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Bruised US economy likely to limp into next year

(Agencies)
Updated: 2008-10-20 18:47

Speaking in a broadcast interview from California, the chairman of the White House Council of Economic Advisers noted that national unemployment stands at 6.1 percent. Ed Lazear said some areas of the US, such as California, have even higher rates of people out of work. "We are seeing what I think anyone would characterize as a recession in certain parts of the country," Lazear said.

Related readings:  Bush to announce new details of bank rescue plan  Obama outlines economic rescue plan  Wall Street soars 11 percent on bank rescue and Morgan deal  US summons banks to meeting on rescue plan

Americans are feeling strained as their paychecks shrink and their savings shrivel. That's causing consumers to cut back, one of the reasons the economy is losing traction. Economic slowdowns overseas, meanwhile, are expected to crimp demand for US exports, which had buoyed up the economy.

Last week, the Treasury Department announced it would inject up to $250 billion in US banks in return for partial ownership, something that hasn't been done since the Great Depression. The government hopes banks will use the capital infusions to rebuild their reserves and bolster lending to customers.

"We took this measure as a last resort," Bush said last week. "Had the government not acted, the hole in our financial system would have grown larger," he warned.

So far this year, 15 banks have failed, compared with three last year. And Wall Street's five biggest investment firms were swallowed by other companies, filed bankruptcy or converted themselves into commercial banks to weather the financial storm.

In other efforts to stem the crisis, the Federal Deposit Insurance Corp. is temporarily guaranteeing new issues of bank debt -- fully protecting the money even if the institution fails.

The FDIC also said it would provide unlimited deposit insurance for non-interest bearing accounts, which small businesses often use to cover payrolls and other expenses. Frequently, these accounts exceed the current $250,000 insurance limit, so the expanded insurance should discourage nervous companies from pulling their money out.

The Fed and the world's other major central banks recently joined forces to slice interest rates, the first coordinated action of that kind in the Fed's history. The United States and other top economic powers also have adopted a five-point action plan and pledge to do all they can to provide relief.

Bush plans to host an international summit to discuss ways to fix the world financial system but warned on Saturday against changes that threaten capitalism. Bush, meeting with French President Nicolas Sarkozy and European Commission President Jose Manuel Barroso at Camp David, did not announce a date or site for the summit. But Sarkozy suggested it be held in the shadow of Wall Street before the end of November.

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