(12-23) 07:23 PST WASHINGTON (AP) —

After a slow and stumbling start, official Washington is scrambling to try to prevent the unfolding mortgage crisis from pushing the country into recession during an election year. There is a strong feeling, though, that the government will need to do more to avert a financial disaster.

One former Treasury secretary advocates temporary tax cuts and emergency spending on the order of $50 billion to $75 billion. Such action could help the U.S. from slipping into what Lawrence Summers, who served under President Clinton, fears could become the worst downturn since the steep 1981-82 recession.

Some Republicans are worried, too.

From both Martin Feldstein, who was President Reagan’s top economic adviser, and former Federal Reserve Chairman Alan Greenspan have come calls for deeper government intervention to deal with the threat.

Before it is all over, the government may have to resort to measures last used in the savings and loan crisis of the 1990s. Back then, it was a new agency to take over failing thrifts sunk by bad loans. Today, it could mean a government agency to buy up billions of dollars of mortgage-backed securities that investors are shunning.

The Bush administration thus far has opted for less dramatic measures. In fact, the administration came reluctantly to the biggest step taken to date Д the “teaser freezer” announced two weeks ago.

A deal with the mortgage industry will freeze the low introductory “teaser” rates for five years on some subprime mortgages Д loans to people with spotty credit histories. The rates were to climb much higher, making the mortgages unaffordable for many people and putting their homes at risk of foreclosure.

The hope is that this agreement will buy time for the housing market to rebound. That would make it easier for these homeowners to refinance to more affordable fixed-rate loans.

But estimates are that only about 250,000 people will end up getting a rate freeze Д a fraction of the 3.5 million home loans that could go into default over the next 2 1/2 years.

The administration also is working with Congress to increase the $417,000 cap on the size of loans that the big mortgage companies Fannie Mae and Freddie Mac can handle. This step could help in high-cost housing areas such as California.

In addition, the administration is supporting legislation that would boost aid to lower-income homeowners by increasing the scope of mortgage insurance programs handled by the Federal Housing Administration.

These efforts may help at the margins. They do not, however, address one of the biggest threats to the economy: a spreading credit crisis triggered by the soaring defaults on subprime mortgages.

Some of the biggest names in finance have suffered multibillion-dollar losses as a result, and critical segments of the credit markets have frozen up. Banks and investors fear making further loans or buying securities backed by debt because they do not know how many more loans might go into default.

Ben Bernanke, facing his first major test as Fed chairman, is getting mixed reviews. The Fed was embarrassed when the credit crisis hit in August. That happened only two days after the central bank had decided to keep interest rates unchanged and declared that inflation was a bigger risk than weak economic growth.

The Fed has cut interest rates by a full percentage point since that time. But only the September cut Д a bigger-than-expected one-half of a percentage point Д elicited cheers on Wall Street. The two quarter-point moves brought about market declines as investors worried the Fed did not recognize the severity of the problem.

The trouble is that the credit crisis is occurring at the same time that a run-up in energy prices is increasing inflationary pressures.

And that is the dilemma.

If the Fed cuts interest rates to keep the economy out of a recession, it could sow the seeds for higher inflation and perhaps give the country the worst of both worlds, bringing back that 1970s bugaboo, “stagflation,” in which growth is stagnant and inflation is getting worse.

In a novel approach, the Fed is auctioning off money to the banks in an attempt to get them to open up their loan spigots. The first two auctions, for a total of $40 billion last week, went well. But the amount of the cash provided to the banks paled in comparison with the $500 billion from the European Central Bank.

Many economists believe the Fed will have to cut its federal funds rate, the interest that banks charge each other, at least three more times and strengthen the wording of its statements. In that way, the markets would know the Fed will do whatever is needed to fight economic weakness in spite of its lingering worries about inflation.

“The difference between a soft economy and a recession is confidence. If the Fed appears reticent to do what is needed, like they did at their last meeting, that does not help confidence,” says Mark Zandi, chief economist at Moody’s Economy.com.

As for the administration and Congress, a tax cut possibly in the form of a rebate probably will be debated in the coming year. President Bush told reporters at the White House on Thursday that “we’re constantly analyzing options available to us.” He insisted that the economy’s underlying fundamentals remained strong.

