Chrysler, which has endured more perils than Pauline, announced Wednesday that it has finalized its global alliance with Fiat, its last obstacle to emerging from bankruptcy.

Everyone in Auburn Hills who still has a job must feel relieved. In the past 24 hours, Chrysler had endured a challenge from secured creditors that wound up in the Supreme Court, as well as opposition from 789 of the dealers whom it is terminating.

Charged with running the new Chrysler Group LLC is a leadership team varied enough to resemble one of those old Hollywood World War II bomber crews.

At the top are chairman C. Robert Kidder, an American industrialist, and CEO Sergio Marchionne of Fiat, an Italian industrialist. The nine-member board consists of four directors chosen by the U.S. government and one by the Canadian government, three Fiat directors, and one from the United Auto Workers union. Among the groups left unrepresented: unhappy buyers of Chrysler products; legacy representatives from former owners Daimler and Cerberus; Bob Lutz, Tom Gale, and other members of Chrysler's 1990s "dream team;" and of course those 789 angry dealers.

Give Marchionne points for candor. In a news release, he admits that the alliance "does not solve every issue faced by the automotive industry today." But in the same breath, he praises the alliance as possessing "first class technology, a devoted workforce, improved efficiency and an unyielding passion for building great cars."

He's been busy, so I guess he didn't have time to read the Obama administration's report on Chrysler published March 30. A number of points:

* Far from possessing great technology, Chrysler spends just over 3% of its revenue on R&D vs. 4%-5% for Toyota and Honda. The government believes that Chrysler "will struggle to comply with increasing fuel efficiency standards."

* Chrysler may have a devoted workforce, but it's certainly a small one. The report found that Chrysler dedicates only half as many engineers to each vehicle platform as GM does. That limits its ability to innovate and develop new product.

* Using fewer engineers may boost efficiency in product development but it doesn't help manufacturing efficiency. The Obama auto team found that increased flexibility in manufacturing is critical but "Chrysler has not invested significantly in common architectures and flexible plant manufacturing capacity."

* Apparently, quality is not one of the ingredients in "a passion for building great cars." Chrysler's current quality scores "significantly lag competitors," according to the Obama team. Since 40% of its quality problems are design related, they typically don't get fixed until a new model is developed. Evidence suggests that Fiat is also a laggard in this category.

At this point in its history, Chrysler is the foster child of the auto industry. It was abused by Daimler, which didn't understand how to nurture its creative strengths. And then it was starved by Cerberus, which had dreams of rebuilding an industrial icon that turned into a nightmare when auto sales cratered.

To use an even harsher metaphor, Chrysler looks like war-torn Europe, trying to rebuild after World War II. Its plants have been shut down for weeks, supplies of cars and parts have been dwindling, and employees have been fleeing, either voluntarily or otherwise.

If Marchionne can produce his own Marshall plan to rebuild this company, he will have pulled off the greatest automotive turnaround since Carlos Ghosn rescued Nissan a decade ago. Or since Lee Iacocca saved Chrysler in 1979 and again in 1991.

It will take hard work, inspiration, and a good deal of luck. A good place to start would be a sober assessment of Chrysler's strengths and weaknesses that can be translated into a compelling sales proposition for potential customers. Chrysler needs to leave its old illusions behind as it goes forward in tandem with Fiat.

Stocks rallied Monday, with the Dow adding 350 points after positive news about the U.S. housing market, including an upbeat profit forecast from Lowes, as well as an upgrade of Bank of America, encouraged investors to step back into the market after last week's selloff.

The Dow Jones industrial average (INDU) gained 235 points, or nearly 2.8%. The S&P 500 (SPX) index rose 3% to close above 900, bringing the average back into positive territory for the year. The Nasdaq composite (COMP) advanced 3.1%.

Stocks slumped last week after worse-than-expected reports on retail sales, housing and weekly jobless claims put investors on the defensive.

But a big rally in Indian markets helped set Monday's bullish tone early on. The buying gained momentum in afternoon trading with retail and banking shares gaining ground.

"I think we're seeing a bounce after the weakness last week," said Richard Sparks, senior equities analyst at Schaeffer's Investment Research. "For investors who think the market is going to continue higher, now might be a good time to get back in at prices that are a bit lower."

Tuesday brings readings on new home construction and building permits in April. Companies reporting quarterly results include Dow components Home Depot (HD, Fortune 500) and Hewlett-Packard (HPQ, Fortune 500).

