LONDON, England – More signs of stress in the U.S. economy. Consumer confidence continues to fall and is now at its lowest level since the beginning of the Iraq war in March of 2003. Consumers are feeling the pinch of higher gas and food prices, and less wealth because of falling house prices. Plunging house prices may actually be closer to the mark.The closely watched Case-Shiller numbers showed a near 13-percent year-on-year drop in their latest report. It gets even more depressing. If you take a three month snapshot, and annualize it, the rate of decline is a shocking 22 percent.

No one’s bragging anymore about how much money they’ve made on their home. And it’s likely to get worse before it gets better, which will complicate any hope of recovery in the economy.

Consumers might get a slight reprieve from tax rebate checks now being sent out, but many of those getting it will pay down debt or save it.

And given how quickly house prices are falling, the rebate is a drop in the economic ocean. It’s estimated a trillion dollars of value has been wiped off homes in just two months … nearly 10 times the size of the federal tax rebate.

I’ve been saying for a long time, you can’t get a recovery in the economy until you get a recovery in housing, and that recovery is still a long way off.

LONDON, England – Some blame Alan Greenspan, the former Fed chairman for helping sow the seeds of the housing bubble and the subsequent fallout. Greenspan of course has answered his critics and defends his policies. Agree or disagree with whether Fed policies played a role in the current financial crisis, everyone still wants to know Greenspan’s thoughts.

I had a rare opportunity to interview him for 50 minutes last week. It’s something few journalists get to do and it wasn’t really planned.

I had gone to the European Pensions and Investments Summit 2008 in Montreaux, Switzerland. About 450 people attend. The attendees have collectively about $3 trillion of assets under management. CNN marketing asked me to attend to underscore our commitment to business programming. I originally went to moderate a panel with five chief European economists, but while there I was asked to interview Greenspan.

The interview was conducted via satellite, with the 82 year old Greenspan in Washington. For me there was one question that loomed above all others, the question everyone wants to know: How much longer will the fallout from the subprime crisis last?

Some key players on Wall Street think the worst is now over, and judging by the performance of financial stocks since March 17 (the day the Fed announced the rescue of Bear Stearns) investors are acting like the worst is behind.

Greenspan however sees it differently. He told me he wouldn’t go so far as to say the worst is over, even in the financial sector. In terms of the economy itself, he sees a turnaround in housing as a key to moving beyond the crisis. And here’s the bleak news, he doesn’t see house prices bottoming out until the second half of next year, specifically in the third quarter.

The panel of European economists I interviewed, with the exception of one, is fairly bearish on the outlook for the U.S. economy, with one of those economists seeing no recovery until 2010.

And course, the longer the U.S. economy stays weak, the greater the knock on effect on the global economy.

There are a lot of headwinds for the U.S. economy… banks are keeping lending tight, consumers in the U.S. are getting squeezed by rising petrol prices, rising food prices, and falling house prices.

I think it will take much longer than many expect for the economy to recover. That’s why I wasn’t surprised when Greenspan told me he’s not convinced the worst isn’t over. It may be easy to criticize him, but on this score its tough to disagree with him.

NEW YORK — Americans woke up Thursday morning to some shocking headlines. Some of the country’s biggest warehouse retailers were limiting how much rice customers could buy.

Rice restrictions at a Costco store in San Francisco.

Sam’s Club, a division of Wal-Mart, said customers would only be allowed only four 10-kilogram (20lb) bags of jasmine, basmati or long grain white rice. Its competitors, Costco and BJ’s, were also said to be contemplating limits. Food rations of any kind are unheard of in the U.S., so this was very big news indeed. For at least a little while.

It didn’t take long for everyone to figure out the rice shortage was mostly media hype. Yes, some warehouse discounters seem to be experiencing inventory issues as small businesses and restaurants stockpile to avoid higher prices. But the majority of supermarkets have no restrictions whatsoever. Unlike places like Haiti and Egypt where real shortages have resulted in riots, in the U.S. rice is readily available. Expensive, but available.

