THE CENTRAL BANK SEEMS TO BE WADING FURTHER INTO SHARK-INFESTED WATERS BY THE DAY as it looks to shore up a blighted credit market that threatens to prolong the pain for a U.S. economy that many analysts fear is already in recession. The Fed had little choice but to act after investment bank Bear Stearns became the biggest casualty to date of the seven-month-long credit crisis, analysts said.

THE FIRM AGREED TO A $2 PER SHARE BUYOUT FROM JPMORGAN CHASE & CO ON SUNDAY. ITS SHARES HAD TRADED AROUND $60 ON THURSDAY AND $160 LAST APRIL. In a surprise move, also on Sunday, the central bank made an emergency quarter-percentage point cut to the discount rate that it charges on loans to banks, and announced a central role in the Bear Stearns deal. The discount rate was dropped to 3.25 percent.

ANALYSTS SAID RISKS TO THE U.S. FINANCIAL SYSTEM APPROACHING THOSE SEEN DURING THE GREAT DEPRESSION FORCED THE FED'S HAND. "The U.S. financial system probably is under more strain now than for at least several decades. Let's hope (the Fed's) determined efforts eventually get 'traction,'" said Rory Robertson, analyst at Macquarie Bank in Sydney.

In New York the Dow Jones Industrials tumbled 194 points, more than 1.5%, in early trading before recovering. London's FTSE 100 index was down 2.7%, in Paris the Cac 40 slumped 2.9% and Frankfurt's Dax fell 4.1%. European banks have been hit. UBS plunged 13.1%, Societe Generale fell 9.1% and Commerzbank was down 7.9%. Asian stocks also fell, with Tokyo's Nikkei average closing 3.7% lower and Hong Kong's Hang Seng slumping 5.2%. In Mumbai, the Sensex was down 6.5%. Investors are worried that the collapse of Bear Stearns, one of Wall Street's biggest names, is a sign that the credit crunch is getting worse and lending might seize up.

CENTRAL BANKS HAVE BEEN TRYING TO RESTORE SOME CONFIDENCE TO THE FINANCIAL SYSTEM. The Bank of England on Monday made an extra £5bn ($10bn) available for banks to borrow - and found that THE FUNDS WERE FIVE TIMES OVER-SUBSCRIBED. On Sunday, the US Federal Reserve reduced its discount rate - the interest rate at which banks lend to each other - from 3.5% to 3.25% and offered to buy up the assets of other troubled banks. THE FED IS EXPECTED TO LOWER ITS GENERAL INTEREST RATES ON TUESDAY BY UP TO 1%.

"DESPERATE TIMES NEED DESPERATE MEASURES. The Federal Reserve is doing what it takes to restore stability and if it means cutting the discount rate on a Sunday night in the US, then so be it," said Craig James, Chief Equities Economist at Commsec in Sydney. Investors' confidence has been hit by the problems at BEAR STEARNS. The investment bank was forced to seek emergency funding from the US Federal Reserve last week and WAS SOLD OVER THE WEEKEND TO JP MORGAN CHASE FOR A TINY FRACTION OF ITS EARLIER VALUE.

The bank got into trouble when other banks refused to lend it money over fears that it had too many bad debts due to the sub-prime mortgage crisis. THE FED HAS AGREED TO TAKE OVER UP TO $30BN OF BEAR STEARNS' ASSETS, REMOVING THE RISK FOR JP MORGAN.

Worries about the credit crisis and the health of the banking industry also undermined the dollar. It fell to 95.72 yen, its lowest level in more than 12 years. The euro hit a record against the dollar, buying $1.5903. The weak dollar boosted commodities, with oil rising to another record, light sweet crude traded at $111.80 before falling back. The dollar is also falling because of the expectation that the US Fed will cut interest rates further, making it less attractive to hold dollars as opposed to other currencies.

It follows years of the opposite, known - unsurprisingly - as leveraging. In the leveraging era, THE WORLD'S BANKS AND OTHER GREAT LENDERS LENT FAR TOO MUCH - to businesses, to various financial speculators, such as hedge funds and private-equity investors, to homeowners, to shoppers, and even to each other. A GREAT BUBBLE OF DEBT WAS CREATED. That bubble was punctured last summer, when lenders suddenly realised that some of their loans - the sub-prime ones to US homeowners with poor credit histories - weren't ever going to be repaid in full.

