The Irish Independent reports that the Government will not force Irish banks to pass on the European Central Bank's 0.5pc cut in interest rates to mortgage holders.

The banks last night refused to commit to passing on the rate cuts to those on standard variable mortgages -- despite enormous pressure from the Financial Regulator, consumer watchdogs, small business groups and the Opposition.

Officials insisted Finance Minister Brian Lenihan would not intervene -- despite the unprecedented €400bn bailout of the banking sector made on behalf of taxpayers last week. "At present, the department does not give instructions to the banks," a spokesman told the Irish Independent.

Homeowners who have tracker mortgages, which are set at an agreed rate above the prevailing ECB base rate, will get the benefit of the reduction.

However, those on variable rates will be at the mercy of the banks.

Most mortgage holders should have been looking forward to savings of up to €90 a month after the ECB joined the US Federal Reserve, the Bank of England and Swiss, Canadian and Swedish banks in a surprise co-ordinated cut in a desperate attempt to stem unprecedented global market turmoil.

America's Fed cut its key federal funds lending rate by half a percentage point to 1.5pc and lowered its discount rate by the same amount to 1.75pc.

The ECB said it would cut its key rate by a half-point to 3.75pc, with the Bank of England also cutting by 0.5pc, taking its rate to 4.5pc.

The cut in European rates follows nine consecutive interest rate increases.

It will mean that someone with a €300,000 tracker mortgage will enjoy a fall of €120 a month in repayments.

It is the first time in more than five years that European interest rates have come down.

The ECB cut will take effect next Wednesday, the day after the Budget.

However, despite the €400bn State bailout, most Irish banks last night refused to say whether they would pass on the rate reductions to consumers and businesses.

Consumer watchdogs and small business groups reacted angrily.

The Financial Regulator warned the banks: "Insofar as banks' cost of funding is reduced, we would expect, in a competitive market, that this would be passed on to customers."

The Consumers' Association insisted that the bailed-out banks owed it to consumers to pass on the cut.

"We're all suffering, but we have given them a lifeline and they must pass on this to us,"its chairman, James Doorley, said.

Small-business lobby group ISME called on the Government to intervene immediately to stop banks "profiteering" . It said many companies were struggling to meet loan repayments in the recession.

However, officials in the Department of Finance last night dashed hopes the Government would intervene to force the banks to pass on the interest rate cuts to customers.

Sources said the minister will be in a position to issue certain commercial directions to banks over the coming weeks, when the exact details of the State guarantee scheme are finally worked out.

However, the Irish Independent understands it is still highly unlikely the minister will issue instructions to the banks at that stage on interest rates on the grounds it would be seen as interference in the market.

Fine Gael enterprise spokesman Leo Varadkar said banks would save €1.3m every day that they failed to pass on the lower rate.

The dramatic move by the world's central banks failed to halt the sale in share prices. After a brief rally, share prices resumed their falls.

The Dublin market tumbled a further 7.4pc yesterday. Several banks contacted yesterday said the rate reduction would be passed on next month for existing customers who have ECB tracker mortgages.

But most banks said no decision had been taken on whether to cut standard variable rates.

The exemptions were AIB and Halifax and Bank of Scotland (Ireland), which said they would pass on the ECB cuts to their customers.

Standard variable rates have become key, as most banks no longer offer ECB-based trackers. Bank of Ireland and its subsidiary ICS Building Society are set to remove trackers for new customers from tomorrow.

This will leave just AIB and NIB offering tracker mortgages.

A number of economists said last night they now expect more rate cuts from the ECB.

Austin Hughes of IIB Bank said he expects rates to fall to 3pc next year, while Ulster Bank's Simon Barry said he expects more reductions in the coming months.

The Irish Independent also reports that a computer industry giant is to axe 133 hi-tech jobs at bases in Dublin and Kildare as part of a major worldwide restructuring plan.

Hewlett Packard and its newly-acquired subsidiary EDS announced the hi-tech redundancies yesterday.

The staff cuts are part of a review of global operations that will see 24,600 job losses worldwide.

The 133 consultancy jobs that will go in Ireland -- in Leixlip and Dublin city centre -- within the space of two years are part of the company's plan to cut over 9,000 jobs across Europe.

Last night, a spokesperson for HP said the Irish job cuts will be made in areas where its operations crossed over with its new subsidiary EDS, which specialises in IT consultancy.

"This is part of a plan to streamline operations,"she said.

Hewlett Packard employs 4,000 people at its facility in Leixlip and EDS employs 400 at Treasury Buildings in Dublin.

In a statement last night, the company said it would hold meetings with HP and EDS employees in the coming days "to share information on the proposed integration plan for Ireland".