That doesn’t mean the news reports aren’t useful. There is a school of thought in financial circles that when the media finally sits up and takes notice, the tide has already turned. This may be true for commodities. After making a record run at $120 a barrel Tuesday, crude oil fell $4 in Thursday’s New York session before finally settling around $116 a barrel. Gold fell to a four-month low. Rice prices stayed close to record levels, but wheat, corn and soybean futures all moved lower.

Global consumers could clearly use some relief from sky high fuel and food costs. But investors who have exposure to the commodity markets might want to take profits and take cover. An oil trader I spoke with in New York warned crude was no longer trading based on the rules of supply and demand. Instead, he said oil had now become a financial tool. Farmers have complained the same is happening in grain markets. Speculators are in the driver’s seat. Up till now they have been buyers. If that changes, the sell-off could be swift and painful.

LONDON, England – Don’t know if you caught the article on CNN.com/living about what some parents spend on children’s birthday parties, but it speaks volumes about what’s gone wrong in our society.

Just to recap, one woman from Manhattan spent $5,000 on a birthday party for her daughter. She booked a fondue restaurant, hired a musical troupe to perform as the Wiggles (her daughter’s favorite group) and ordered a four-layer cake. Each guest took home a Fisher Price guitar and custom CD. Her daughter’s age, 3. I didn’t even know that 3 year olds like fondue.

And apparently it’s not just in Manhattan. There’s a children’s birthday party planning company in Southern California where parties can take six weeks to plan and cost as much as $10,000 dollars. The parties can range from former Marines running military themed parties to tea parties with expensive china.

The owner of the party service says: “We really promote a healthy balance of living year round, but it’s OK to indulge your child once a year, because it’s about making a memory.”

Making a memory, give me a break. It’s making a statement, which is about skewed values and bragging rights to your friends. What child of 3, let alone 10, needs to have $5,000, let alone $10,000 spent on a birthday party? She gives the word indulgence new meaning. The one thing she has right is calling her party planning service Over the Top Productions.

When I was growing up it was about getting some other children to come to your house, having a cake with candles, playing a few games, and that was enough.

I realize the world has moved on, but now it’s gone mad, and it sends the wrong signal.

Most people of course, don’t have $5,000 to $10,000 to blow on a child’s birthday party, let alone $1,000, or even $500. Want to create a memory for your child? How about lots of love and laughter. Looking back, your child will remember that much more than fondue and fine china.

LONDON, England – I have been to the High Court in London many times over the last two decades: I have seen Richard Branson win the “Dirty Tricks” suit against British Airways, I have seen George Michael lose a contract dispute with Sony, I have seen the Beatles’ Apple Records lose to Steve Jobs’ Apple (that was the one and only time I laid eyes on the Beatles’ legendary and now late confidant Neil Aspinall). I have even been there for the adoption of my two sons.

Star Wars prop designer Andrew Ainsworth.

But the current civil trial in Court 52 pitting a costume maker against the mighty “Star Wars” empire of George lucas is most unusual.

When the hearing began last week, I counted on the front bench a dozen “Star Wars” helmets and off to the side two mannequins, one dressed as a full sized storm trooper. Some were originals taken from the Lucasfilm Archives in Marin County, California.

Sitting before them was the judge dressed formally with his gray wig (wonderfully known in court as “Mr. Justice Mann” — sounds like a cartoon character) and two barristers also donning their gray wigs. That is not unusual in Britain of course, but as the opening statements included references to tusken raiders, storm troopers, even characters some of my favourite cartoons, I knew this was going to be different. And if I was a real “Star Wars” fanatic, I would see this as a once in a lifetime opportunity. After all, the Lucas side was flying in three Academy Awarding winning production designers to testify. The two sides even spent 10 minutes on the first day debating with the judge about how many breathing holes can be seen in the first drawings of helmets. After the judge left at the end of the first day, there was then a spat over which helmets should be labeled and displayed for the judge. The issue being the shape of a mohawk on the back of one helmet that I don’t even remember from the films.

