NY airports and subway reopen, limited East Coast service (Reuters)

WASHINGTON (Reuters) – New York-area airports reopened on Monday as U.S. airlines gradually restored more flights to their operations throughout the Northeast that were halted by Hurricane Irene.

New York subways also resumed service, gradually at first, after weekend closure, as did passenger rail Amtrak on the Northeast Corridor between Washington and Philadelphia.

Amtrak service north of Philadelphia was canceled due to flooding, track debris and continued electrical power problems, the railroad said. All Northeast service was shut down on Sunday.

Commuter rail service from Washington to Boston was uneven as most lines struggled to offer full or even partial schedules due to flooding and power outages.

Airlines would need a day to reposition aircraft flown out of the region ahead of the storm, leaving Tuesday as their target for returning normal service to the storm-struck region.

John F Kennedy and LaGuardia in New York and Newark in New Jersey -- biggest U.S. aviation hub with 100 million passengers annually -- were closed on Saturday as the storm bore down on the mid-Atlantic.

The three airports handle about 6,000 flights per day total.

JFK and Newark opened to arrivals at 6 a.m. EDT and will begin handling departures at noon. LaGuardia would open to both arrivals and departures at 7 a.m., the Port Authority of New York and New Jersey said.

Airports in Philadelphia, Washington, and Boston were all open as well.

Airlines began winding down schedules on Friday in advance of Irene. They canceled more than 12,500 flights, including 1,300 on Monday, according to the online tracking service Flightaware.com.

Delta Air Lines include US Airways, American Airlines, United Airlines, and JetBlue Airways were most affected.

Some repositioning flights heading to open airports carried passengers while others were empty. Carriers had to reassemble flight crews and ground staff.

(Reporting by John Crawley; Editing by Derek Caney)

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6 years after Katrina, Lower 9th Ward still bleak (AP)

NEW ORLEANS – In New Orleans' Lower 9th Ward, the grasses grow taller than people and street after street is scarred by empty decaying houses, the lives that once played out inside their walls hardly imaginable now.

St. Claude Avenue, the once moderately busy commercial thoroughfare, looks like the main street of a railroad town bypassed long ago by the interstate. Most buildings are shuttered, "For Sale" signs stuck on their sides. There aren't many buyers. And the businesses that are open are mostly corner stores where folks buy pricey cigarettes, liquor and packaged food.

Six years after Hurricane Katrina slammed into the Gulf Coast, the New Orleans neighborhood that was hardest hit still looks like a ghost town. Redevelopment has been slow in coming, and the neighborhood has just 5,500 residents — one-third its pre-Katrina population.

But politicians, investors and celebrities continue to promise a better future. City leaders recently announced plans to rebuild a high school and pave the neighborhood's roads. And actor Wendell Pierce, who stars in an HBO series about New Orleans, is backing a new supermarket for an area that hasn't had one in 20 years.

While residents welcome the news, they remain skeptical. Promises have been dashed too many times.

"Look around you at the Katrina houses!" said Robert Stark, a 54-year-old disabled veteran, sweating in stifling August heat on a porch looking onto Flood Street. He waved at two vacant crumbling houses, like so many that dot the Lower 9th Ward.

He shook his head and added: "Look at the grass." In many lots, fields of high grass grow in place of houses. "There ain't nothing new down here. Nothing new ... nothing new."

That's not completely true.

Since Katrina, the predominantly black neighborhood has been the site of rebuilding by environmental groups and thousands of volunteers. There's now an eco-friendly community center and a cluster of more than 50 modernistic houses, built with the help of actor Brad Pitt. It sits near where the floodwall toppled on Aug. 29, 2005, killing dozens of people and swamping thousands of homes with floodwaters that reached rooftops.

Also, a charter school has been rebuilt and many of the shotgun-style homes and Creole cottages in the older part of the neighborhood, Holy Cross, are a display of bright New Orleans colors and cheery yards.

But residents of the Lower 9th Ward, downriver from the French Quarter, nevertheless feel left behind.

Other parts of New Orleans have flourished thanks to federal recovery dollars that have brought new businesses, schools and streets.

Entrepreneurship and civic engagement is up, city schools have shown test-score gains and the middle class is growing, according to a new report by the Greater New Orleans Community Data Center, a group tracking the city's recovery. Even crime — still nearly twice the national average — is being held in check and falling, the report said. Meanwhile, the Army Corps of Engineers is getting closer to finishing $14 billion in work to better shield the city from future hurricanes.