Effort

"HP will make every effort where possible to redeploy impacted individuals,"it said.

Meanwhile, the Woodstock Hotel in Ennis, which opened in 1999, has announced it will close its doors tomorrow after laying off 40 workers, leaving just a skeleton staff to wind down the business.

"This is very sad news for the town and in particular for the employees and their families," said Ennis Chamber of Commerce CEO Rita McInerney.

"In fairness to the Dunne Group, they worked very hard to maintain the hotel after going into examinership but unfortunately it will have to close its doors. We rely heavily on tourism in Ennis and have to have a quality product available for tourists."

It has been a grim week for the employment market as it was revealed that the live register rose by almost 80,000 over the past 12 months -- an increase of almost 50pc.

There was some good news yesterday though after it emerged that 300 of 420 jobs that were under threat at a car component manufacturer in the midlands have been secured.

Workers at the Iralco factory in Collinstown, Co Westmeath expressed their relief after it was confirmed it has been sold to C&F Tooling.

The Irish Times reports that mortgage borrowere will see their loan repayments drop by between €50 and €150 a month following yesterday's move by central banks to cut interest rates by half a percentage point.

A further interest rate cut may be made before the end of the year, economists predicted yesterday.

Borrowers who hold tracker mortgages will see their repayments fall automatically in line with the European Central Bank (ECB) rate cut of half a percentage point, which becomes effective from next Wednesday.

However, people who hold standard variable-rate mortgages and personal loans will have to wait to see if their lender passes on the rate cut to customers or pockets the benefit by increasing the margins on their loans.

AIB and Bank of Scotland (Ireland) became the first two banks to confirm they will pass on the interest rate cut in full to all variable-rate customers yesterday.

Several other financial institutions, including the three biggest mortgage lenders, Permanent TSB, the Ulster Bank group and Bank of Ireland, said they were reviewing the interest rates on their variable-rate mortgages.

Customers on fixed-rate mortgages will not benefit from the rate cut during the term of the fix.

The ECB cut interest rates yesterday as part of a co-ordinated move with the US Federal Reserve and the Bank of England to help ease the turmoil in the banking sector and to spur economic growth.

This is the first cut in the key euro-zone rate since June 2003. At that time, Irish lenders came under political pressure from former taoiseach Bertie Ahern to pass on the rate cuts in full and in a speedy manner to customers.

Construction Industry Federation (CIF) director general Tom Parlon yesterday called on the banks to pass on the full benefit of the savings immediately. "This decision is a positive signal to those who wish to buy a home of their own," he said.

Interest rate movements are usually passed on to tracker mortgage customers within five working days of the date at which the ECB rate change becomes effective. The exact value of the rate cut will depend on the interest rate charged, the size of the loan and the term of the repayments.

Tracker mortgages first became popular in 2004. Borrowers liked the idea of a "price promise" that the interest rate would move up and down in line with the ECB rate, rather than on the whim of the lender.

These loans also boasted the lowest interest rates available to new borrowers.

But since 2007, many lenders have increased the margins on trackers for new borrowers, who have been encouraged to take up standard variable rates instead.

Standard variable rates are more flexible for lenders as they allow them to increase their margins whenever they want to make more money from their mortgage business.

Bank of Ireland is to withdraw its tracker mortgages from Friday.

Bank of Scotland (Ireland), which includes its retail banking arm, Halifax, was the first bank to announce yesterday that it would also apply the rate cut to standard variable-rate mortgages.

This cut will become effective from November 1st.

AIB said it would pass on the rate cut to all personal, business and mortgage customers, but did not confirm the date from which the lower interest rate will apply.

A spokesman for IIB Bank said the rate cut would be good for consumers and should be good for the money markets.

The Irish Times also reports that shares in troubled Dublin-based electronic payments group Payzone fell to an all-time low yesterday after the company announced it has sold its businesses in France, Italy and Spain for €20 million.

Payzone's stock closed down 14.3 per cent in London yesterday at 6 pence. This gave it a market value of just £26.44 million.

Payzone was formed last December through the merger of Irish electronic payments group Alphyra with UK ATM operator Cardpoint.

Its shares opened on the Alternative Investment Market (AIM) at 76 pence but have since declined steadily.

The businesses are being sold to LCom, a French company that specialises in the distribution of payment products and services.

Under the deal, Payzone will receive €13.2 million in cash and €6.8 million "by way of assignment of financial guarantees".

In addition, Payzone will write off €4.2 million it is owned by the businesses. The deal is scheduled to close on October 31st, subject to regulatory approval in France.

Payzone said it would use the majority of the funds to pay down debt. "The remainder will be retained by the company," a statement from the group added.