The case is self is serious for one man. Andrew Ainsworth, of Shepperton Design Studios, made the original helmets for the first film back in 1977. He started to make replica helmets in 2004 from the original mould which sat in the basement of his west London studio for nearly 30 years. His Web site, sdsprops.com, offers replica helmets for up to $1,000.

Lucasfilm accuses him of violating its copyright. Its lawyer said in his opening argument that Ainsworth manufactured the helmets based on detailed drawings and paintings sent to him through a costume designer. Ainsworth says he made sufficient and unique changes to the original design so that he should own the copyright.

The Lucasfilm barrister made the point that all these bits in front of him were more than movie props. “There are no helmets, there is no armour.” His point: this was intellectual property.

Mr. Justice Mann, the same judge who ruled in favour of Apple Computers (he had to confess in that case he owned an iPod — he has not disclosed while I was there whether he was a “Star Wars” fan), will have to decide who owns the rights to the helmets.

Ainsworth wants a slice of the $12 billion Lucas has made just from the products sold around the six films. The question is, do freelance workers on projects retain the rights to their work, if there is no contract (as is the case here)?

This is Ainsworth’s last chance really to tilt at the Lucas empire. He’s already lost this case before a California judge in 2006 and he nearly went broke defending himself then. His London lawyers are working on a no-win-no-fee basis. Not a problem for Lucas of course.

HONG KONG, China – Americans are used to hearing about the growing influence of China. Every week seems to bring another screaming headline about how the communist nation is an economic juggernaut set to dominate the world. Yet the country may be in danger of losing its competitive edge. Over the past two decades, China has transformed itself into a manufacturing machine. The country has been able to convince companies to set up factories there with its cheap labor, huge market potential, and business-friendly rules. Chinese manufacturers have been churning out everything from T-shirts and toys to television sets for cheap, helping to keep global consumer prices down. These exports have been fueling China’s economic boom, accounting for roughly 40 percent of gross domestic product.

New labor laws are likely to make China less competitive.

However, soaring costs are now threatening China’s manufacturing might. Prices of fuel and raw materials are up, eating into manufacturers’ dwindling profit margins. Surging prices of food staples such as pork have propelled Chinese inflation to an 11-year high, driving up workers’ wages. Wages, by some estimates, are already growing by up to 30 percent every year as companies compete for skilled labor.

In addition, a new labor law, requiring stronger employment contracts, is complicating the hiring and firing process for manufacturers. A dispute arbitration law comes into effect in May. Employers say the new laws restrict them from laying off substandard workers even in times of economic difficulty. They say the rules shifts the bargaining power in favor of employees at a time when factory owners are already facing labor shortages and the possibility of a U.S. recession. These laws, combined with tougher environmental standards, higher corporate taxes, and an appreciating Chinese currency — which makes goods from China more expensive overseas — are adding to manufacturers’ financial woes.

These changes are due largely to the Chinese government’s recent campaign to start prioritizing human welfare over speedy industrial growth. For decades, authorities emphasized the need for rapid economic development, often overlooking poor working conditions or pollution. The new labor and environmental policies are meant to address those problems, by prodding manufacturers into better corporate behavior. Beijing authorities are also looking to encourage Chinese manufacturers to move away from producing basic goods towards advanced products. They want China to follow in the footsteps of Japan, South Korea, or Taiwan and step up the global manufacturing ladder.

Yet China may not be ready for this economic transition. Unlike its exporting Asian rivals, China has to consider the welfare of over a billion people, many of whom are still unemployed. Low-end manufacturing is a labor-intensive industry, requiring tens of millions of workers. A shift of support away from this sector could lead to an unwelcome loss of jobs at a time when the government is desperately trying to raise the standard of living for the nation’s poor and prevent social unrest.

China’s economy, though growing fast, is also said to be at a less developed stage than the economies of Japan, South Korea, or Taiwan. Some pundits say consumers there had greater purchasing power than the Chinese do now, allowing governments to rely more on domestic spending as a driver of economic growth. China is in the midst of deploying the same tactic — encouraging citizens to shop — yet the average Chinese consumer is still inclined to save.