Housing: Lowe's (LOW, Fortune 500), the No. 2 home-improvement retailer, projected a higher fiscal second-quarter profit after posting a 22% decline in the first quarter that still managed to top analysts' forecasts. Shares rose 8%.

"The housing issue is front and center in the economic recovery," said Quincy Krosby, chief investment strategist at The Hartford. "Lowe's is a major player in that space and their comments are important."

Two private reports helped bolster confidence in the housing market. The National Association of Home Builders said its index of homebuilder confidence rose for the second month in a row. Separately, the NAHB said home prices are at their most affordable in nearly two decades.

Banking: Shares of financial services companies got a boost after Bank of America (BAC, Fortune 500) was upgraded to "buy" by Goldman Sachs (GS, Fortune 500). Analysts said the bank will be able to raise needed capital thanks to gains in mortgage and capital markets activity. BofA gained 10%.

Financial holding company State Street (STT, Fortune 500) announced a $1.45 billion stock offering and said it would also offer non-guaranteed senior notes. The company said it plans to repay its government bailout funds.

No state has been harder hit by the housing bust than California.

It has piled up more foreclosures and has endured among the worst home-price declines. The median price of a single-family home sold in February was $247,590, down 41% from 12 months earlier, according to the California Association of Realtors (CAR).

And home construction in the Golden State has nearly vanished: December housing permits shrank to about a quarter of what they were during the boom years, according to the National Association of Homebuilders.
0:00 /3:17Housing on the rebound?

But there are signs that California's housing market may be coming out of this tailspin: Sales volume is increasing, investors are returning and inventory is shrinking.
Bringing back buyers

Low prices have brought out droves of buyers. In February, they purchased more than 600,000 homes, some 80% more than they bought in February 2007, according to CAR. And most of this activity is where prices are off 40% to 60% from their peaks.

In the Sun City area of Riverside County, for example, prices have fallen more than 35% over the past 12 months. Two-thirds of February's sales in the area were of foreclosed properties owned by banks, according to Chuck Whitehead, broker with Coldwell Banker Associated Brokers.

"The sales rebound is largely centered around areas that have experienced the biggest impact from the subprime crisis," said CAR chief economist Leslie Appleton-Young.
How low can home prices go in your city?

In more stable communities, where fewer homes were saddled with toxic mortgages, prices have not crashed as badly and sales are rebounding more slowly. But foreclosures still account for a significant portion of sales, according to Phil Jones, a broker with Coldwell Banker Coastal Alliance in Long Beach.

Most analysts foresee continued price declines in California, according to Nicholas Retsinas, director of Harvard's Joint Center for Housing Studies. "But [there'll be] a slowing of that decline, which portends the end of price drops."

That may already be happening in Long Beach, according to Jones. The measure he uses to judge market trends there, price per square foot, turned up in February, growing 5% to $360.

"Every one of my agents is very busy," Jones said.
Investing 2.0

Another positive sign that markets don't have much further to fall is that investors are returning to some markets.

"I spoke with one investor who is putting together a group of buyers and they're ready to get back into the market," said Jones. "They're planning to buy single-family homes in bulk."

John Dugan is one such investor. The San Francisco-based medical supplies salesman is using a portion of his Entrust Group-managed IRA to buy townhouses in the Sacramento area.

So far he's purchased three 840-square-foot, two-bedroom, one-bath duplexes. He paid just $35,000 to $80,000 a piece - down from their $180,000 to $200,000 selling prices a few years ago.

He paid cash for the first property and rents it out for $750 a month, a profit of $550 after dues and common charges. That's a 19% return on investment, without figuring on appreciation.

"This kind of pricing is something you only think of as Midwestern, not Californian," he said.
Supply dropping

The booming sales have whittled away existing home inventory to just six and a half months - down from 15 months a year ago.

"Typically, I would describe a normal market as having a six to seven month supply of homes," said Appleton-Young. "We have that now."

California's inventory now compares favorably with the rest of the nation, where there's a 9.7 month supply of homes on the market, according to the National Association of Realtors.

One wildcard, however, is that banks have kept many repossessed homes off the market. "Banks are spoon feeding them out very slowly so they don't overload the market," said Whitehead. But, he added, if they release a lot of properties during the heavy spring buying season, they "will be eaten right up by buyers."
Could the end be near?

