the same time.”

That fall, Representative Rahm Emanuel, a leading Democrat, former investment banker and now the incoming chief of staff to President-elect Barack Obama, warned the White House it was not doing enough. He said he told Joshua B. Bolten, Mr. Bush’s chief of staff, and Mr. Paulson in a series of phone calls that the credit crisis would get “deep and serious” and that the only answer was big, internationally coordinated government intervention.

“You got to strangle this thing and suffocate it,” he recalled saying.

Instead, Mr. Bush developed Hope Now, a voluntary public-private partnership to help struggling homeowners refinance loans. And he worked with Congress to pass a stimulus package that sent taxpayers $150 billion in tax rebates.

In a speech to the Economic Club of New York in March 2008, he cautioned against Washington’s temptation “to say that anything short of a massive government intervention in the housing market amounts to inaction,” adding that government action could make it harder for the markets to recover.

Dominoes Start to Fall

Within days, Bear Sterns collapsed, prompting the Federal Reserve to engineer a hasty sale. Some economic experts, including Timothy F. Geithner, the president of the New York Federal Reserve Bank (and Mr. Obama’s choice for Treasury secretary) feared that Fannie Mae and Freddie Mac could be the next to fall.

Mr. Bush was still leaning on Congress to revamp the tiny agency that oversaw the two companies, and had acceded to Mr. Paulson’s request for the negotiating room that he had denied Mr. Snow. Still, there was no deal.

Over the previous two years, the White House had effectively set the agency adrift. Mr. Falcon left in 2005 and was replaced by a temporary director, who was in turn replaced by James B. Lockhart, a friend of Mr. Bush from their days at Andover, and a former deputy commissioner of the Social Security Administration who had once run a software company.

On Mr. Lockhart’s watch, both Freddie and Fannie had plunged into the riskiest part of the market, gobbling up more than $400 billion in subprime and other alternative mortgages. With the companies on precarious footing, Mr. Geithner had been advocating that the administration seize them or take other steps to reassure the market that the government would back their debt, according to two people with direct knowledge of his views.

In an Oval Office meeting on March 17, however, Mr. Paulson barely mentioned the idea, according to several people present. He wanted to use the troubled companies to unlock the frozen credit market by allowing Fannie and Freddie to buy more mortgage-backed securities from overburdened banks. To that end, Mr. Lockhart’s office planned to lift restraints on the companies’ huge portfolios — a decision derided by former White House and Treasury officials who had worked so hard to limit them.

But Mr. Paulson told Mr. Bush the companies would shore themselves up later by raising more capital.

“Can they?” Mr. Bush asked.

“We’re hoping so,” the Treasury secretary replied.

That turned out to be incorrect, and did not surprise Mr. Thomas, the Bush economic adviser. Throughout that spring and summer, he warned the White House and Treasury that, in the stark words of one e-mail message, “Freddie Mac is in trouble.” And Mr. Lockhart, he charged, was allowing the company to cover up its insolvency with dubious accounting maneuvers.

But Mr. Lockhart continued to offer reassurances. In a July appearance on CNBC, he declared that the companies were well managed and “worsts were not coming to worst.” An infuriated Mr. Thomas sent a fresh round of e-mail messages accusing Mr. Lockhart of “pimping for the stock prices of the undercapitalized firms he regulates.”

Mr. Lockhart defended himself, insisting in an interview that he was aware of the companies’ vulnerabilities, but did not want to rattle markets.

“A regulator,” he said, “does not air dirty laundry in public.”

Soon afterward, the companies’ stocks lost half their value in a single day, prompting Congress to quickly give Mr. Paulson the power to spend $200 billion to prop them up and to finally pass Mr. Bush’s long-sought reform bill, but it was too late. In September, the government seized control of Freddie Mac and Fannie Mae.

In an interview, Mr. Paulson said the administration had no justification to take over the companies any sooner. But Mr. Falcon disagreed: “They absolutely could have if they had thought there was a real danger.”