Since then lenders have been asking for their money back from those perceived to be a lousy credit prospect - and pushing up the cost of credit for almost everyone. This de-leveraging process, which has gone in fits and starts, moved up a gear in the past fortnight, as lenders became increasingly fearful about the outlook for the biggest economy in the world, that of the US. Borrowers dependent on certain parts of the US economy, especially its ailing housing market, are increasingly perceived as bad risks.

That's what caused the crises last week at Carlyle Capital Corporation and Bear Stearns. IN THE COMING DAYS YOU CAN EXPECT MORE BAD NEWS FROM FINANCIAL FIRMS WHOSE SOURCES OF FINANCE ARE DRYING UP.

So is there nothing that governments can do to minimise the dislocation caused by de-leveraging? Well in a way our own government has actually been encouraging de-leveraging, by supporting the plan of Northern Rock - the nationalised bank - to shrink its balance sheet by around £60bn. The impact of that is to cut the amount of mortgage finance available in the UK by up to a fifth. AS FOR CENTRAL BANKS, THEY INCREASINGLY LOOK NOT LIKE SUPERMEN BUT SEVEN-STONE WEAKLINGS.

Worse still, perhaps, the cost of longer-term loans is being pushed up, because lenders and investors believe THE FED IS DEVALUING THE DOLLAR AND STOKING UP INFLATION. As the distinguished economist Joseph Stiglitz has observed, much of central banks' evasive action looks as effective as pushing on a piece of string.

Meeting over the weekend, Fed Chairman Ben Bernanke cut the so-called discount rate at which it is prepared to lend to banks to 3.25pc and said it will lend more to the 20 big banks that make the market for US government debt. Coming a day before the Fed was scheduled to meet on interest rates, the action signals that THE CENTRAL BANK IS INCREASINGLY FEARFUL OF AN IMPLOSION IN MARKETS.

Vincent Reinhart, a former director at the Fed, told Bloomberg News THAT THE MOVE'S "GOT TO TELL YOU THE ECONOMY IS IN A PRETTY PRECARIOUS STATE." The news sent shares in Asia tumbling, with Japan's Nikkei 225 down more than 3pc, Hong Kong's Hang Seng index off more than 4pc and THE DOLLAR CRASHING TO A NEW LOW AGAINST THE EURO.

The greenback, which has been battered so far this year, also fell against the yen and reached parity with the Swiss Franc. David Goldman, a strategist at Asteri Capital in New York, said: "SOMETHING IS SYSTEMICALLY VERY WRONG AND WE'RE AT A VERY DANGEROUS MOMENT." JP Morgan Chase last night sealed the eleventh hour deal to buy stricken investment bank Bear Stearns at a bargain price after the Federal Reserve agreed to provide a $30bn funding lifeline.

A link between hyperactive behaviour and the substances used to colour sweets, drinks and medicines was established in a British study published last year. University of Southampton researchers warned the additives "damage the psychological health" of children. The study was funded and designed by scientists from Britain's Food Standards Agency.

However, the European Food Safety Authority has decided flaws in the way the research was drawn up mean it does not offer definitive evidence of a risk to the general population. This means there is no legal reason for manufacturers to remove the suspect additives. Products known to include the additives range from Cadbury Creme Eggs to Fanta and Calpol. The Southampton research team is adamant it identified "significant adverse effects" among healthy children given drinks containing a cocktail of additives. The campaigning food and health group, Sustain, condemned the European authority's stance and called on Britain to impose a unilateral ban. Campaigns director Richard Watts said: "No one now disputes these artificial additives pose a threat to children's health and well being.

The additives linked to hyperactive behaviour are the colours Tartrazine (E102); Quinoline Yellow (E104); Sunset Yellow (E110); Carmoisine (E122); Ponceau 4R (E124); and Allura Red (E129). The preservative Sodium Benzoate(E211) is also implicated.