Moreover, the competitive environment for countries has dramatically changed. Companies can open and close factories more swiftly than they have been able to in the past as governments compete aggressively to attract investment by offering tax breaks and other financial incentives. In other words, nations can gain and lose competitiveness more quickly than in years prior.

China has already started losing thousands of manufacturers. According to an industry body, the Federation of Hong Kong Industries, over 10-percent of the 70,000 factories operating in the Pearl River Delta, the country’s manufacturing belt, will shut their doors this year. Some manufacturers are investing heavily in new equipment and technology, thereby reducing their workforce, but many are moving operations to lower-cost countries such as Vietnam. Beijing’s frequent trade rows with Washington are also prompting manufacturers to look to diversify their production bases. Some U.S. politicians, fairly or unfairly, criticize the Chinese for their safety standards and their currency, the yuan. These lawmakers argue the yuan is artificially cheap, contributing to America’s ballooning trade deficit.

However, that criticism may soon subside. With the threat of inflation growing in China, authorities there have little choice but to allow the yuan, which only de-pegged from the U.S. dollar in 2005, to appreciate further. A stronger yuan would help reduce import costs and curb economic growth by muting demand for Chinese goods. China’s efforts to protect workers’ rights and the environment could also silence Beijing’s critics in Washington. And though China will likely remain a formidable player in manufacturing due to its economies of scale, the country is no longer the mecca for manufacturers it once was. Other nations stand to benefit if investment is diverted away from China.

China, in the coming years, may appear to be less of a threat to the U.S. economy than it is today.

Watch my report on China’s economic shake-up

LONDON, England – More reminders of the sub-prime crisis debacle will come this week with further massive writedowns from Citigroup and Merrill Lynch.

By doing a mea culpa, banks are clearly hoping that they can keep further regulation at arm's length.

And while the fallout from the crisis continues to weigh on the real economy, a group representing more than 375 of the largest  financial companies has admitted “major points of weaknesses in business practices,” including management of risk and the bankers’ pay.

But at the same time, it warned against imposing more regulation on the industry. “We think it would be completely wrong to jump to some premature regulatory measures,” said Josef Ackermann, head of Deutsche Bank and chairman of the Institute of International Finance. “We want to demonstrate we can do a better job within the industry,” he added.

Give me a break. You bankers take heavy leveraged bets that go terribly wrong, resulting in probably the worst financial crisis in the last 50 years, and you say you can regulate yourself. I say, who do you think you are kidding Mr. Ackermann?

I think it’s clear that greater oversight and regulation is needed. Not the type of regulation that impairs banks’ ability to loan money, but regulation that make it far less likely that another crisis like this one could ever happen again.

Paul Volcker, the former Fed chairman, recently said: “The bright new financial system for all its talented participants, for all its rich rewards, has failed the test of the marketplace.”

The Institute of International Finance admitted banks had failed in many ways including inadequate protection against shortages of liquidity and too much reliance on financial models. It also cited the conflict of interests over bankers’ pay.

That would be a good place to begin. Defer huge payouts for several years to see whether or not the big bets taken actually work out.

By doing a mea culpa, banks are clearly hoping that they can keep further regulation at arm’s length. I say given all that’s happened, make them pay the price and impose stricter regulation. They deserve it and we need it.

NEW YORK – The drumbeat of economic news coming out of the U.S. this week has been nothing short of dismal. Business bankruptcies are surging. The price of crude oil hit a new record high. Shipping company UPS, which is often seen as a barometer of economic activity, has warned profits will be down.

Former Federal Reserve Chairman Alan Greenspan went on record, saying the U.S. is most certainly in a recession. Former Labor Secretary Robert Reich went further, telling CNN there was a remote chance that the U.S. was in a depression.