Summers, however, in a speech last week, urged bolder action. “For the last year, the economic consensus, and the policy actions that have flowed from it, has been consistently behind the curve,” he said.

Gaining some currency is the idea of a government agency modeled after the Resolution Trust Corp. of the S&L days that would buy up mortgage-backed securities as a way of dealing with bad loans. About $100 billion in such loans have surfaced and an additional $200 billion are likely, according to market estimates.

If the government spent $150 billion to $200 billion to purchase mortgage-backed securities, the thinking goes, it would prevent a fire-sale that would drive prices of these securities even lower.

When the housing market stabilizes, the price of the government-held securities would begin to rise, allowing the government to sell them back to investors.

Whatever approach the government decides to take, economists said it will take time for the current problems to resolve themselves. They expect this housing downturn, which followed a five-year boom, to last through most of next year even under a best-case scenario in which the country avoids a full-blown recession.

“We have the fundamental problem that we built too many houses and we charged too high a price for them,” says David Wyss, chief economist at Standard & Poor’s in New York. “We have to stop building houses for a while and the prices have to come down. We are trying to make sure that process doesn’t derail the rest of the economy.”

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EDITOR’S NOTE Д Martin Crutsinger has covered economic issues for The Associated Press in Washington since 1984.

A late penalty by Cristiano Ronaldo enabled Manchester United to move within a point of Premier League leaders Arsenal, after they were pushed all the way in a hard-fought contest against Everton.

Ronaldo gave United the lead with a sublime opening goal midway through the first half but Tim Cahill replied four minutes later with a trademark header that took the wind out of the title holders’ sails. But just when it appeared as though the visitors were destined to stretch their unbeaten sequence to 14 matches at Old Trafford Stephen Pienaar needlessly tripped Ryan Giggs in the penalty area to offer the hosts a lifeline that Ronaldo gratefully accepted.

Everton began the match confidently despite the absence of playmaker Mikel Arteta but the opening exchanges were marred by bookings for Cahill and Tony Hibbert, while Wayne Rooney and Patrice Evra also received early cards at Christmas for tackles that were clumsy in nature rather than malicious.

With United missing Edwin van der Sar, Rio Ferdinand and Owen Hargreaves, they struggled to get into their stride, Carlos Tevez’s ambitious long-range volley notwithstanding. The Argentina international also saw his effort blocked when he followed up on Rooney’s angled shot after Cristiano Ronaldo had squeezed in a low cross from the byline. However, Everton looked comfortable enough until Ronaldo nonchalantly broke the deadlock midway through the half. Afforded too much time on the ball, the Portuguese cut inside and bent an unstoppable left-footed 20-yarder past Tim Howard.

Undaunted the visitors soon hit back. Constantly looking to test right-back Danny Simpson, making his first league start for United, it was from the left flank that David Moyes’s side worked their equaliser. Pienaar sent over an inswinging cross and Cahill rose above Evra to head his seventh goal of the season past Tomasz Kuszczak. Everton could even have taken the lead after 32 minutes, when Andy Johnson raced down the exposed left side and found Yakubu Ayegbeni, who teed up Phil Neville, but the former United midfielder lost his composure and fired over from the edge of the area.

Stirred into retaliatory action, the champions laid siege to Everton’s goal and twice came close to restoring their advantage. Rooney’s impudent chip was cleared off the line by the excellent Joleon Lescott and, on the stroke of half-time, Ronaldo exchanged a one-two with Ryan Giggs in a sweeping team move before meeting the Welshman’s cross with a skied volley. After the break, the onslaught continued, Tevez dancing into the area before shooting over and then bringing a fine stop from Howard on 52 minutes after Giggs sent him through down the right.

Everton were holding out bravely. Joseph Yobo and Lescott were continually called upon to put out fires deep in their own half as their midfield withdrew under the sheer weight of red numbers. However, as the match became stretched Everton threatened to break through the home side’s rearguard, which now included John O’Shea in place of Simpson. Johnson outpaced Anderson only to play a sloppy final pass and Yobo ballooned an ill-advised strike from range.

Rooney could have made it 2-1 when Ronaldo slipped a clever free-kick into his path but the 22-year-old shaved the bar with his ferocious strike. And the Everton old boy’s miss looked to have been United’s last chance. But then came Pienaar’s aberration. With just three minutes left on the clock Giggs raced into the area and was heading for the bylline when the South African flicked out a leg - a gift too generous for the United veteran to pass up. Giggs crashed to ground and the Old Trafford faithful rose in unison as Ronaldo coolly clipped in the decisive spot-kick.