Payzone said the total net liabilities within the three businesses were €3.6 million at August 31st and they contributed a €600,000 loss to the company's pretax profits for the nine months to the end of September.

Payzone's intention to sell these businesses was revealed by The Irish Times on August 8th.

Commenting on the deal, Payzone chief executive Mike Maloney said: "This is great news for Payzone. France, Italy and Spain were not part of our strategic focus on growth.

"By completing their disposal the management can concentrate resources on Payzone's key business. This represents an important step forward in our strategy to focus on those markets that offer significant scale and growth for our services."

Payzone hit the headlines in January when it sought to dismiss chief executive John Nagle and finance head John Williamson.

The pair obtained a High Court injunction preventing their dismissal, but were sacked in March after an egm of shareholders.

Payzone then raised €40 million through an equity placing and drew down €291 million from Royal Bank of Scotland to refinance its debt.

In June, Payzone reported an operating loss of €152.9 million for the six months to the end of March 2008.

The Irish Examiner reports that the Health Service Executive (HSE) has told health service unions it will need to slash costs by a further €120 million by the end of the year to come in on budget, despite already introducing a series of swingeing cutbacks.

The detailed HSE briefing document, seen by the Irish Examiner, warns of further serious cuts next year and outlines a number of proposed cuts. These include:

• The non-replacement of unavailable staff.
• Limiting services to defined budget levels.
• Money-making measures internal to the service.
• Streamlining and “reconfiguring” of hospital services into the community

According to the confidential document, the proposed cost-cutting plans have been caused by the HSE still being €118m over-budget this year, meaning €40m will have to be cut for each of the next three months if it is to come in on budget.

By the end of September the HSE was a massive €118m over-budget and, while expenditure had been stabilised, the report said it was “not declining” and the HSE needed “to recover the deficit... in the remaining months through VFM (value for money) measures”.

In further bad news for patients, the HSE document has also proposed a series of budget cuts connected to staff levels, service reconfiguration and new money-making measures as part of its soon to be published service plan for next year.

Irish Nurses Organisation general secretary Liam Doran has heavily criticised the proposals, claiming the planned cutbacks for the next three months and in 2009 will cause “meltdown” and could be even more damaging than the 1987 budget restrictions.

“Lets be quite clear about this. The scenario put forward is possibly bleaker than the scenario of 1987, which some hospitals took years to get over. These are serious cutbacks that are being proposed, and if they are planning to save almost €120m by the end of the year, that’s €40m a month, then we are talking about extended ward closures, staff cutbacks, even more A&E overcrowding, and the end of nursing home subventions.”

A HSE spokesperson insisted the plans are “part of a range of measures aimed at ensuring the HSE remains within budget for 2008”.

The Financial Times reports that Wednesday’s interest rate cut by six central banks in North America and Europe is a historic move that attempts to produce for the first time a comprehensive international monetary policy response to the economic risks of the credit crisis.

The transatlantic move marks a recognition that growth had already weakened across the industrialised world even before the latest escalation of financial stress.

The combination of an increasingly global downturn, plus global financial stress, raises the likelihood of rising unemployment in leading economies and has already depressed commodity prices, making the inflation outlook less worrying.

Policymakers see the danger that the feedback loop between financial sector weakness and economic weakness that has menaced the US since the start of the credit squeeze may now be replicating at global level.

Since the financial markets are global, the threat to growth is global, and falling commodity prices are global, it makes sense to address the economic risks through global monetary easing.

The Federal Reserve, Bank of Canada, European Central Bank, Bank of England, Swiss National Bank and the Swedish Riksbank would in any case have moved in convoy to ease rates in the coming weeks.

China’s move – and the rate cut by the Reserve Bank of Australia earlier this week – further strengthens the notion that this is a truly global effort. However, for the six central banks to act as one has a number of advantages.

First, by acting simultaneously, the central banks maximised the chance that their actions might shock the credit markets back to life and bolster collapsing confidence among households and businesses.

By contrast, Fed chairman Ben Bernanke was sceptical that a Fed rate cut on its own – that was already priced into the market – would do very much to boost growth or ease market stress.

Second, the co-ordinated nature of the move made it less embarrassing for central banks to U-turn on rates – particularly the ECB, but also the Bank of England and the Fed, which adopted a neutral balance of risks at its last policy meeting.

Third, it avoided the risk that one-at-a-time rate cuts would produce disorderly swings in currency markets. This was a particular concern for the Fed and the Bank of England, since the dollar and sterling have both suffered bouts of extreme weakness since the credit crisis began.

The ECB did not want to see the euro swing higher against the dollar even on a temporary basis following a Fed emergency rate cut.