"ENOUGH WITH THE SLAUGHTERS. ENOUGH WITH THE VIOLENCE. ENOUGH WITH THE HATRED IN IRAQ!" Benedict said to applause at the end of Palm Sunday Mass in St. Peter's Square. On Thursday, the body of Archbishop Paulos Faraj Rahho was found near the northern Iraqi city of Mosul, from where he had been abducted on Feb. 29. No one has claimed responsibility, but al-Qaida retains its last urban stronghold in the area.

BENEDICT HAS CALLED RAHHO'S DEATH AN "INHUMAN ACT OF VIOLENCE" THAT OFFENDED HUMAN DIGNITY. The Vatican strongly opposed the U.S.-led invasion of Iraq. In its aftermath, Benedict has frequently criticized attacks against Iraqi Christians by Islamic extremists. Last year, he urged U.S. President George W. Bush to keep the safety of Iraqi Christians in mind.

Benedict is due to preside over a memorial service at the Vatican on Monday in honor of Rahho. Typically, the pope only presides over such services when a cardinal dies.

"Everyone in the family has been ordered to take a shower immediately after they've been out," said Wong, a 33-year-old father of two and insurance agent at Prudential Plc. "It reminds me of SARS. We're taking the same precautionary measures." On Thursday, Hong Kong shut all kindergartens and primary schools, affecting more than 500,000 children. The schools will remain closed through March 28, the end of a scheduled Easter holiday break. In 2003, severe acute respiratory syndrome decimated Hong Kong's economy and wrecked the tourism industry. People hid behind surgical masks and locked themselves inside their homes, leaving once bustling streets deserted. The territorial government was criticized for responding too slowly to SARS. This time it isn't taking chances.

The WHO estimates that the flu causes 250,000 to 500,000 deaths a year worldwide. Several strains of flu and other common respiratory viruses are circulating in the city, said Susan Chiu, associate professor at the University of Hong Kong's department of pediatrics and adolescent medicine. In addition, the disease spreads easily in a crowded city like Hong Kong, with almost 7 million people. "When people live, work and play in close proximity to each other, the chances of transmitting a virus are higher, and Hong Kong is certainly a densely populated city," said Gregory Hartl, a WHO spokesman in Geneva.

THOSE CHEMICALS HELP FEED CROPS ON LAND, BUT AS THEY BUILD UP IN THE STILL, WARM WATERS OF THE GULF, THEY IN TURN FEED EXCESS GROWTH OF ALGAE. When algae dies and decomposes, the process sucks much of the oxygen out of the water. A sea without oxygen is little different from the surface of the moon - nothing can live there. Fish and other sea life flee, or suffocate. That's the Gulf's dead zone, and LAST YEAR IT REACHED 7,915 SQ. MI (20,500 SQ. KM) - NEARLY THE SIZE OF NEW JERSEY. Worse, the dead zone is getting bigger, with last year's bloom the third largest in history.

THAT'S CAUSE FOR CONCERN AS AMERICAN FARMERS PLANT INCREASING AMOUNTS OF CORN, A CROP THAT REQUIRES HEAVY FERTILIZER, TO MEET THE GROWING GLOBAL DEMAND FOR GRAIN AND TO SUPPLY AMERICA'S CORN-HUNGRY ETHANOL MAKERS. According to a separate study published by University of British Columbia and University of Wisconsin researchers this week in the Proceedings of the National Journal of Sciences, ethanol is directly linked to the Gulf of Mexico dead zone. If farmers produced enough corn to meet the congressional goal of producing 15 billion gallons of ethanol by 2022, nitrogen runoff into the Gulf would increase by 10% to 19%, the study's authors reported, and shrinking the dead zone would be "practically impossible."

Mulholland backs that conclusion. Our inland waterways can barely handle the nitrogen fertilizer we're already using in order to grow record yields of corn and other crops. Truly ramping up biofuel production - unless it can be done in a way that uses much less fertilizer, perhaps with experimental techniques that harness plant waste matter instead of food crops - might overwhelm that system. "We have to be very careful about biofuels in terms of what kind of crops we grow and where we grow them," says Mulholland. "The great expansion of corn could be a real problem." IT WOULD BE A POOR TRADEOFF IF WE KILLED THE SEAS TO FUEL OUR CARS.