Don’t tell that to investors on Wall Street. According to them, the glass is half full. It is a phrase I have heard used over and over again this week. That’s right — the group at the epicenter of the credit crisis is feeling cautiously upbeat.

About the stock market that is.

They agree the U.S. economy is pretty terrible. But many believe a lot of that bad news is already priced in. There are some signs they may be right. After hitting a 19-month low in March, the S&P 500 is now up some 7 percent. The Chicago Board Options Exchange volatility index, which measures the level of fear in the market, has been steadily declining since mid-March.

And it is not just the traders on the frontlines. On Thursday, Goldman Sachs CEO Lloyd Blankfein told shareholders attending the company’s annual meeting that “the markets are probably in the last stages of the global credit crisis that began last summer.” He added that people “feel like they’re seeing light at the end of the tunnel.”

Fears of a financial meltdown are slowly being replaced by the fears of missing any stock rebound. Many hedge fund managers had a terrible first quarter and can’t afford to be left sitting on the sideline if U.S. stocks start to march higher.

Sound like a massive case of wishful thinking? It could be. Some of the strongest rallies come in bear markets. But if you have the stomach for risk and keep a short-term perspective, this may be a good time to look at some beaten down U.S. names.

LONDON, England – Now there’s speculation that Yahoo is close to making a deal with Time Warner’s AOL. According to press reports, Yahoo would gain control of AOL, get a cash investment from Time Warner in return for about 20 percent of the Yahoo/AOL tie-up. Time Warner is also the parent company of CNN.

I think this potential deal is less about Yahoo/AOL and more about anyone but Microsoft. Yahoo has rebuffed Microsoft from the moment it made its unsolicited offer of $31 a share. It rejected the Microsoft bid, saying it was too low and not in the best interest of shareholders.

It can be argued that AOL isn’t the strongest player to tie up with. In terms of search queries, Google of course is the most popular site, attracting 59.2 percent of queries in February. Yahoo is number two with 21.6 percent, Microsoft 9.6 percent, and AOL is a distant fourth with just under 5 percent of search queries.

But Yahoo could take the cash it gets from Time Warner, repurchase Yahoo shares at a price in the mid-30 dollar range. That would be above where the stock is now trading.

Even if the Yahoo/AOL deal doesn’t happen it could be used as a bargaining chip to force a higher price from Microsoft.

Meanwhile there are media reports that Microsoft could team up with Rupert Murdoch’s News Corp to make a bid for Yahoo. News Corp owns the popular Web site MySpace. Now that could be formidible combination, and one that would likely be much more attractive to Yahoo shareholders.

Microsoft has threatened to take its fight directly to Yahoo shareholders via a proxy fight. The smart money is still on Microsoft winning its battle for Yahoo. But for now Yahoo is doing everything in its power to prevent that happening.

LONDON, England – I’ve been accused by some of you of being too pessimistic, of having a dark cloud hanging over me, when talking about the economy and the credit crunch. But I don’t make up the data, I just report and interpret it. I have been bearish and I continue to be bearish.

Call me Mr. Doom and Gloom, but if you want to call me that, then you better start thinking about names for the Fed and the IMF, because they too are speaking in dark tones.

The Fed now says its staffers expect the U.S. economy to shrink in the first half of the year. And some members of the Fed are now worried about the possibility of a “severe and protracted down” that could last into next year.

That’s an even darker assesment than what Fed chairman Ben Bernanke painted publicly just last week during a congressional hearing. He admitted that a recession is possible, but suggested that by next year things would be looking much better.

Meanwhile, the International Monetary Fund is warning that losses from financial crisis could approach a trillion dollars. More than half of that would be suffered by the banks, with insurance companies, hedge funds, pension funds and others shouldering the rest.

“It is now clear that the current turmoil is more than simply a liquidity event, reflecting deep-seated balance sheet fragilities and weak capital bases, which means its effects are likely to be broader, deeper and more protracted,” according to the IMF.

Just a reminder, those are the words of the IMF, not me. But I couldn’t agree more. That’s not being pessimistic, just realistic.