Fourth, it reassured the markets that the world’s central banks were operating in harmony, at a moment when governments around the world are adopting emergency actions – such as bank deposit guarantees or recapitalisation plans – that are plainly not co-ordinated and often have harmful spillover effects.

In particular, the central banks were signalling that there would be no “beggar-thy-neighbour” efforts at competitive devaluation.

Pulling this off was no mean feat. Since the start of the credit crisis the world’s central banks – in particular the Fed and the ECB – have appeared to take a different approach to dealing with the danger. The Fed cut rates early and aggressively, to lean against the widening of borrowing spreads in the market and pre-emptively address the risk to growth, while the ECB adopted a strict “separation principle” distinguishing between liquidity operations and rate policy.

Wednesday’s joint action marks a coming together of these two approaches. It represents a globalisation of the Fed strategy of using rate cuts to ease or at least offset what would otherwise be a tightening of financial conditions in order to reduce the danger to the world economy from the credit crisis.

But is also respects the ECB separation principle, since the rate cuts are explicitly targeted at the economy rather than the financial system, and are justified by the change in the inflation outlook.

The FT also reports that the financial crisis will drive down global economic growth to its lowest since 2002 with a big risk it will drop even further, the International Monetary Fund has warned.

Though Olivier Blanchard, the fund’s chief economist, said that the chance of another Great Depression was “nearly nil”, the IMF said that the US and European economies were mainly already in or close to recession.

“The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s,”the IMF said. “The situation is exceptionally uncertain and subject to considerable downside risks.”

The fund said that global growth was likely to slow to 3.9 per cent growth in 2008 and 3 per cent in 2009, sharply down from 5 per cent growth last year. Some economists regard 3 per cent or 2.5 per cent global growth as equivalent to a world recession, given the trend rates of growth in the global economy, but Mr Blanchard said that such definitions were unhelpful.

Mr Blanchard said that Wednesday’s co-ordinated interest rate cuts from the major economies were “definitely a step in the right direction”, though declined to say whether more reductions would be needed in the short term. “More may be needed, and if so we hope it is done,” he told reporters. “Fifty basis points [cut] is not nothing.”

The IMF chief economist’s optimism that the world would avoid a repeat of the Great Depression of the 1930s was based on an expectation that governments would follow the right policies. European governments were having difficulty in coordinating their response to the crisis and more action was needed to shore up their shaky financial systems, he said.

The fund reduced its forecast for global growth next year by nearly a full percentage point, compared with its previous projection in July, with expected US growth for 2009 cut by 0.7 percentage points to 0.1 per cent – hovering just above a “full recession” of a year-on-year fall in growth rather than the narrower definition of “technical recession” of two successive quarters of a shrinking economy. Predicted growth for the eurozone in 2009 was cut by a percentage point to an increase of 0.2 per cent.

Emerging market economies, which have seen rapid falls in asset prices this week but have yet to bear the brunt of the slowdown in the real economy, would fare somewhat better, the fund thought.

The projection for Chinese growth next year was cut by half a percentage point to a still-healthy 9.3 per cent, and India was forecast to grow at 6.9 per cent. Charles Collyns, the deputy director of the IMF’s research department, said that India, being less open an economy than China and many of the industrialised economies, had strong internal drivers of growth which should shield it from the worst of the economic downturn.

Growth in sub-Saharan Africa, being also less exposed to financial turmoil, would slow to 6.3 per cent next year from 6.9 per cent last year, the fund said.

The New York Times reports that having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials.

Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones.

The Treasury plan was still preliminary and it was unclear how the process would work, but it appeared that it would be voluntary for banks.

The proposal resembles one announced on Wednesday in Britain. Under that plan, the British government would offer banks like the Royal Bank of Scotland, Barclays and HSBC Holdings up to $87 billion to shore up their capital in exchange for preference shares. It also would provide a guarantee of about $430 billion to help banks refinance debt.

The American recapitalization plan, officials say, has emerged as one of the most favored new options being discussed in Washington and on Wall Street. The appeal is that it would directly address the worries that banks have about lending to one another and to other customers.

This new interest in direct investment in banks comes after yet another tumultuous day in which the Federal Reserve and five other central banks marshaled their combined firepower to cut interest rates but failed to stanch the global financial panic.

In a coordinated action, the central banks reduced their benchmark interest rates by one-half percentage point. On top of that, the Bank of England announced its plan to nationalize part of the British banking system and devote almost $500 billion to guarantee financial transactions between banks.

The coordinated rate cut was unprecedented and surprising. Never before has the Fed issued an announcement on interest rates jointly with another central bank, let alone five other central banks, including the People’s Bank of China.