"Some of the data shows that New Orleans is rebuilding better than before," said Allison Plyer, deputy director of the Greater New Orleans Community Data Center.

Still, Plyer said the Lower 9th Ward is among a number of low-income communities that have had difficulty rebuilding since Katrina's flooding.

In the Lower 9th Ward, the fire station for Engine 39 hasn't been rebuilt. Instead, the firefighters use a trailer. Schools and churches are boarded up. Scores of houses still bear the markings of search-and-rescue crews — the now familiar "X" spray painted on doors and the front of houses to designate whether a building had been searched, by whom and whether any bodies had been found inside. The only difference is they are faded now.

The lack of people makes those who've come back feel that their neighborhood has been forgotten, even though a steady stream of politicians came to promise to help after Katrina and millions of dollars flowed in.

Now there's a new push to revive the neighborhood.

In recent days, city leaders have put forward plans to rebuild the Alfred Lawless High School and spend $45 million repaving most of the streets where the heaviest damage took place.

A group of investors that includes Pierce, a New Orleans native starring on the HBO show "Treme," has announced plans to build a full-scale grocery store on the grounds of a former baseball field by 2013. Developers hope to get federal hurricane recovery low-interest and forgivable loans. If built, the 25,000-square-foot store would represent one of the first pioneering commercial investments for the Lower 9th Ward since Katrina.

Pierce said big-chain supermarkets are unable to see the potential for profit in a place like the Lower 9th Ward, where his parents lived before he was born.

"Corporate America only sees the risk side of the ledger," he said. "I'm tired of industry standing on the sidelines. There is value here, there is wealth here... It's pent-up demand and I feel as though it is something that can be mined."

Not everyone is convinced.

David J. Livingston, a Wisconsin-based grocery consultant who's studied the New Orleans market, said the Lower 9th Ward is too depopulated to support a supermarket. He questioned whether the Lower 9th Ward, cut off by an industrial canal from the rest of New Orleans, can ever be a lively spot for commerce despite the best efforts of actors Pitt and Pierce.

"All the work that Brad Pitt has done, has it really made a significant difference? Glad he did it, better than it was. But it's still not the garden spot of New Orleans," Livingston said, referring to the cluster of eco-friendly homes built by the Pitt-backed foundation Make It Right.

But local residents and merchants hold out hope the supermarket can help turn things around.

"Maybe some of the folks going to the supermarket would come here," said April Lawrence, the owner of a beauty salon who took a chance and opened in 2009 on Dauphine Street. "Today, I have just one client," she said glumly. Unless business picks up, she said, she will have to close.

Down the street, regulars sat outside on the sidewalk in front of Mercedes' Place, a bar and video poker spot, chatting, drinking and smoking. For them, anything would be better than the options they have now: Drive miles to get something decent to cook up at home.

"It's needed!" Lynette Gibson said emphatically and loudly. She helps her 72-year-old mother, Mercedes, run the bar.

She shook her head at the thought of the handful of gas stations and convenience stores on the main streets. "It's limited," she said. "They only satisfy neighborhood people who drink."

Roosevelt Johnson Sr., a 51-year-old disabled veteran, stood outside his house and looked at the empty grass field where the grocery store would be built.

"With them bringing a supermarket, it might increase property values," he reasoned. "It might bring some normalcy back here. Make it like any other neighborhood where you go 10 minutes to the supermarket."

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Poker-faced Bernanke buys more time for Fed options (Reuters)

JACKSON HOLE, Wyoming (Reuters) – Like a skilled poker player, Federal Reserve Chairman Ben Bernanke kept some cards close to his vest when facing fellow central bankers in cowboy country.

In doing so, he may have bought himself time to play the strongest hand possible when he is ready.

Bernanke's speech on Friday at an annual Fed conference here came at a time of alarm about a fading U.S. economic recovery and concern about the health of Europe's banks.

Many were looking for a clear signal the central bank is ready to step in with further monetary policy stimulus after Bernanke led the Fed into taking massive stimulus measures over the last few years.

He acknowledged slower-than-hoped-for growth in the world's largest economy and warned that high long-term unemployment could leave lasting scars.