All of those factors add up to a more optimistic forecast for California, which is seen as a harbinger of things to come for the rest of the country.

Appleton-Young said that while home prices should continue to decline for the rest of 2009, she predicts that the pace of decline will slow. In total, she's predicting a total loss of 19% for the year. But, "I think we could see home price stabilization by early next year," she said.

If that happens in California, it could spread to the rest of the hard-hit Sun Belt markets - and beyond.

"California was the pace setter for lots of the mortgage products that went toxic," said Retsinas. "The sense is if the problems can be addressed there, the rest of the country will follow."

President Obama has now added tax reform to his to-do list.

The administration said this week it will form a task force to propose ways to simplify the tax code, reduce evasion, close loopholes and make changes in corporate breaks.

One overarching end-goal: Raise revenue.

Obama isn't setting a revenue target but is placing two constraints on the task force's efforts: Members may not propose tax increases for 2009 and 2010; and beyond 2010, they may not propose tax increases on families making less than $250,000.

A major focus for the task force will be to reduce the estimated $300 billion-a-year tax gap -- the difference between what individual and corporate taxpayers owe and what they actually pay.

"Three hundred billion a year or more is a lot of money, and we are interested in being as aggressive as possible in trying to reduce that number," White House budget director Peter Orszag said.
Closing the gap

Reducing the tax gap is far easier said than done.

"Managing to make headway to reduce that gap often means difficult reforms," said James Poterba, president of the National Bureau of Economic Research and a member of President Bush's tax reform panel created in 2005.

The biggest reason for the gap is underreporting of income. There's a high rate of compliance when it comes to income reported by third parties, such as employers reporting workers' incomes on W-2s.

But the compliance is much lower in cases when there's no third-party reporting, such as with small business owners who do mostly cash transactions. The cash economy may account for over $100 billion of the annual tax gap, according to testimony from Nina Olson, the National Taxpayer Advocate.

The IRS is already working to improve compliance. For instance, starting in 2011, brokerages will be required to report taxpayers' cost basis when they sell a publicly traded security. That will make it easier for the IRS to verify capital gains income.

Boosting third-party reporting in areas where it is lacking means more work and expense for someone and almost certainly "will bump into [resistance] from those required to do the reporting," Poterba said.

Of course, the gap isn't all due to intentional tax avoidance. Some of it comes from honest mistakes by filers confused by a tax code that is almost universally acknowledged to be maddeningly complex.

Simplifying the code may actually help narrow the tax gap since currently "people don't perceive the tax code to be fair and that encourages non-compliance," said Len Burman, co-director of the Tax Policy Center.

The perception is that the code now allows too many people to escape paying their fair share. And where there are popular tax breaks to be had, they often come with Twister-like eligibility requirements that can qualify or disqualify tax filers seemingly arbitrarily. And where different credits or deductions target similar groups -- such as retirement savers or low-income workers with kids -- the rules for each are different.

The task force will be charged with suggesting ways to streamline those types of credits.

But what the task force may find is that behind every Byzantine requirement is a rationale and a group that lobbied for it.

"What looks like simplification to one person looks like a tax increase to another," Poterba said.

So, how much of the $300 billion-a-year tax gap can be recouped realistically?

Poterba says he's not sure. "There's not one magic bullet," he said, noting that it takes serious time and effort to change individual provisions in ways that make sense in the broader scheme of things.
Targeted changes more likely than overhaul

The members of the task force will come from the Presidential Economic Recovery Board, which is headed by former Federal Reserve Chairman Paul Volcker. It will present its proposals to Obama on Dec. 4.

Given the president's mandates and the many urgent priorities facing lawmakers, the task force's recommendations are likely to be less far-reaching than those of President Bush's tax reform panel. The Bush panel proposed ways to change and simplify not only individual tax measures but also considered alternative structures for the tax system.

"To get fundamental tax reform you really need the political stars to line up in just the right way. ... It also requires concentrated attention from the political process. It requires a fair amount of heavy lifting," Poterba said.

Those stars were not aligned when Poterba's panel put forth their proposals in November 2005. Nothing came of their report and Bush made little or no mention of it after the day it was presented. But tax experts praised the group's efforts, and Burman thinks there are a lot of ideas in their work that could serve as good starting-off points for Obama's task force.

Even if the Obama task force recommends only targeted changes to the tax code, the administration will still need to get the House and Senate on board in many cases.