Yet the world’s markets hardly seemed comforted. Credit markets on Wednesday remained almost as stalled as the day before. Stock prices, which had plunged in Europe and Asia before the announcement, continued to plummet afterward. And stock prices in the United States went on a roller-coaster ride, at the end of which the Dow Jones industrial average was down 189 points, or 2 percent.

The gloomy market response sent policy makers and outside experts on a scramble for additional remedies to stabilize the banks and reassure investors.

There is no shortage of ideas, ranging from the partial nationalization proposal to a guarantee by the Fed of all lending between banks.

Senator John McCain, the Republican presidential candidate, on Wednesday refined his proposal — revealed in a debate with the Democratic nominee, Senator Barack Obama, the night before — to allow millions of Americans to refinance their mortgages with government assistance.

As Washington casts about for Plan B, investors are clamoring for the Fed to lower interest rates to nearly zero. Some are also calling for governments worldwide to provide another round of economic stimulus through expensive public works projects.

Yet behind the scramble for solutions lies a hard reality: the financial crisis has mutated into a global downturn that economists warn will be painful and protracted, and for which there is no quick cure.

“Everyone is conditioned to getting instant relief from the medicine, and that is unrealistic,”said Allen Sinai, president of Decision Economics, a forecasting firm in Lexington, Mass.“As hard as it is for investors and jobholders and politicians in an election year, this crisis will not end without a lot more pain.”

One concern about the Treasury’s bailout plan is that it calls for limits on executive pay when capital is directly injected into a bank. The law directs Treasury officials to write compensation standards that would discourage executives from taking “unnecessary and excessive risks” and that would allow the government to recover any bonus pay that is based on stated earnings that turn out to be inaccurate. In addition, any bank in which the Treasury holds a stake would be barred from paying its chief executive a “golden parachute” package.

Treasury officials worry that aggressive government purchases, if not done properly, could alarm bank shareholders by appearing to be punitive or could be interpreted by the market as a sign that target banks were failing.

At a news conference on Wednesday, the Treasury secretary, Henry M. Paulson Jr., pointedly named the Treasury’s new authority to inject capital into institutions as the first in a list of new powers included in the bailout law.

“We will use all the tools we’ve been given to maximum effectiveness,”Mr. Paulson said,“including strengthening the capitalization of financial institutions of every size.”

The idea is gaining support even among longtime Republican policy makers who have spent most of their careers defending laissez-faire economic policies.

“The problem is the uncertainty that people have about doing business with banks, and banks have about doing business with each other,”said William Poole, a staunchly free-market Republican who stepped down as president of the Federal Reserve Bank of St. Louis on Aug. 31. “We need to eliminate that uncertainty as fast as we can, and one way to do that is by injecting capital directly into banks. I think it could be done very quickly.”

Mr. Paulson acknowledged that the flurry of emergency steps had done little to break the cycle of fear and mistrust, and he pleaded for patience.

“The turmoil will not end quickly,”Mr. Paulson told reporters on Wednesday. “Neither the passage of this law nor the implementation of these initiatives will bring an immediate end to the current difficulties.”

Mr. Paulson will play host to finance ministers and central bankers from the Group of 7 countries this Friday. But he cautioned against expecting a grand plan to emerge from the gathering.

More likely, the participants will compare notes about the measures they are adopting in their own countries. David H. McCormick, Treasury’s under secretary for international affairs, said there was no “one size fits all” remedy for the crisis, though countries were cooperating through the coordinated cuts in interest rates, with guarantees on bank deposits and in regulations.

At the Federal Reserve in Washington, officials insisted they had not run out of options and made it clear they were willing to do whatever it took to shore up the economy.

Fed officials increasingly talk about the challenge they face with a phrase that President Bush used in another context: “regime change.”

This regime change refers to a change in the economic environment so radical that, at least for a while, economic policy makers will need to suspend what are usually sacred principles: minimal interference in free markets, gradualism and predictability.

In the last month, both the Treasury and the Fed took extraordinary steps toward nationalizing three of the biggest financial companies in the country. Last month, the Treasury took over Fannie Mae and Freddie Mac, the giant government-sponsored mortgage-finance companies that were on the brink of collapse. A week later, the Fed took control of the American International Group, the failing insurance conglomerate, in exchange for agreeing to lend it $85 billion.

On Wednesday, the Federal Reserve announced that it would lend A.I.G. an additional $37.8 billion.

But neither the individual corporate bailouts nor the Fed’s enormous emergency lending programs — including up to $900 billion through its Term Auction Facility for banks — have succeeded in jump-starting the credit markets.

“The core problem is that the smart people are realizing that the banking system is broken,” said Carl B. Weinberg, chief economist at High Frequency Economics.“Nobody knows who is holding the tainted assets, how much they have and how it affects their balance sheets. So nobody is willing to believe that anybody else isn’t insolvent, until it’s proven otherwise.”