Although he said the Fed would consider what more it could do to boost growth -- comments that helped push up U.S. share prices -- he stopped short of outlining new moves, unlike his Jackson Hole speech last year that was seen as opening the door to a second round of massive bond buying.

"Not much detail," was the curt analysis of Bernanke's speech by a prominent analyst at the exclusive retreat, which brings together an international elite of policymakers, economic thinkers and well-connected financial gurus.

CAREFUL GOING

The Fed is caught between a flagging recovery and persistently high unemployment on one side, and political pressures against more monetary easing on the other. It has already pushed interest rates close to zero and bought $2.3 trillion in bonds to try to lower longer-term borrowing costs.

The Fed is also split internally about what to do next, adding to the challenge faced by Bernanke.

Participants at the conference gave the chairman -- who looked relaxed in faded jeans and a polo shirt -- high marks for deftly maneuvering the fine line between offering hope of monetary relief without overcommitting the central bank.

"The Fed is going to continue to tread slowly," said Barry Eichengreen, an economics professor at the University of California at Berkeley.

The most tantalizing tidbit Bernanke provided was that the Fed's next policy meeting will run for two days instead of one on September 20-21.

A two-day meeting will allow Fed staff to present studies of possible courses of action and will let each of the 17 members of the policy-setting Federal Open Market Committee air views on policy and where the economy is heading.

The expansion of the meeting underscores the degree to which Bernanke is worried about high unemployment, weak manufacturing data, stock market volatility and strains at European banks.

It also suggests he may see a need to line up support for more action at the Fed, where three policymakers dissented against an early-August decision to let financial markets know the central bank expects to hold interest rates at ultra-low levels through the middle of 2013.

The opportunity for a fuller discussion suggests Bernanke is inclined to loosen monetary policy further but wants more data, such as the August jobs report due on Friday, to buttress his case.

One idea that is clearly on the agenda is more bond buying matched by a draining of bank reserves to keep the size of the Fed's already bloated balance sheet in check.

This could help pressure longer-term interest rates lower without fueling fears in financial markets the Fed's massive balance sheet might eventually fuel inflation.

HEARTS AND MINDS

By emphasizing the process rather than tools, Bernanke may have been seeking to smooth over the rift exposed by the three who cast "no" votes at the central bank's last policy meeting.

Attendees at the conference here said the risk of future dissents would not deter Bernanke from acting, but that the Fed chairman would seek as much support as possible.

"Anything the Fed does will be more effective in terms of calming the markets and restoring confidence if they are unanimous when they do it," Eichengreen, a panelist at one of the conference sessions, told Reuters Insider.

Detailed analysis by Fed staff economists on the possible benefits of further balance sheet measures may also help a core group of Fed policymakers close to Bernanke, that includes Vice Chair Janet Yellen and New York Fed President William Dudley, overcome skepticism about the effectiveness of new moves.

"They're done and they know it. They've got nothing left," scoffed an analyst attending the conference.

Despite the doubts, discussions on the sidelines of the event made clear some at the Fed believe there is evidence an effort to further flatten longer-term interest rates could help the economy.

One U.S. monetary policy insider was heartened by the recommendation by International Monetary Fund chief Christine Lagarde at the conference that central bankers dive back into unconventional measures to provide additional monetary help.

KUDOS FROM THE CROWD

Bernanke also got high marks for shifting some of the burden for restoring growth to governments and politicians, a theme also emphasized by Lagarde.

While addressing the importance of cutting deficits, politicians should also be sensitive to the fragile recovery and develop a less nerve-wracking process for making budget decisions than the showdown in Congress that brought the United States close to a debt default this summer, he said.

"To me the more interesting part of the chairman's remarks was the shot across the bow of the government saying, 'Don't keep layering expectations on the Federal Reserve guys, you have a job to do,'" Columbia University professor Glenn Hubbard told Reuters Insider.

Bernanke arrived in Wyoming several days early and told attendees he had gone to a rodeo with his family. He jokingly told the conference that seeing that slice of Americana had given him a lot to think about.

He may have decided a little bit of cowboy reticence would suit his Jackson Hole message.

(With additional reporting by Dan Burns and Ann Saphir; Editing by Maureen Bavdek)

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Libyan forces close in on Gaddafi stronghold (Reuters)

TRIPOLI (Reuters) – Libyan forces closed in on Muammar Gaddafi's home town on Sunday, saying they would seize it by force if negotiations for its surrender failed.

