Bush Administration Accelerates in Waning Days
WASHINGTON – At a time when most administrations are slowing down, the Bush White House appears to be speeding up — at least when it comes to getting the $700 billion financial rescue program up and running.
Treasury Secretary Henry Paulson, President Bush's point man on the gigantic program, is pushing his staff to do everything possible to show markets that the government is getting the money out the door to bolster the financial system and get banks to resume more normal lending.
On Wednesday, one day after Sen. Barack Obama won the presidency, the Treasury Department detailed how it planned to borrow a record $550 billion before the end of this year to back the bailout. Treasury said it would sell $55 billion in bonds next week, including a reintroduction of the three-year note — all part of a massive borrowing effort required because of the cost of the bailout and a budget deficit that some believe could hit nearly $1 trillion next year.
The government's surging financing needs are a stark reminder of the challenges awaiting Obama even as the current administration moves to implement its rescue program and the Fed fine-tunes its approach to the crisis.
The financial turmoil flared anew Wednesday with the Dow Jones industrial average plunging 486.01 points, or more than 5 percent, as investors absorbed more bad economic news with a report on the manufacturing sector showing that the segment of the economy where most Americans work had dipped into recession territory in October.
The selling carried over to Asia, where Japan's Nikkei stock average retreated 5.7 percent and Hong Kong's Hang Seng Index lost 6.7 percent in early trading Thursday.
Investors were braced for more bad news Thursday with the number of newly laid-off workers filing claims for unemployment benefits expected to remain around 480,000, a level that usually signals a recession.
Economists expect a separate report will show productivity slowed to a weak 0.8 percent rate of gain in the third quarter, far below the 2.8 percent increase in the second quarter. And they were looking for the slowdown in productivity to be accompanied by a rise in labor pressures with unit labor costs climbing at a rate of 2.8 percent, compared with the 0.5 percent rate of decline turned in during the second quarter.
And those reports were coming one day before the government was scheduled to report on unemployment for October, a report expected to show that the jobless rate shot up to 6.3 percent last month as businesses cut 200,000 workers from their payrolls, the 10th straight month of joblessness since January.
The government said last week that the overall economy, as measured by the gross domestic product, fell at an annual rate of 0.3 percent in the July-September quarter, reflecting the biggest drop in consumer spending in 28 years. Analysts are forecasting that GDP will fall by an even larger amount of around 2 percent in the current quarter. That would meet the classic definition of a recession of two consecutive quarters of declining GDP.
Mark Zandi, chief economist at Moody's Economy.com, said he thinks GDP will keep shrinking through the first half of next year, pushing the unemployment rate up to 8 percent before a solid rebound can begin.
Zandi expects this downturn to produce the most severe unemployment since the 1981-82 recession, when the jobless rate jumped to 10.8 percent, the highest since the 1930s.
"I think we are through the worst of the financial panic, but I expect the recession will last through next summer," Zandi said.
While major bond trading firms are projecting that the government will need to borrow a record $1.4 trillion during the current budget year, which began Oct. 1, Zandi expects the borrowing costs to be closer to $2 trillion.
He noted the size of the rescue program that needs to be financed and the likelihood that Obama and a Congress with larger Democratic majorities will pass a second economic stimulus program of between $150 billion and $300 billion.
On Wednesday, the Federal Reserve said it will slightly boost the interest rates it pays banks on their required reserves and the excess reserves they choose to deposit with the Fed. The rescue bill authorized the central bank to start paying interest rates to commercial banks on the reserves. Policymakers hope the move will further bolster the banks' reserves.
In other developments, Treasury also gave Congress its first report on the operation of the bailout fund, detailing the $125 billion the government spent last week to buy stakes in nine of the country's biggest banks. The bailout legislation requires Treasury to issue reports each time its spending passes a $50 billion marker.
Paulson has pledged to work with Obama to ensure a smooth transition. He has already set up desks and phone lines at the department where Obama's incoming Treasury team can work between now and the inauguration on Jan. 20.
In light of the crisis, Obama is expected to quickly name members of his economic team. Former Treasury Secretary Lawrence Summers, who served in the Clinton administration, and Timothy Geithner, president of the New York Federal Reserve Bank, are among the names being mentioned for Treasury secretary.