By Sept. 18, when Mr. Bush and his team had their fateful meeting in the Roosevelt Room after the failure of Lehman Brothers and the emergency rescue of A.I.G., Mr. Paulson was warning of an economic calamity greater than the Great Depression. Suddenly, historic government intervention seemed the only option. When Mr. Paulson spelled out what would become a $700 billion plan to rescue the nation’s banking system, the president did not hesitate.

“Is that enough?” Mr. Bush asked.

“It’s a lot,” the Treasury secretary recalled replying. “It will make a difference.” And in any event, he told Mr. Bush, “I don’t think we can get more.”

As the meeting wrapped up, a handful of aides retreated to the White House Situation Room to call Vice President Dick Cheney in Florida, where he was attending a fund-raiser. Mr. Cheney had long played a leading role in economic policy, though housing was not a primary interest, and like Mr. Bush he had a deep aversion to government intervention in the market. Nonetheless, he backed the bailout, convinced that too many Americans would suffer if Washington did nothing.

Mr. Bush typically darts out of such meetings quickly. But this time, he lingered, patting people on the back and trying to soothe his downcast staff. “During times of adversity, he bucks everybody up,” Mr. Paulson said.

It was not the end of the failures or government interventions; the administration has since stepped in to rescue Citigroup and, just last week, the Detroit automakers. With 31 days left in office, Mr. Bush says he will leave it to historians to analyze “what went right and what went wrong,” as he put it in a speech last week to the American Enterprise Institute.

Mr. Bush said he was too focused on the present to do much looking back.

“It turns out,” he said, “this isn’t one of the presidencies where you ride off into the sunset, you know, kind of waving goodbye.”

The president’s plan gives carmakers until March 31 to restructure.

WASHINGTON — The emergency bailout of General Motors and Chrysler announced by President Bush on Friday gives the companies a few months to get their businesses in order, but hands off to President-elect Barack Obama the difficult political decision of ruling on their progress.

The plan pumps $13.4 billion by mid-January into the companies from the fund that Congress authorized to rescue the financial industry. But the two companies have until March 31 to produce a plan for long-term profitability, including concessions from unions, creditors, suppliers and dealers.

Another $4 billion will be available for G.M. if and when the rest of the $700 billion bailout package is released in February.

Even before the March 31 deadline, it might fall to the Obama administration to persuade Congress to release the second $350 billion of the Treasury Department’s huge financial system stabilization program — a request that the Bush administration is reluctant to make because it will face angry criticism by lawmakers.

The auto bailout plan sets “targets” rather than concrete requirements about what those concessions may be, meaning that Mr. Obama and his advisers have enormous latitude to decide how to define long-term viability.

While Mr. Obama has broadly insisted that the automakers radically increase the fuel efficiency of their fleets, reduce carbon emissions and save the maximum number of jobs possible, he will have just nine weeks after taking office to press for a detailed transformation of an industry whose problems have been building for three decades.

In Chicago, Mr. Obama embraced the plan but said he had not had enough time to study the details. He never addressed the question of how he would turn a program designed as a short-term bridge loan into a long-term reorganization.

“I do want to emphasize to the Big Three automakers and their executives that the American people’s patience is running out, and that they should seize on this opportunity over the next several weeks and months to come up with a plan that is sustainable. And that means that they’re going to have to make some hard choices,” he said.

Mr. Obama said it was his intention to preserve jobs “for years to come” and that he wanted to make sure “that it’s not just workers who are bearing the brunt of that restructure, that they’re not the ones who are taking all the hits.”

Yet as the economy falters and joblessness balloons, Mr. Obama will be under extreme political pressure not to be too tough on the industry.

Already, Ron Gettelfinger, the president of the United Automobile Workers union, said he was pleased that the administration acted on the loan requests, but said the president added “unfair conditions” that singled out blue-collar workers.

Mr. Gettelfinger said the union expected to appeal to Mr. Obama to alter the expectations for wage and benefit cuts. According to Treasury Department officials who drafted the wording, Mr. Obama would be free to change the requirements and loosen the standards, especially on how much workers would have to give up.

Mr. Bush announced the plan early Friday, before the markets opened, and took no questions about its details. The day before, he conceded that he had been forced by the severity of the economic downturn to ignore many of the free-market principles he came to office embracing.