Libya's new rulers, trying to establish control over all the country, set their sights on the coastal city of Sirte --Gaddafi's birthplace -- and two other towns controlled by his supporters, Sabha in the southwest and Jufrah in the southeast.

One commander said his forces were within 100 km (60 miles) of Sirte from the east and others were advancing from the west.

"We will continue negotiations as long as necessary. However, the liberation of these cities will take place sooner or later," said the military spokesman of the National Transitional Council (NTC) in the eastern city of Benghazi.

"In our opinion this is a matter of days," Colonel Ahmed Bani said.

In Tripoli, the stench of rotting bodies and burning garbage still hung over the city, overrun by anti-Gaddafi forces last week. Many corpses have turned up, some of slain Gaddafi soldiers, others the victims of killings in cold blood.

A Libyan official said 75 bodies had been found at the Abu Salim hospital, which was caught up in heavy fighting, and another 35 corpses were found at the Yurmuk hospital.

The NTC and the Western powers that backed rebel forces with a five-month bombing campaign are acutely aware of the need to prevent Libya collapsing into the kind of chaos that plagued Iraq for years after the U.S.-led invasion of 2003.

The NTC, whose leaders plan to move to Tripoli from Benghazi this week, is trying to impose security, restore basic services and revive the oil- and gas-based economy.

GOOD OMENS

In good omens for economic recovery, officials announced that a vital gas export pipeline to Europe had been repaired and that Libya's biggest refinery had survived the war intact.

In the far west, Tunisian authorities reopened the main border crossing into Libya, restoring a key supply route for Tripoli, after Gaddafi forces were driven out on Friday.

That should help relieve a looming humanitarian crisis in the city, where food, drinking water and medicines are scarce.

Trucks loaded with food and other goods were already moving across the Ras Jdir crossing toward Tripoli, about two hours' drive away. A U.N. official said aid would be sent along the route once it was confirmed to be secure.

The streets of the capital were quiet after sporadic overnight gunfire and explosions in a city traumatized by emerging evidence of widespread summary killings that took place during last week's battles to expel Gaddafi.

Some residents ventured out to hunt for water, food and fuel. And in Martyrs' Square, known as Green Square in the Gaddafi era, traffic police reappeared in crisp white uniforms, directing cars amid a sea of bullet casings.

"I came back to work on Friday. Life is beginning to come back to normal," said one policeman, Mahmoud al-Majbary, 49.

Asked if fighters were obeying the traffic police, he said: "Not yet, we're getting there slowly. We're mainly really here to reassure the people that they are safe."

Libyans may remain fearful as long as the man who subjected them to his capricious will for 42 years remains at large.

Gaddafi, 69, is on the run, perhaps intending to lead an insurgency against his foes grouped loosely under the NTC.

NTC officials rejected any idea of talks with Gaddafi, saying he was a criminal who must be brought to justice.

"We did not negotiate when we were weak, and we won't negotiate now that we have liberated all of Libya," the NTC's information minister, Mahmoud Shammam, told a news conference.

The Associated Press earlier quoted Gaddafi's spokesman, Moussa Ibrahim, as saying Gaddafi was still in Libya and wanted to discuss forming a transitional government with the NTC.

NTC officials say Gaddafi, his son Saif al-Islam and his spy chief should be tried in Libya, although they are wanted by the International Criminal Court for crimes against humanity.

Sirte, 450 km (280 miles) east of Tripoli, is a vital prize for anti-Gaddafi forces, who say they prefer a negotiated handover of the city, but will storm it if need be.

"Our aim isn't bloodshed, our aim is liberation," Colonel Salem Muftah al-Refaidy, an NTC commander, said in Benghazi.

He told Reuters there was no going back to the past. "After all this bloodshed we can't say, 'Come here Muammar, come here Saif -- we're sorry, take Libya'. It's done. Game over."

He said NTC troops were within 100 km of Sirte from the east and were also approaching from Misrata to the west.

Shammam warned that negotiations could not be "endless," adding that if talks failed rebel supporters already in Sirte would rise up as they had in Tripoli before it fell.

SHORTAGES

In Tripoli, residents queued for bread or scoured grocery shops for food. Many took a stoical view of their plight.

"This is a tax we pay for our freedom," said Sanusi Idhan, a lawyer waiting to buy food.