A NYT report begins with a quote:“Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” — Alan Greenspan in 2004

George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential“hydrogen bombs.”

And Warren E. Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

One prominent financial figure, however, has long thought otherwise. And his views held the greatest sway in debates about the regulation and use of derivatives — exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, the former Federal Reserve Chairman Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street. “What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,” Mr. Greenspan told the Senate Banking Committee in 2003. “We think it would be a mistake” to more deeply regulate the contracts, he added.

Today, with the world caught in an economic tempest that Mr. Greenspan recently described as “the type of wrenching financial crisis that comes along only once in a century,” his faith in derivatives remains unshaken.

The problem is not that the contracts failed, he says. Rather, the people using them got greedy. A lack of integrity spawned the crisis, he argued in a speech a week ago at Georgetown University, intimating that those peddling derivatives were not as reliable as “the pharmacist who fills the prescription ordered by our physician.”

But others hold a starkly different view of how global markets unwound, and the role that Mr. Greenspan played in setting up this unrest.

“Clearly, derivatives are a centerpiece of the crisis, and he was the leading proponent of the deregulation of derivatives,” said Frank Partnoy, a law professor at the University of San Diego and an expert on financial regulation.

The derivatives market is $531 trillion, up from $106 trillion in 2002 and a relative pittance just two decades ago. Theoretically intended to limit risk and ward off financial problems, the contracts instead have stoked uncertainty and actually spread risk amid doubts about how companies value them.

If Mr. Greenspan had acted differently during his tenure as Federal Reserve chairman from 1987 to 2006, many economists say, the current crisis might have been averted or muted.

Over the years, Mr. Greenspan helped enable an ambitious American experiment in letting market forces run free. Now, the nation is confronting the consequences.

Derivatives were created to soften — or in the argot of Wall Street, “hedge” — investment losses. For example, some of the contracts protect debt holders against losses on mortgage securities. (Their name comes from the fact that their value “derives” from underlying assets like stocks, bonds and commodities.) Many individuals own a common derivative: the insurance contract on their homes.

On a grander scale, such contracts allow financial services firms and corporations to take more complex risks that they might otherwise avoid — for example, issuing more mortgages or corporate debt. And the contracts can be traded, further limiting risk but also increasing the number of parties exposed if problems occur.

Throughout the 1990s, some argued that derivatives had become so vast, intertwined and inscrutable that they required federal oversight to protect the financial system. In meetings with federal officials, celebrated appearances on Capitol Hill and heavily attended speeches, Mr. Greenspan banked on the good will of Wall Street to self-regulate as he fended off restrictions.

Ever since housing began to collapse, Mr. Greenspan’s record has been up for revision. Economists from across the ideological spectrum have criticized his decision to let the nation’s real estate market continue to boom with cheap credit, courtesy of low interest rates, rather than snuffing out price increases with higher rates. Others have criticized Mr. Greenspan for not disciplining institutions that lent indiscriminately.

But whatever history ends up saying about those decisions, Mr. Greenspan’s legacy may ultimately rest on a more deeply embedded and much less scrutinized phenomenon: the spectacular boom and calamitous bust in derivatives trading.

Faith in the System

Some analysts say it is unfair to blame Mr. Greenspan because the crisis is so sprawling. “The notion that Greenspan could have generated a totally different outcome is naïve,” said Robert E. Hall, an economist at the conservative Hoover Institution, a research group at Stanford.

Mr. Greenspan declined requests for an interview. His spokeswoman referred questions about his record to his memoir, “The Age of Turbulence,” in which he outlines his beliefs.

“It seems superfluous to constrain trading in some of the newer derivatives and other innovative financial contracts of the past decade,”Mr. Greenspan writes.“The worst have failed; investors no longer fund them and are not likely to in the future.”

In his Georgetown speech, he entertained no talk of regulation, describing the financial turmoil as the failure of Wall Street to behave honorably.

“In a market system based on trust, reputation has a significant economic value,”Mr. Greenspan told the audience. “I am therefore distressed at how far we have let concerns for reputation slip in recent years.”

As the long-serving chairman of the Fed, the nation’s most powerful economic policy maker, Mr. Greenspan preached the transcendent, wealth-creating powers of the market.

A professed libertarian, he counted among his formative influences the novelist Ayn Rand, who portrayed collective power as an evil force set against the enlightened self-interest of individuals. In turn, he showed a resolute faith that those participating in financial markets would act responsibly.

An examination of more than two decades of Mr. Greenspan’s record on financial regulation and derivatives in particular reveals the degree to which he tethered the health of the nation’s economy to that faith.