It hasn't gotten off to the most auspicious start. The announcement of the task force appears to have come as a surprise to leading lawmakers, according to Congress Daily.

The top Senate Democratic tax writer indicated that the panel could be constructive, but he would prefer they offer a broad set of principles rather than specific tax changes.

"We'll certainly look at it, but we're the Congress, we'll do what we think makes sense," Senate Finance Chairman Max Baucus, D-Mont., told reporters.

"Springing a tax reform panel without talking to [leading tax writers on the Hill] is not politically astute," said Anne Matthias, director of research at Concept Capital. "But it doesn't mean [the panel's work] won't end up being important."

Is this the worst economy since the Great Depression? And what are the chances of the economy falling into another depression?

The answer to the first question is fairly clear. In most ways that matter to economists and average Americans, this is the worst economic crisis since the Depression.

The answer to the second question is not as clear. While the National Bureau of Economic Research officially declares the beginning and end of recessions, nobody does that for depressions.

Still, the general consensus of economists is that another depression is not likely. But the risks are greater than they were only a few months ago.
Why this recession is so bad

First things first: Even though it may seem obvious to most that this is the worst downturn since the Great Depression, the economy has experienced other serious recessions in the past, particularly in the mid-1970s and early 1980s.

But this recession dwarfs those two for several reasons.

In terms of length, the longest post-Depression economic decline was 16 months, which occurred in both the 1973-75 and 1981-82 recessions. This recession began in December 2007, which means that it will enter its 17th month next Wednesday.

The current recession is also more widespread than any other since the Depression. The Federal Reserve's readings show that 86% of industries have cut back production since November, the most widespread reduction in the 42 years the Fed has tracked this figure.

What's more, every state reported an increase in unemployment this past December, the first time that has happened in the 32 years that records for unemployment in each state have been kept.
0:00 /3:54Jobless - it feels so bad

"This is important because there's nowhere you can move to find a job," said Gus Faucher, director of macroeconomics for Moody's Economy.com.

Finally, during the past nine months, the drop in household wealth has been larger since anything on record in the post-World War II period.
Why this won't be another depression

So far during this recession, the nation's gross domestic product, the broadest measure of economic activity, has dropped about 1.7%. Forecasts of experts surveyed by the National Association for Business Economics work out to about a 3.4% decline in GDP over the life of this recession.

To be sure, there already have been some quarters where the drop was much more severe. The government will report its final revision of GDP for the fourth quarter of 2008 and economists are expecting that report to show an annual rate of decline of 6.6%. And some economists think the drop in the first quarter could be even greater.

But measuring the drop in economic activity from top to bottom is how economists judge a recession's depth. And a 3.4% drop would be the worst since World War II, and far worse than the average recession in that period.

Still, that's a long way from the 26.5% drop in GDP that took place between 1929 and 1933.

One of the main reasons why economists think another depression could be avoided is that it will take more than just a sharp decline in consumer spending and household wealth to spark a depression.

Even though household net worth has fallen a record $11 trillion, or 18%, during the course of this recession, the broader economy can weather such a shock.

Historically, stock market crashes and bursting housing bubbles haven't necessarily led to depressions. It takes a variety of economic factors and policy decisions to turn a recession into something even more serious.

"I don't know if you can make a causal link between a loss of wealth and a depression," said Lakshman Achuthan, managing director of Economic Cycle Research Institute.
Learning lessons of the 1930s

Significant policy changes since the 1930s will also cushion the blow.

Unemployment insurance, Social Security payments and larger government at the federal, state and local levels keep money flowing into the economy even as consumers and businesses pull back on their own spending.

"There's a lot more safeguards in place," said Keith Hembre, chief economist at First American Funds.

Hembre said the $787 billion stimulus bill passed by Congress in February will also spur more economic activity down the road.

In addition, the Federal Reserve, led by Great Depression expert Ben Bernanke, has pumped trillions of dollars into the economy with new lending programs the central bank has never tried before. That has swelled the supply of money. By way of contrast, the money supply tightened during the Great Depression.

There were many other policy mistakes made in the 1930s that economists say are not being repeated today, including stiff tariffs that killed international trade and government imposed limits on prices and production levels.

Even if Congress imposed "Buy American" provisions in the public works paid for by the stimulus bill, there is no call to move back to the strict protectionism of the 1930s or production and price controls.

"I'd like to think we've learned something, so in terms of policy we're doing better," said Achuthan.