Aymen Mohammed poured water into plastic containers for his neighbors. "There are many people here who don't have water so we're filling the bottles from our well," he said.

With Libyan television off the air, the NTC has begun using mobile phone text messages to reach the public. One issued on Sunday urged electricity workers to get back to work.

An earlier message said former Gaddafi loyalists should be treated with dignity and respect. Another said any pro-Gaddafi fighters still carrying weapons should be treated as outlaws.

Usama el-Abed, deputy chairman of the Tripoli council, said water shortages were affecting 70 percent of the city's two million people. He told reporters hospitals were all working except for the one where the killings occurred in Abu Salim.

Shammam said public sector workers would not lose their jobs. Efforts to pay the salaries of those in and around Tripoli were under way.

"Money is still tight, but things will be better in the next few days," he told a news conference in Tripoli.

The NTC hopes to gain access soon to hundreds of millions of dollars of assets frozen abroad. It also needs to get oil and gas revenue, normally 95 percent of exports, flowing again.

Bani, the military spokesman, said the gas pipeline to Europe had been repaired.

"The gas pipeline is back and running, supplying the pump stations and the Mellitah (gas processing) refinery. Gas will start flowing to Europe," he declared, without saying when such shipments would resume.

The pipeline, which supplied about 10 percent of Italy's gas imports in 2010, was shut down in February shortly after the revolt against Gaddafi began.

Libya's largest oil refinery at Ras Lanuf on the Mediterranean coast is intact despite fighting that had raged nearby and staff are preparing to restart operations at the 220,000 barrel per day plant, the general manager told Reuters.

Ras Lanuf was held by Gaddafi forces until a few days ago and the front line is only about 25 km to the west.

(Additional reporting by Mohammed Abbas and Maria Golovnina in Tripoli, Robert Birsel, Alex Dziadosz and Emma Farge in Benghazi and Richard Valdmanis in Tunis Writing by Alistair Lyon; Editing by Angus MacSwan)

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Irene batters shuttered New York but worst is over (Reuters)

NEW YORK (Reuters) – Hurricane Irene lashed New York with heavy winds and driving rain on Sunday, flooding some of Lower Manhattan's deserted streets and large parts of the northeast, but the feared major devastation was avoided as the storm lost some of its punch.

Irene was downgraded to a tropical storm on Sunday morning after marching up the East Coast, leaving 11 dead, as many as 3.6 million customers without electricity, forcing the closure of New York's mass transit system, and the cancellation of thousands of flights.

"It's safe to say that the worst of the storm up to and including New York and New Jersey has passed," Homeland Security Secretary Napolitano said late Sunday morning as the sun started to peek through the clouds in New York City.

She said pre-storm preparations dramatically reduced the loss of life, but warned that river flooding across the eastern seaboard posed a danger.

While weakened, the swirling storm still packed a wallop, sending waves crashing onto shorelines and flooding coastal suburbs and broad swathes of New Jersey, where residents reported basements full of water and numerous trees down.

There was about a foot of water in the streets at the South Street Seaport in Lower Manhattan before the tide began receding. There appeared to be less damage than many had feared, and New Yorkers shrugged it off.

"It's not bad as they said it would be. The streets are flooded but not as bad as I thought," said John Harris, 37, who defied an evacuation order and stayed home overnight in the Rockaways.

Wall Street's financial district seemed largely unaffected as did Ground Zero, where the 10th anniversary of the September 11 attacks is soon to be observed. The New York Mercantile Exchange building planned to open as usual on Monday, while the New York Stock Exchange and Nasdaq Stock Market also said they expected a normal trading day.

But the big question for residents and the millions who commute to work in the city each day, was whether the city's subways and public transportation would be allowed to resume in time for Monday's rush hour after being closed from noon on Saturday.

About 370,000 city residents were ordered to leave their homes in low-lying areas in an unprecedented move by the authorities. It was unclear when they would be allowed to return.

BEACH DAMAGE

Heavy rains and wind forced the closure of three bridges leading to the Rockaways peninsula facing the Atlantic Ocean, and further east on Long Island sand berms built to hold off the flooding and protect coastal businesses appeared to have failed. Six inches of rain fell on Central Park.

Irene was blamed for at least 11 deaths in North Carolina, Virginia, Florida and Maryland as it churned up the East Coast.

