New fears on US economy

October 15, 2008
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, NEW YORK, October 15 – A top Federal Reserve official raised new fears about the health of the US economy, adding to worries of a global slowdown while nations are already battling a serious crisis in money markets.

The comments came as the United States unveiled plans to take a stake in nine major banks, propping up more institutions hit by the credit crunch that has set off the worst financial crisis since the Great Depression.

"This is an essential short-term measure to ensure the viability of America\’s banking system," President George W. Bush said Tuesday in announcing the move, the latest in a series of US government rescues.

Acknowledging he had his own misgivings about the decision, Bush said the government\’s intervention was "not intended to take over the free market, but to preserve it."

The rescue plan followed similar bank bail outs in Europe in recent weeks, as world governments have taken urgent steps to restore confidence in the financial system and ease the credit crunch at the root of the current turmoil.

But while those measures appear to be soothing some concerns, there are growing worries that the global economy is sliding into recession.

Janet Yellen, president of the San Francisco Federal Reserve, said the United States, the world\’s largest economy, appeared to be in recession already.

"Virtually every major sector of the economy has been hit by the financial shock," she said in a speech in California.

"The recent flow of economic data suggests that the economy was weaker than expected in the third quarter, probably showing essentially no growth at all," Yellen said.

"Growth in the fourth quarter appears to be weaker yet, with an outright contraction quite likely."

Recession is typically defined as two consecutive quarters of economic contraction or negative growth. The US economy grew 2.8 percent in the second quarter, and third-quarter data are not expected until the end of October.

Worries about a worldwide slowdown and the crisis in the money markets have given global stock markets a battering this year. While there have been wild swings, all the main markets have suffered significant losses in 2008.

Share markets were broadly mixed on Wednesday after the latest US rescue.

In Asia, Japan was up 1.1 percent while Hong Kong was down 2.9 percent. The market in Australia, which announced a 7.25 billion dollar economic stimulus package on Tuesday, dropped 0.8 percent.

Japan and Hong Kong have lost 38 percent and 41.5 percent so far this year, respectively, and analysts say investors — even those who feel the credit crisis is easing — are still concerned about a worldwide economic slowdown.

"All the good news has now come out," said Masatoshi Sato, a broker at Japan\’s Mizuho Investors Securities, referring to the slew of bailouts and rescues. "Attention has now shifted to the real economy."

At the opening bell in Europe on Wednesday, London shares slipped 0.19 percent, French stocks were down 0.55 percent and Germany\’s Dax index in Frankfurt was off 0.23 percent.

In the US, the Dow Jones Industrial Average fell 0.82 percent Tuesday while the Nasdaq shed 3.54 percent.

Governments around the world have been scrambling to shore up banks and restore public confidence, pledging trillions of dollars and guaranteeing bank deposits as well as injecting temporary funds to keep lending.

US Treasury Secretary Henry Paulson said that the decision to take a government stake in nine major banks was "objectionable to most Americans" but that it had to be done.

"Today\’s actions are not what we ever wanted to do," he said. "But today\’s actions are what we must do to restore confidence to our financial system."

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