As the nascent derivatives market took hold in the early 1990s, and in subsequent years, critics denounced an absence of rules forcing institutions to disclose their positions and set aside funds as a reserve against bad bets.

Time and again, Mr. Greenspan — a revered figure affectionately nicknamed the Oracle — proclaimed that risks could be handled by the markets themselves.

“Proposals to bring even minimalist regulation were basically rebuffed by Greenspan and various people in the Treasury,” recalled Alan S. Blinder, a former Federal Reserve board member and an economist at Princeton University. “I think of him as consistently cheerleading on derivatives.”

Arthur Levitt Jr., a former chairman of the Securities and Exchange Commission, says Mr. Greenspan opposes regulating derivatives because of a fundamental disdain for government.

Mr. Levitt said that Mr. Greenspan’s authority and grasp of global finance consistently persuaded less financially sophisticated lawmakers to follow his lead.

“I always felt that the titans of our legislature didn’t want to reveal their own inability to understand some of the concepts that Mr. Greenspan was setting forth,” Mr. Levitt said. “I don’t recall anyone ever saying, ‘What do you mean by that, Alan?’ ”

Still, over a long stretch of time, some did pose questions. In 1992, Edward J. Markey, a Democrat from Massachusetts who led the House subcommittee on telecommunications and finance, asked what was then the General Accounting Office to study derivatives risks.

Two years later, the office released its report, identifying “significant gaps and weaknesses” in the regulatory oversight of derivatives.

“The sudden failure or abrupt withdrawal from trading of any of these large U.S. dealers could cause liquidity problems in the markets and could also pose risks to others, including federally insured banks and the financial system as a whole,”Charles A. Bowsher, head of the accounting office, said when he testified before Mr. Markey’s committee in 1994. “In some cases intervention has and could result in a financial bailout paid for or guaranteed by taxpayers.”

In his testimony at the time, Mr. Greenspan was reassuring. “Risks in financial markets, including derivatives markets, are being regulated by private parties,” he said.

“There is nothing involved in federal regulation per se which makes it superior to market regulation.”

Mr. Greenspan warned that derivatives could amplify crises because they tied together the fortunes of many seemingly independent institutions. “The very efficiency that is involved here means that if a crisis were to occur, that that crisis is transmitted at a far faster pace and with some greater virulence,” he said.

But he called that possibility “extremely remote,” adding that “risk is part of life.”

Later that year, Mr. Markey introduced a bill requiring greater derivatives regulation. It never passed.

Resistance to Warnings

In 1997, the Commodity Futures Trading Commission, a federal agency that regulates options and futures trading, began exploring derivatives regulation. The commission, then led by a lawyer named Brooksley E. Born, invited comments about how best to oversee certain derivatives.

Ms. Born was concerned that unfettered, opaque trading could “threaten our regulated markets or, indeed, our economy without any federal agency knowing about it,” she said in Congressional testimony. She called for greater disclosure of trades and reserves to cushion against losses.

Ms. Born’s views incited fierce opposition from Mr. Greenspan and Robert E. Rubin, the Treasury secretary then. Treasury lawyers concluded that merely discussing new rules threatened the derivatives market. Mr. Greenspan warned that too many rules would damage Wall Street, prompting traders to take their business overseas.

“Greenspan told Brooksley that she essentially didn’t know what she was doing and she’d cause a financial crisis,”said Michael Greenberger, who was a senior director at the commission.“Brooksley was this woman who was not playing tennis with these guys and not having lunch with these guys. There was a little bit of the feeling that this woman was not of Wall Street.”

Ms. Born declined to comment. Mr. Rubin, now a senior executive at the banking giant Citigroup, says that he favored regulating derivatives — particularly increasing potential loss reserves — but that he saw no way of doing so while he was running the Treasury.

“All of the forces in the system were arrayed against it,”he said. “The industry certainly didn’t want any increase in these requirements. There was no potential for mobilizing public opinion.”

Mr. Greenberger asserts that the political climate would have been different had Mr. Rubin called for regulation.

In early 1998, Mr. Rubin’s deputy, Lawrence H. Summers, called Ms. Born and chastised her for taking steps he said would lead to a financial crisis, according to Mr. Greenberger. Mr. Summers said he could not recall the conversation but agreed with Mr. Greenspan and Mr. Rubin that Ms. Born’s proposal was “highly problematic.”

On April 21, 1998, senior federal financial regulators convened in a wood-paneled conference room at the Treasury to discuss Ms. Born’s proposal. Mr. Rubin and Mr. Greenspan implored her to reconsider, according to both Mr. Greenberger and Mr. Levitt.

