The government's drastic economic rescue efforts will eventually pay off, President Bush insisted Friday, offering calming words to anxious Americans but no suggestion of a quick revival as Wall Street saw another wild day.
The economy didn't falter overnight, "and it's going to take a while for the credit system to thaw," Bush said just before the markets opened, speaking across a park from the White House at the U.S. Chamber of Commerce building, a symbolic headquarters of American business.
Despite a flurry of radical actions by the Bush administration and the Federal Reserve, banks in the United States and abroad are still wary of lending money to each other and to their customers. The credit clog is depriving the wheezing U.S. economy of oxygen.
Financial and credit problems have dragged on for more than a year and took a dangerous turn for the worse last month. All the fallout threatens to plunge the U.S. economy — as well as the world economy — into a painful recession.
That has led to erratic trading on Wall Street, where the Dow Jones industrials have swung widely, slashing a trillion dollars of wealth from the markets one day, only to pile some of it back on the next. The Dow closed down 127 points at 8,852 Friday after being up more than 300 points earlier in the afternoon.
Housing Downturn Continues
Before Bush spoke, there was more grim news: Homebuilders cut back sharply, dropping new-home construction to its slowest pace since January 1991, when the country was in a recession and going through a similar painful housing correction.
The Commerce Department reported Friday that construction of new homes and apartments dropped by 6.3 percent last month, a much bigger decline than the 1.6 percent decrease that had been expected. It pushed total production to a seasonally adjusted annual rate of 817,000 units.
Applications for building permits, considered a good sign for future activity, also fell sharply in September, dropping by 8.3 percent to an annual rate of 786,000 units, the weakest level since November 1981.
Also on Friday, a Reuters/University of Michigan survey found that consumer confidence suffered its steepest monthly drop on record in October. The survey index of confidence plummeted to 57.5 from 70.3 in September.
Bush: Rescue Plan 'Big Enough' To Work
Bush defended the recent deep government intrusions into private business, which would have been extraordinary for any U.S. administration but have been particularly so for a Republican president.
"I would oppose such measures under ordinary circumstances," Bush said. "But these are not ordinary circumstances."
Seeking to calm fearful investors, Bush said the steps are "big enough and bold enough to work."
Earlier this week, the Treasury Department announced it would inject up to $250 billion into U.S. banks in return for partial ownership stakes, something that hasn't been done since the Great Depression of the 1930s. The government hopes banks will use the capital infusions to rebuild their reserves and bolster lending to customers.
Bush and his top economic aides have repeatedly asked Americans to be patient and give the government's relief efforts time to work. Democrats on Capitol Hill, though, insist another round of economic stimulus is needed.
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.
Backing The Banks
At the same time as the Treasury announcement, the Federal Deposit Insurance Corp. said it would temporarily guarantee 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 are mainly used by small businesses 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.
Last week, the Fed and the world's other major central banks 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 adopted a five-point action plan and pledged to do all they can to stem the crisis.
Even with so many unprecedented steps taken, Wall Street has convulsed. On Thursday, the Dow Jones industrials finished up 401.35 points, after falling 380 points early in the session. A day earlier, the Dow fell a staggering 733 points. The index started the week with a record-shattering 936-point gain.
Fed Chairman Ben Bernanke warned this week that even if financial markets were to stabilize, the economy would not quickly snap back to good health.
Unemployment — now at 6.1 percent — could hit 7.5 percent or higher by next year. Many analysts predict that the economy will shrink later this year and early next year, meeting the classic definition of a recession. Some believe the economy already jolted into reverse during the July-to-September quarter.
Americans are feeling strained as their paychecks shrink and their savings shrivel. That's causing shoppers to cut back, one of the reasons the economy is losing traction. Economic slowdowns overseas, meanwhile, are expected to crimp demand for U.S. exports, which has been a main force keeping the economy afloat.
From The Associated Press