Macroeconomic Advisers tells clients this morning they expect “weaker growth in Q3, a deeper decline in Q4 than we previously expected, and a weak rebound in Q1 of next year will now qualify this period formally as a recession.”

U.S. unemployment rate “could well reach 7%,” the forecasting firm says, as it projects a 50 to 75 basis point easing by the Federal Reserve to address the weakening data as well as financial conditions.

In a sign of the concern of a global slowdown, the DJ Iron & Steel Index has shed 15.6 percent in the past week. It is the worst-performing of the stock sector indexes tracked by DJ. (See the DJ sector indexes here). The coal stocks index is the second, followed by Industrial Metals & Mining. In fact, of the ten worst performing, only two are directly financial sector indexes and the rest are directly related to commodities, basic materials and transportation.

In the futures market, U.S. November crude settled down $10.52 to $96.37 a barrel, after touching a session low of $95.04 after lawmakers rejected the bailout package.

"This decision is a shock to the system," said Sarah Emerson, director of Energy Security Analysis Inc. "The oil market is reacting strongly in part because of the implications of a weak economy on demand."

Wall Street’s cheering the Paulson Plan - a multi-billion-dollar taxpayer-funded effort to contain the credit market crisis. But a backdraft is underway in the blogosphere. Strategist-blogger Barry Ritholtz lays it out here in The Big Picture:

We now see that the grand experiment of deregulation has ended, and ended badly. The deregulation movement is now an historical footnote, just another interest group, and once in power they turned into socialists.

Comments rolling into Calculated Risk are uniformly negative, with the two presidential candidates coming in for some scorn for supporting the asset relief plan.

A temporary ban on short-selling from the SEC is drawing some arrows as well from Zac Bissonnette in BloggingStocks:

It’s clear why the SEC is now banning it: this isn’t about leveling the playing field or making the market more fair or efficient. This about the SEC using its power to manipulate the market upward.

Some close to the Street were critical of the ramifications too. “Wall Street has discovered a great business where the upside is potentially unlimited, but the downside is ultimately put on the taxpayers’ tab,” Cary Leahey, economist and managing director of Decision Economics told Reuters.

Some financial firms, but not all, will be saved. The pattern was set with Bear Stearns in March and repeated with Fannie,  Freddie and AIG this month — but not Lehman Brothers. Information Arbitrage lays it out this morning here.

“Unwittingly or not, Treasury Secretary Paulson has effectively created the Paulson Doctrine. The doctrine states that firms that he deems too big to fail (but we’re not exactly sure where the line is drawn: LEH? No. BSC? Kind of. MER? Maybe. AIG, FNM and FRE? Definitely.) get the U.S. Government (and the U.S. taxpayer) as new senior shareholders, while the others are either left to execute an orderly private markets Good Bank/Bad Bank restructuring (if they can, like Mellon in the late 1980s) or a hurried Chapter 11 Good Bank/Bad Bank restructuring (if they can’t: see BCS/LEH circa 2008).

Sure, the headline reads that the Fed bailed out AIG, but was anyone other than Mr. Paulson pulling the strings? I doubt it. So what of this doctrine, and what does it mean for the global financial markets, the integrity of the U.S. regulatory regime and the U.S. taxpayer?

As for the Federal Reserve-backed rescue ofAIG, Reuters’ Emily Kaiser says that the “US central bank may have wiped out what credibility it won resisting Lehman Brothers’ rescue plea, and opened its door to countless other companies to come calling for cash.”

What do you make of the ‘Paulson Doctrine’?

Picture: Treasury Sec. Paulson/REUTERS/Paul Szep 

As CNBC’s on-again, off-again call for the calvary for AIG held the stock market’s attention, Tyler Cowen posted what may well be what we’ll remember about this unusual day: “It’s a little scary that the world’s largest insurance company hasn’t planned for a rainy day.” (Marginal Revolution)

Mark Thoma is monitoring the bailout-moral risk debate on AIG and sides with Willem Buiter in the FT this morning. “Unless we are very certain that telling AIG to ‘go away’ will not endanger the overall economy, then protect jobs and the economy first and foremost by ensuring, minimally, that an orderly liquidation occurs,” he posted in the Economist’s View.

Count Stan Collender at Capital Gains and Games as one of the surprised at the sudden shift of events. After two weeks off the gird, he returns Tuesday and notes “a substantial change in the reporting on the financial situation. There was a certain almost arrogance and swagger just before I left. The mantra was that Bear Sterns was the beginning of the end of the problem. I don’t hear that now.”

Marc Gerstein isn’t too interested in the blame game. “Exotics or not, if you lend a ton of money to people who can’t pay it back, you’re going to suffer.” He puts growth and sentiment models to the test and concludes “we’re still likely to be better off if we own reasonably valued shares of companies with demonstrated records of being able to grow earnings” despite the wrenching transition taking place in some sectors. (Gerstein used to write an investment column at Reuters.com and is now at Portfolio123).

On the broader economic front, Brad DeLong’s Semi-Daily Journal looks at Monday’s Industrial Production release and concludes: “For about a year we have been blessing the disconnect between financial chaos and construction depression on the one side and real-side economic ‘weakness’ elsewhere in the economy. Let’s hope the disconnect continues. But it looks as though it isn’t: the recession has spread out from construction into goods production broadly.”

The Wall Street investment banking model is being tested. No, it’s broken. No, it’s been broken for a while and the bailout of Bear Stearns and the demise of Lehman show that it’s on the mend…

Views are coming in from across the spectrum as financial world commentators join the markets and try to piece together what the busy weekend on Wall Street will mean for stocks and the shape of the financial services industry.

Thestreet.com’s voluble Jim Cramer declares: “Nobody from the Fed has gotten ahead of this problem.” How can the Federal Reserve not cut interest rates “right now?”

Market strategist Barry Ritholtz, blogging in The Big Picture , says a cut “would be ill advised … Why on earth the FOMC would want to undue any of the work by Treasury with a rate cut? That is the current market bet, that a 25 or even 50 basis cut may occur at tomorrow’s Fed meeting.” The Fed should keep its powder dry, he concludes.

Arnold King at Econlog says he’s thinking about the Fed simply as the “the lender of last resort” today. He adds: “For the stock market, I’d say if it only drops 3 or 4 percent and stays open all day, I would count that as a win.”

Paul Kedrosky at Infectious Greed is on watch for signs of blaming the short-sellers. A “one-sided piece in today’s NY Times is a good example of something we are likely to see,” he says.

Calculated Risk pulled from a transcript from Bank of America’s CEO this morning on his expectation for a tough 2008-2009 in financial services and a key comment from Merrill’s John Thain, that “as we go forward, size is going to matter, so the ability to have a diversified stream of earnings, the ability to maintain high degrees of funding certainty are going to continue to be very important.”

And beyond New York, economics professor Greg Mankiw writes that he gives his introductory lecture at noon today for Harvard students and notes that he’d like to “thank all my friends on Wall Street for doing so much to spark interest in economic issues.”

What’s your view on what the Fed should or shouldn’t do next?

Bank of America’s planned $44.3 billion acquisition of Merrill Lynch is the seventh largest bank acquisition ever announced, according to Thomson Reuters Deals Intelligence.  Bank of America is the fourth largest bank globally and the top US bank with a market value of US$153.9 billion.

In the big picture: M&A targeting of the banking sector has reached $187.2 billion so far in 2008. Activity in the third quarter stands at a 5 quarter high of $87.3 billion.

–Research from Matthew Toole, Daily Deals Insight