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No magic wand in sight as US grapples with sinking economy
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IndyMac has failed. Fannie Mae and Freddie Mac are under attack. Stocks are floundering in a bear market.

Add to the mix a set of U.S. leaders who appear to have run out of options to rescue an economy on the brink of recession, and the situation may seem rather volatile.

The shares of Fannie and Freddie, the troubled mortgage finance giants that account for about 50 percent of the 10.6 trillion dollars of U.S. mortgage debt, have tumbled by 80 percent over the past year.

California-based IndyMac, which specialized in a type of mortgage that often required minimal documents from borrowers, became the third largest banking failure in U.S. history days ago, as a housing bust and credit crunch strain financial institutions.

"I fear that we're sitting on a financial powder keg," said Senator Richard C. Shelby of Alabama, senior Republican on the upper house's Banking Committee.

Fannie and Freddie's woes "appeared to mark a new phase in the U.S. financial crisis, with fears of a contagion effect that could yet weigh more heavily on the global economy," noted a recent report in The Washington Post.

Some analysts have called on the Federal Reserve and the Bush administration to take swift action to prevent the crisis from deteriorating, noting the tipping points of economic crises are almost always more about psychology than fundamentals, with panic over a bank's insolvency, for instance, potentially becoming a self-fulfilling prophecy.

"I think the problem now is a general confidence crisis that is complicated by some global contagion that's now spreading," said Brian Bethune, a chief economist with Global Insight at Lexington, Massachusetts.

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