File this under “Everything old is new again.”

Eaton Vance Corp. released a survey of financial advisers last week that showed a majority “now view equity income as a distinct asset class.”

If you have been a fund investor for a while, you may be scratching your head because there have been “equity-income” funds and “growth-and-income funds” for years - possibly even in your own portfolio - and you probably thought they already were an asset class unto themselves. Most retirement plans, for example, include several fund types covering a range of investments and the entire spectrum of risks; typically, those plans position equity-income or growth-and-income issues several clicks down the risk scale from, say, an aggressive-growth fund.

In fact, Lipper Inc. has a category for equity-income funds and has had it as a separate asset class for years.

That said, the Eaton Vance study reflects current investment interests, not history. The basic finding was that financial advisers want to use stocks for dual purposes, providing both income from dividends and growth from capital appreciation, and that they want stock-focused funds built to be income-producing supplements to bonds and other income investments.

“That has not been a dominant theme for years, because the 1990s were the decade of the lost dividends,” says Duncan Richardson, chief equity investment officer at Eaton Vance. “People were mostly thinking about the market as a capital appreciation vehicle, and that got extreme in the ’90s, when dividend yields were so low and growth so high.”

Indeed, during the bull market - with dividend yields on the Standard & Poor’s 500 falling to historic lows - most funds of this genre were really “growth-but-no-income funds.” They may have had a mandate to secure dividend income, but most didn’t follow it because focusing on income meant buying slower-growth stocks, sinking a fund to the bottom of the asset class.

During this time, most industry participants divided the world into tightly focused asset classes. Equity-income issues basically became “large-cap value” funds, because the stocks they held tended to be from underpriced big companies.

“Growth-and-income and growth funds were doing the same thing,” says Jeff Tjornehoj, senior research analyst at Lipper. “The better (equity-income) funds used some convertible securities and other strategies to keep income up, but most didn’t, because that’s not where the money was.”

Fast-forward to today: Dividend yields are up, but not wildly. Interest rates, however, are low. And tax-law changes reduced the burden on dividend payments.

Thus, heightened interest in stocks that truly live up to the growth-and-income label.

Says Richardson: “People traditionally had bond ladders going out years and years, but that ladder is laying on its side because you aren’t getting much extra income for going out a few years. As a result, people are taking some rungs out of bond ladders and moving that money into income-producing equities. … You are diversifying away from interest-rate risk and credit risk by looking for income in the equity market.”

“It could be a real sea change in the way people think about how they are getting their income.”

It could be, except that investors are still largely lost on where to turn for a true equity-income fund.

While market conditions have changed, funds have not necessarily returned to the objective shown in their prospectus. Plenty of funds use the magic words in their names, but not in their deeds.

Fidelity Equity-Income (FEQIX), for example, has a yield of just over 1.5 percent. That’s a bit more than double the payout from its sister, Fidelity Large-Cap Value, which occupies the same large-cap asset space, but you’d have to bump it by half to put the payout where it would be attractive to a true equity-income investor.

“If income is important, you need enough to offset expenses and 12b-1 fees on the fund,” says Christine Benz, director of mutual fund research at Morningstar Inc., which does not list equity-income funds as a separate asset class. “You want to be focused on total return - because managers can get into trouble when they go chasing yield - but you’d like the yield to be at 2.25 percent or higher. … You can look into what the fund holds to see if the manager is using convertibles and other strategies to generate more income.”

One other option, for investors seeking income-producing stocks, is to go the route of exchange-traded or closed-end funds, where there is a wide range of equity-income options, many focusing on various flavors of the “dividend achievers” strategy.

“The big point is that advisers - and their clients - want to use stocks to produce income,” Richardson says. “Maybe some growth-and-income and equity-income funds were started with this in mind but they got away from it, so if someone wants to buy equity-income as an asset class, they need to make sure they’re getting a fund that will actually do the job.”

Chuck Jaffe is senior columnist for MarketWatch. He can be reached at cjaffe@marketwatch.com or at Box 70, Cohasset, MA 02025-0070.