Janet Yellen labels it a recession

October 14, 2008 12:00:00 AM PDT
We all know we're in a financial crisis, but Tuesday night, the head of San Francisco's Federal Reserve Bank actually said what leaders in Washington seem reluctant to.

Janet Yellen spoke at a dinner in Palo Alto and uttered the "R" word -- recession. Yellen talked about weak growth in the third quarter, then continued, "Growth in the fourth quarter appears to be weaker yet, with an outright contraction quite likely. Indeed, the U.S. economy appears to be in a recession.''

To deal with the teetering economy, the federal bailout effort is moving into a realm we haven't seen since the Great Depression. Tuesday the government announced it will take partial ownership of U.S. banks. Call it the "reluctant" rescue plan. The Treasury Secretary didn't really want to go this far, so there were mixed feelings from Henry Paulson and apparently some of the banks.

Reports emerged Tuesday night that the chairman of San Francisco-based Wells Fargo wasn't too receptive about receiving a multi-billion-dollar bailout. However, he eventually signed on to the idea, since he was under intense pressure from the Treasury Secretary.

It was an announcement Treasury Secretary Henry Paulson never wanted to make -- that the government now plans to purchase $250 billion worth of shares in the nation's top banks.

"Government owning a stake in any private U.S. company is objectionable to most Americans, me included," said Paulson.

Paulson instead wanted to use all of the $750 billion bailout money to purchase bad mortgage debt, but analysts say a shift in policy was unavoidable.

"I think the fact that Prime Minister did it first and was bold enough to do it, and then other European leaders basically did the same thing, I think it probably makes sense that the United States do the same thing here because it's the quickest way to infuse cash into the banking system," said Leon Panetta, President Clinton's former Chief of Staff, now with the Panetta Institute for Public Policy.

Not everyone, though, was taken with the idea. At a Treasury Department meeting on Monday with the country's top bank executives, the Chairman of Wells Fargo, Richard Kovacevich reportedly balked at the plan.

Tuesday night in San Francisco, Kovacevich made no mention of it at the Bay Area Council's annual dinner where he received an award. However, the New York Times reports Kovacevich told Secretary Paulson his bank was not in trouble and didn't need a bailout. Paulson, however, offered no alternative.

"The idea there was to avoid the stigma of a bank, a weaker bank, receiving government investment in its capital. That could make a bad situation worse. It simply shines the spotlight on some of the weaker banks in the system," said Gary Schlossberg, from Wells Capital Management.

So far, reaction to the plan has been positive -- lending between banks seems to be picking up as the overnight rates banks charge each other, have fallen for the second straight day. Still, while that may be bringing a certain level of relief, Panetta warns at some point, everyone must come to grips on how we're going to pay for it.

"The federal government is probably looking at what may very well be close to a trillion dollar deficit next year," said Panetta.

That is a jaw-dropping figure considering it is well over this year's national deficit of $454 billion, an all-time high.


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