A quick tally of the record of civil liberties erosion in the United States since 9/11 suggests that the majority of Americans are ready to trade diminished privacy, and protection from search and seizure, in exchange for the promise of increased protection of their physical security. Polling consistently supports that conclusion, and Congress has largely behaved accordingly, granting increased leeway to law enforcement and the intelligence community to spy and collect data on Americans. Even when the White House, the FBI or the intelligence agencies have acted outside of laws protecting those rights - such as the Foreign Intelligence Surveillance Act - the public has by and large shrugged and, through their elected representatives, suggested changing the laws to accommodate activities that may be in breach of them.

Civil libertarians are in a state of despair. "People don't realize how damaging it is to a democratic society to allow the government to warehouse information about innocent Americans," says Mike German, national security counsel at the American Civil Liberties Union. For now, however, civil libertarians will have to continue to argue that THE DANGER LIES NOT IN HOW THE GOVERNMENT'S EXPANDED POWERS ARE BEING USED NOW, BUT HOW THEY MIGHT BE USED IN THE FUTURE. So far, that argument hasn't convinced the people.

Western powers embroiled in a deepening standoff with Tehran over its disputed nuclear plans condemned Friday's election as unfair after many reformist politicians, the hardline president's staunchest critics, were barred from running. But even though pro-reformers will only have a minority in the new legislature of world's fourth-largest oil-producer, analysts say they could team up with more moderate conservatives who have voiced concern about Ahmadinejad's economic policies blamed for surging inflation.

Iranian officials have hailed the election as a victory over the United States, the Islamic Republic's arch-foe, which on the day of voting said the result was "cooked". "More than 70 percent of parliament seats belong to principlists," Shahabeddin Sadr, projected to win a seat for the conservatives in Tehran, told Reuters. "It is a great honor that people put their trust in us again." But the European Union, whose main members agree with U.S. suspicions that Iran is making nuclear weapons, said the election was "neither fair nor free".

Bernanke and the four Fed governors voted yesterday to become creditors to Bear Stearns Cos., a securities firm that isn't a bank, by invoking a law that hasn't been used since the 1960s. Three days earlier, the Fed said it would swap Treasury notes on its balance sheet for privately issued mortgage-backed securities held by Wall Street firms. "It's a re-drawing of the relationship of the Federal Reserve with the rest of the financial system," said Vincent Reinhart, former director of the Division of Monetary Affairs at the Board. Risks of so-called moral hazard, where firms will now come to count on bailouts by a federal agency, "are considerable," he said.

Former Treasury Secretary Lawrence Summers said THE FED IS TRYING TO NAVIGATE THROUGH A ONCE-IN-A-GENERATION FINANCIAL AND ECONOMIC STORM. Panic selling is lowering the value of stocks and bonds, spurring more selling. Unemployment is rising, reducing incomes and spending, and falling asset prices -- including homes -- are leading to a contraction in credit.

"That three-way combination feels like something we have not seen in this country in a very, very long time," Summers, now a professor at Harvard University, said in a Bloomberg Television interview in Washington. "It's a near-certainty we are in a recession and there is a real prospect that it could be a serious one without strong policy action. THE NAME OF THE GAME IS PREVENTING DISASTER," said NYU's Gertler. "BY LETTING ONE HOUSE BURN DOWN, YOU MIGHT HAVE THE WHOLE NEIGHBORHOOD BURN DOWN. YOU WANT TO AVOID THAT."

THERE ARE FOUR PROBLEMS WITH ALL OF THIS. The first is that bad news overwhelms good. The collapse of one of the Carlyle Group's funds, and rumours of the impending demise of Bear Stearns, trumped Bernanke's announcement.

THE SECOND PROBLEM is that the Fed is a tiny player in the mortgage market. The $200 billion of mortgages Bernanke will be taking on are a drop in the ocean that is the $11 trillion mortgage market. And HE HAS ONLY ANOTHER $400 BILLION IN TREASURY NOTES TO PLAY WITH - if he is willing to have these mortgages make up his entire stock of assets.

THIRD, so long as house prices continue falling, the value of mortgages will continue falling. The Fed can't do much to stop that decline, and WE SEEM TO HAVE A LONG WAY TO GO before house prices reach some bottom, unsold houses are absorbed, and the market turns up.