By 11 a.m. EDT (1500 GMT) Irene's winds had diminished to 60 mph (95 kmh) and the center had reached Danbury, Connecticut, about 70 miles northeast of New York.

There was a general sense in New York that the storm, reported on breathlessly for days by television reporters, was not as bad as it could have been.

"The water looks really groovy, it's like in that movie 'The Perfect Storm,' -- it's swelling every way and the wind is blowing it every way, it's heaving," said Jill Rubenstein, speaking from her third-floor apartment in an evacuation zone at the Harlem Yacht Club on City Island in the Bronx.

New York City's normally bustling streets were mostly quiet overnight but as the waters receded, tourists and locals began venturing out for a look around New York's Times Square, where Broadway shows had been canceled in anticipation of the bad weather.

In Astoria, Queens, about a dozen people were out on the waterfront overlooking Manhattan, some snapping photographs of a partially flooded playground.

The storm dumped up to eight inches of rain on the Washington region, but the capital avoided major damage. Some bridges were closed but airports remained open and transit operated on a normal schedule.

Rick Meehan, mayor of Ocean City, Maryland, said initial assessments showed flooding and continuing power outages in some areas of the seaside resort, but not much damage.

"It looks like we dodged a missile on this one," Meehan told the local Fox News station, WBOC News.

New Jersey Governor Chris Christie told NBC's "Meet the Press" he expects damages from Irene to be costly, possibly worth billions of dollars, along the Atlantic coast and from inland river flooding.

The Federal Emergency Management Agency said it could take several days to make preliminary damage assessments.

On the south shore of Long Island, Jim Nolan, a 55-year-old architect, was out making his own assessment of the area around his home on the shore of a lagoon at Copiague. But downed trees and flooding stopped him from driving very far.

"It was about as bad as I expected," he added of the storm. "The more scientific weather channels had a tropical storm, the high end news companies had doom and gloom reports of 80 to 90 miles an hour -- I just didn't believe it."

He had a busy night taking care of his 34-foot cabin cruiser tied to a dock by a number of lines that broke during the night. "About 3 O'clock two snapped, two snapped about four or five o'clock and one snapped half an hour ago," Nolan said. "It was nice and warm so I put my bathing suit on and went out there to work on it with my son," Nolan said.

BAD YEAR FOR U.S. STORMS

From the Carolinas to Maine, tens of millions of people were in the path of Irene, which howled ashore in North Carolina on Saturday, dumping torrential rain, felling trees and knocking out power. The storm was forecast to pass over parts of Massachusetts and Rhode Island later on Sunday.

After Irene, weather watchers were keeping an eye on Tropical Storm Jose, which formed near Bermuda.

This year has been one of the most extreme for weather in U.S. history, with $35 billion in losses so far from floods, tornadoes and heat waves.

(Additional reporting by Pascal Fletcher in Miami; Joe Rauch and Jim Brumm in Wilmington, N.C.; Tom Hals in Delaware; Claudia Parsons, Basil Katz and Jonathan Allen in New York; Alistair Bell, Malahti Nayak, Andy Sullivan, David Morgan and Lisa Lambert in Washington; Andrea Shalal-Esa in Ocean City; Michael Fitzpatrick in Long Branch, New Jersey. Writing by Steve Holland, Editing by Jackie Frank, Martin Howell)

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Obama meets with advisers for update on Irene (Reuters)

WASHINGTON (Reuters) – President Barack Obama held a video conference on Sunday with key officials involved in the response to Hurricane Irene as the storm pounded New York City with winds and heavy rain.

"The president was updated on the response and recovery efforts that are currently under way in coordination with state and local officials as well as the status of critical energy and transportation infrastructure," the White House said in a statement.

Among the officials participating in the conference call were White House Chief of Staff Bill Daley, Department of Homeland Security Secretary Janet Napolitano, Treasury Secretary Timothy Geithner and Craig Fugate, head of the Federal Emergency Management Agency.

In the call in the White House Situation Room, Obama asked Napolitano and Fugate to keep in close contact with state and local officials about their response needs.

The White House said Obama planned to reconvene the team on Sunday evening.

(Writing by Caren Bohan; Editing by Bill Trott and Eric Beech)

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Analysis: Economic leaders fear policy paralysis (Reuters)

JACKSON HOLE, Wyoming (Reuters) – The heads of the U.S. Federal Reserve, IMF and OECD stepped up pressure on political leaders on both sides of the Atlantic to shake off their inertia and tackle urgent economic problems.