Still, even if the United States does not enter another depression, that doesn't make the current economic crisis any less painful for many Americans. Also, few economists are predicting an end to the recession anytime soon.

Hembre said he is worried that the country could be in a period of prolonged economic stagnation similar so the so-called lost-decade that Japan suffered starting in the 1990s. He said continued weakness in housing and high debt levels by households and governments could hold the economy back for some time.

And some economists aren't completely ruling out another depression.

In a paper for the National Bureau of Economic Research last month, Harvard University professors Robert Barro and Jose Ursua put the chance of a minor depression (which they defined as a GDP decline of at least 10%) at about 20% and a 3% chance of a major depression (defined as a GDP drop of at least 25%). Moody's Economy.com is forecasting a 10% chance of a depression.

Stocks tumbled Tuesday morning as investors showed caution following the best day on Wall Street in four months.

The Dow Jones industrial average (INDU) lost 70 points, or 0.9%, in the early going. The S&P 500 (SPX) index lost 10 points, or 1.2%. The Nasdaq composite (COMP) lost 19 points, or 1.2%.

Investors are looking to Washington, where Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner are testifying at a Congressional hearing about the government's intervention at American International Group.

Stocks around the world soared Monday, boosted by the U.S. Treasury's plan to remove toxic assets from the balance sheets of banks. The Dow surged 6.8% while the S&P 500 rallied 7.1%. But investors may be ready for a rest after the dramatic advance. Full story

"It wouldn't be a big surprise if there was a negative hangover in the following session," said Ken Wattret, economist with BNP Paribas in London. "Given the scale of the preceding day, you would expect to see a decline.

But given Wall Street's gains over the last two weeks, Wattret detected a bit of optimism in the air, going forward.

"There's a feeling that we're getting to the end of the worse of the news," he said. But he noted that there's plenty to be pessimistic about, including skepticism over whether the toxic assets at the center of the government's plan - and the inspiration for Monday's rally - will ever rise in value.

Financial shares - leaders of the rally Monday - led the decline Tuesday, with Citigroup (C, Fortune 500), Bank of America (BAC, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) among the losers.
0:00 /01:34AIG back on lawmakers' minds

AIG hearing: Investors will be watching Bernanke and Geithner. Both will testify at a House Financial Services Committee hearing on AIG (AIG, Fortune 500), due to start at 10 a.m. ET. Full story

AIG has been given access to $182 billion in taxpayer funds in the past six months. Recently it paid out $165 million in retention bonuses to employees in the company's financial products division. Those bonuses were written into employee contracts written in early 2008.

But Dan Cook, senior market analyst at IG Markets in Chicago, believes the government has already wasted too much time on the topic of AIG bonuses - and Tuesday's hearing won't help the stock markets.

"We still have an opportunity to wreck the run we've been on with this AIG hearing," he said. "It's such an emotional issue, this AIG thing, but if you look at the [total] cost, it's a drop in the bucket."

World markets: Asian shares extended gains, rising to their highest level in two months. Japan's Nikkei added 3%. Major European markets were mixed in morning trading, with a decline in London's FTSE, but increases in the XETRA-DAX in Hamburg and the CAC in Paris.

Oil and money: Oil prices fell 55 cents a barrel to $53.25. The dollar rose versus the euro and the yen, but fell against the British pound.

The federal government, in its latest effort to prop up the financial system, took over two big wholesale credit unions Friday with combined assets of $57 billion.

U.S. Central Federal Credit Union in Lenexa, Kan., and Western Corporate Federal Credit Union in San Dimas, Calif., were placed under conservatorship "to stabilize the corporate credit union system and resolve balance sheet issues," according to the National Credit Union Administration.

The administration is a federal agency that regulates, charters and supervises federal credit unions.

Neither of the failed institutions serve consumers directly. As corporate credit unions, they service the credit union system. Credit unions count 90 million members nationwide.

Members of the two credit unions will not experience any disruption in service and are free to make deposits and access funds, according to the regulator.

U.S. Central Federal Credit Union has about $34 billion in assets, with 26 retail corporate credit union members. WesCorp has $23 billion in assets and approximately 1,100 retail credit union members.
0:00 /3:41Bypassing the banks

The board of the NCUA analyzed the health of the mortgage and asset backed securities held by all corporate credit unions starting on Jan. 28. The board determined that the two credit unions taken over had "an unacceptably high concentration of risk," according to the statement.