FINALLY, the Fed might be fighting yesterday's war, when the problem seemed to be a liquidity crisis. The Fed first lowered interest rates to facilitate borrowing. No luck; long-term rates were immovable. It then made funds available to credit markets for very short periods on attractive terms. No luck; credit markets remained frozen. So now we have the offer of $200 billion of high-quality assets to replace those of lesser quality. TUNE IN AFTER A FEW WEEKS TO FIND OUT IF THIS HAS SIGNIFICANTLY EASED CREDIT MARKETS, OR MERELY CREATED A BIT OF EUPHORIA IN STOCK MARKETS.

Meanwhile, THE FED'S CRITICS ARE SAYING THAT THE ENEMY IS NO LONGER LIQUIDITY, BUT THE THREAT OF INSOLVENCY. We have already had billions in write-offs, and hundreds of billions more of such "marking to market" is coming. So steep will these write-downs be that the banks will find they are bust - what they owe to depositors and creditors exceeds the value of their shrivelled assets. UNLESS THEY CAN GET MORE CAPITAL, SAY THE DOOM-MONGERS, THEY WILL HAVE TO SHUT THEIR TELLERS' WINDOWS.

The Palace's blunt retort caused consternation in Downing Street, where a spokeswoman said: "You don't have anything on the record, do you?", before calling back to say that it was a matter for Lord Goldsmith and the Ministry of Justice. ROYAL INSIDERS ALSO ACCUSED LORD GOLDSMITH OF FALSELY IMPLYING THAT HIS REVIEW HAD THE FULL AUTHORITY OF THE ROYALS.

Lord Goldsmith, who left the Government last summer, argued that asking school leavers to pledge an oath of allegiance at passing-out ceremonies would "promote a sense of shared belonging" and "better integrate newcomers to our society". But he infuriated traditionalists by suggesting the HISTORIC OATH TO THE CROWN, as already taken by new British citizens, MIGHT BE REPLACED BY A PLEDGE OF COMMITMENT TO THE COUNTRY or a statement on the rights and responsibilities of citizens.

Critics condemned the oath AS BEING MORE APPROPRIATE FOR A REPUBLIC, such as France or America, than a monarchy. For centuries, members of both Houses of Parliament have been required to take an oath, swearing TO 'BEAR TRUE ALLEGIANCE' TO THE QUEEN AND HER SUCCESSORS. Oaths are also sworn by all new recruits to the British Army and the Royal Air Force, and have become a central part of citizenship ceremonies.

The current holder of the 658-year-old post, Lieutenant General Sir Michael Willcocks, is being forced to quit the job two years earlier than expected - and his successor will have only half his powers. The job will still include ceremonial responsibilities, but day-to-day running of the Lords' offices will be switched to a corporate-style "director general of facilities".

The decision has led to a behind-the-scenes battle - with claims it is revenge for Sir Michael's row with Tony Blair over the Queen Mother's funeral in 2002. Mr Blair made an official complaint after The Mail on Sunday revealed he tried to steal the limelight at the Queen Mother's lying-in-state. He was forced to climb down after Black Rod said the story was true.

A Conservative peer said: "LABOUR HAVE NO RESPECT FOR TRADITION AND WANT TO TURN THE LORDS INTO LITTLE MORE THAN A COUNTY COUNCIL." The post of Black Rod was created in 1350. He is responsible for security at the Lords and the State Opening of Parliament, when he bangs on the Commons door three times with his mace to summon MPs to hear the Queen's Speech.

The Fed meeting is expected to result in yet another cut in the target Fed Funds rate; a half-percentage point cut would take the rate to 2.50%, the lowest level since February 2005. The FOMC continues to take liquidity actions to deal with credit market deterioration, by reducing rates and providing new sources of funds to struggling depositary institutions and investment banks.

While the stock market jumped after the Federal Reserve said it would help primary dealers (investment banks), it gave back some of the gains one day later, and then reacted negatively on news of emergency actions to deal with liquidity issues at Bear Stearns. The focus shifted to liquidity since financial institutions are generally more vulnerable to liquidity pressures than credit pressures.

Those events lead directly to this coming Tuesday's meeting which, before Friday's emergency Federal Reserve action, had already been deemed critical.