G.M. said it expected to draw on the first installment of its loans by Dec. 29. Soon after it pays suppliers and workers, the troubled automaker will begin putting drastic downsizing plans into effect, outlined to Congress this month, which include eliminating more than 30,000 jobs, shutting factories, shedding dealerships and determining the future of its Saab, Saturn and Pontiac brands.

In Detroit, a visibly relieved Rick Wagoner, G.M.’s chairman, told reporters that the loans would allow the automakers to pay their bills and prevent a financial crisis from spreading through the industry’s suppliers and dealers.

Mr. Wagoner, who has been G.M.’s chief executive for eight years, added that he had no plans to step aside during the difficult months ahead. “Do you think I would have gone through what I’ve gone through in the past two months if I didn’t want to stay?”

His reaction was echoed at Chrysler. “We intend to be accountable for this loan, including meeting the specific requirements set forth by the government, and will continue to implement our plan for long-term viability,” Chrysler’s chairman, Robert L. Nardelli, said in an e-mail message to employees.

Beyond the initial hurdles to provide all of the money, it will be left to Mr. Obama to make the tough judgments needed about the future of the industry. Are enough jobs being cut and factories being closed? Have the right product lines been consolidated? Are all of the stakeholders on the same page enough to make the long-term viability plans workable? And how should financial viability be defined?

On paper, Mr. Obama will inherit a club to wield against the automakers and the unions: he can threaten to “call” the loans and require repayment in 30 days.  Yet as a practical matter, demanding immediate repayment would be enormously difficult to do, unless Mr. Obama chose to drive the two icons of American industrial strength into bankruptcy court during the first 70 days of his administration.

His aides know that he will come under tremendous pressure, including from the U.A.W., which supported his candidacy and helped finance his campaign. “What we’ve seen from the U.A.W. already forces Obama to make a decision over whether to throw the U.A.W. under the bus,” said Brian Johnson, an analyst with Barclays Capital.

The bailout Mr. Bush announced is missing one major element: a “car czar” to administer the program, a key feature of the legislation that was defeated in the Senate last week. Until the end of Mr. Bush’s presidency, in just over a month, the Treasury secretary, Henry M. Paulson Jr., will play that role. But it is unclear what will happen after Mr. Obama is sworn in.

For now, his auto brain trust is mainly composed of Paul A. Volcker, the former Federal Reserve chairman, who was on the board for the Chrysler bailout in 1979; Austan Goolsbee, whose expertise at the University of Chicago has been the economics of industrial organizations; and Joshua Steiner, who is experienced in financial restructuring.

While many elements of the loan requirements are drawn from legislation that failed in Congress, there is one crucial difference between Mr. Bush’s plan and the one the House approved: it strips away a requirement that Cerberus Capital Management, the private equity firm that owns 80 percent of Chrysler, be held liable for any losses experienced by the taxpayers.

Instead, Cerberus on Friday said it would give the first $2 billion to the government if it ever sold Chrysler Financial, the company’s financing arm. While it has not asked for immediate help, the Ford Motor Company said it welcomed the assistance to G.M. and Chrysler because of the fragile, interdependent nature of the industry and its vast network of suppliers.

Both G.M. and Chrysler outlined a turnaround program calling for deep cuts in operations and expenses in their original requests to Congress for government loans.

But the White House appears to be expecting more than conventional restructuring strategies. Mr. Bush called for the companies to extract major concessions from their bondholders, creditors, dealers, suppliers and the U.A.W.

Under the Bush administration plan, G.M. and Chrysler would each have immediate access to $4 billion upon the signing of the emergency loan agreements with the Treasury. G.M. would then have access to an addition $5.4 billion on Jan. 16 and another $4 billion on Feb. 17 provided that Congress has released the remaining $350 billion for the Treasury’s rescue program.

The companies would be required to limit executive pay, eliminate “golden parachute” severance packages and sell their corporate jets. While the loans are outstanding, the companies would be barred from paying shareholder dividends.

The loan deal also requires the companies to quickly reduce their huge debt obligations by two-thirds, mostly through debt-for-equity swaps, and to reach agreements on wage and benefit cuts with the unions by Dec. 31.