If politicians ignore their pleas -- including a blunt call from International Monetary Fund chief Christine Lagarde to "act now" -- the slowdown in world growth and debt turmoil in Europe could morph into a deeper crisis, top monetary officials and economists warned at an annual retreat here.

"I hope they listen," said Bank of Israel Governor Stanley Fischer.

Alarm over political deadlock was as obvious a backdrop to the annual meeting of policymakers in the wilds of Wyoming as the thunderstorms that rolled over the nearby Grand Teton peaks and dumped rain on the Jackson Lake Lodge.

"The governance right now is not going through a very brilliant moment, I have to say, neither in Europe nor in the United States," Angel Gurria, who heads the multi-nation Organization for Economic Co-operation and Development, told Reuters.

"The signals that are coming out of the short-term discussions is, 'We can't even agree on about the time of the day, even if there's a big clock telling us what the time of the day is.'"

In the United States, the political impasse has thwarted moves to tame massive budget deficits which brought the nation to the edge of a debt default and cost the United States its coveted AAA credit rating from Standard & Poor's.

In Europe, leaders are fighting over who should pay for the sovereign debt crisis in the euro zone, which has a unified regime for monetary policy but whose member nations run their own budget policies.

PHONE CALLS, SPEECHES

Lagarde, whose appearance on Saturday was a late addition and reflected her sense of urgency, delivered a hard-hitting pitch against braking spending too fast as nations struggle to rein in long-term budget deficits.

She was far from alone.

The Fed has slashed U.S. interest rates to near zero and bought $2.3 trillion in long-term securities in an effort to kick-start the recovery. With monetary policy stretched to its limits, fiscal policy is now key, Fed Chairman Ben Bernanke suggested.

"Although the issue of fiscal sustainability must urgently be addressed, fiscal policymakers should not as a consequence disregard the fragility of the current economic recovery," he said on Friday.

"Fortunately the two goals of achieving fiscal sustainability -- which is the result of responsible policies set in place for the longer term -- and avoiding the creation of fiscal headwinds for the current recovery are not incompatible."

Bernanke said battling long-term joblessness in the United States must be a top priority, and he called on the U.S. government to put a floor under the sagging housing market, remarks that Lagarde echoed forcefully on Saturday.

Bernanke's speech was "the shot across the bow of the government saying, 'don't keep layering expectations on the Federal Reserve, guys, you have a job to do,'" Columbia Business School Dean Glenn Hubbard said in an interview with Reuters Insider.

"The Fed is simply saying, 'We are monitoring the situation very carefully but would encourage the government, both parties, to get their act together and pass a long-term fiscal strengthening package and then perhaps short-term stimulus.

The calls from the world's economic policy elite may give some political cover to President Barack Obama, who faces a tough re-election fight next year with the U.S. unemployment rate stuck above 9 percent.

Obama is preparing for a speech after the September 5 Labor Day holiday in which he is expected to lay out proposals to boost hiring. He is reaching out to other world leaders too.

On Saturday, Obama spoke with German Chancellor Angela Merkel, and the White House said the two leaders vowed to act to shore up a global recovery that now looks at risk.

A day earlier Obama had called Lagarde to talk about fiscal policy. They agreed that the world economy needs further steps to boost growth.

Obama's potential presidential challengers, including leading Republican candidate Mitt Romney, have repeatedly blamed Obama's policies for impeding growth.

The U.S. economy grew less than 1 percent in the first half of the year and has yet to return to its pre-recession size.

EUROPE'S BANKS FACE SCRUTINY

In Europe, the biggest threat is a spreading sovereign debt crisis, and richer euro zone nations, chief among them Germany, have shown a hesitancy in picking up the tab for nations on the debt-strapped periphery.

Stress tests last month exposed the degree to which European banks are exposed to Greek and other shaky government debt, and lenders are balking at extending credit.

Lagarde and European Central Bank President Jean-Claude Trichet both said strengthening bank balance sheets is crucial.

"Although there is clarity on required policies, the uncertainty created by the political stances in both Europe and the United States poses some serious risks," Cornell University Professor Eswar Prasad said.

"Getting the policy balance right is tricky in itself; this adds a layer of uncertainty that will make it that much harder," Prasad said.

(Writing by Ann Saphir; Editing by Braden Reddall)

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