Ms. Born pushed ahead. On June 5, 1998, Mr. Greenspan, Mr. Rubin and Mr. Levitt called on Congress to prevent Ms. Born from acting until more senior regulators developed their own recommendations. Mr. Levitt says he now regrets that decision. Mr. Greenspan and Mr. Rubin were “joined at the hip on this,” he said. “They were certainly very fiercely opposed to this and persuaded me that this would cause chaos.”

Ms. Born soon gained a potent example. In the fall of 1998, the hedge fund Long Term Capital Management nearly collapsed, dragged down by disastrous bets on, among other things, derivatives. More than a dozen banks pooled $3.6 billion for a private rescue to prevent the fund from slipping into bankruptcy and endangering other firms.

Despite that event, Congress froze the Commodity Futures Trading Commission’s regulatory authority for six months. The following year, Ms. Born departed.

In November 1999, senior regulators — including Mr. Greenspan and Mr. Rubin — recommended that Congress permanently strip the C.F.T.C. of regulatory authority over derivatives.

Mr. Greenspan, according to lawmakers, then used his prestige to make sure Congress followed through. “Alan was held in very high regard,” said Jim Leach, an Iowa Republican who led the House Banking and Financial Services Committee at the time. “You’ve got an area of judgment in which members of Congress have nonexistent expertise.”

As the stock market roared forward on the heels of a historic bull market, the dominant view was that the good times largely stemmed from Mr. Greenspan’s steady hand at the Fed.

“You will go down as the greatest chairman in the history of the Federal Reserve Bank,” declared Senator Phil Gramm, the Texas Republican who was chairman of the Senate Banking Committee when Mr. Greenspan appeared there in February 1999.

Mr. Greenspan’s credentials and confidence reinforced his reputation — helping him to persuade Congress to repeal Depression-era laws that separated commercial and investment banking in order to reduce overall risk in the financial system.

“He had a way of speaking that made you think he knew exactly what he was talking about at all times,”said Senator Tom Harkin, a Democrat from Iowa. “He was able to say things in a way that made people not want to question him on anything, like he knew it all. He was the Oracle, and who were you to question him?”

In 2000, Mr. Harkin asked what might happen if Congress weakened the C.F.T.C.’s authority.

“If you have this exclusion and something unforeseen happens, who does something about it?”he asked Mr. Greenspan in a hearing.

Mr. Greenspan said that Wall Street could be trusted. “There is a very fundamental trade-off of what type of economy you wish to have,” he said. “You can have huge amounts of regulation and I will guarantee nothing will go wrong, but nothing will go right either,” he said.

Later that year, at a Congressional hearing on the merger boom, he argued that Wall Street had tamed risk.

“Aren’t you concerned with such a growing concentration of wealth that if one of these huge institutions fails that it will have a horrendous impact on the national and global economy?” asked Representative Bernard Sanders, an independent from Vermont.

“No, I’m not,”Mr. Greenspan replied. “I believe that the general growth in large institutions have occurred in the context of an underlying structure of markets in which many of the larger risks are dramatically — I should say, fully — hedged.”

The House overwhelmingly passed the bill that kept derivatives clear of C.F.T.C. oversight. Senator Gramm attached a rider limiting the C.F.T.C.’s authority to an 11,000-page appropriations bill. The Senate passed it. President Clinton signed it into law.

Pressing Forward

Still, savvy investors like Mr. Buffett continued to raise alarms about derivatives, as he did in 2003, in his annual letter to shareholders of his company, Berkshire Hathaway.

“Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers,”he wrote. “The troubles of one could quickly infect the others.”

But business continued.

And when Mr. Greenspan began to hear of a housing bubble, he dismissed the threat. Wall Street was using derivatives, he said in a 2004 speech, to share risks with other firms.

Shared risk has since evolved from a source of comfort into a virus. As the housing crisis grew and mortgages went bad, derivatives actually magnified the downturn.

The Wall Street debacle that swallowed firms like Bear Stearns and Lehman Brothers, and imperiled the insurance giant American International Group, has been driven by the fact that they and their customers were linked to one another by derivatives.

In recent months, as the financial crisis has gathered momentum, Mr. Greenspan’s public appearances have become less frequent.

His memoir was released in the middle of 2007, as the disaster was unfolding, and his book tour suddenly became a referendum on his policies. When the paperback version came out this year, Mr. Greenspan wrote an epilogue that offers a rebuttal of sorts.

“Risk management can never achieve perfection,”he wrote. The villains, he wrote, were the bankers whose self-interest he had once bet upon.

“They gambled that they could keep adding to their risky positions and still sell them out before the deluge,”he wrote. “Most were wrong.”

No federal intervention was marshaled to try to stop them, but Mr. Greenspan has no regrets.

“Governments and central banks,”he wrote,“could not have altered the course of the boom.”