Geithner Warns of Deeper Slump, Seeking Backing for Bank Rescue

March 5 (Bloomberg) -- Treasury Secretary Timothy Geithner warned the U.S. recession is worsening, and the Federal Reserve said there’s little hope of an improvement in coming months.

Almost all U.S. industries saw deterioration in their business in January and February, with food and drug necessities among the few exceptions, the Fed’s Beige Book survey showed yesterday. Geithner said at a Senate hearing that “this is still a deepening recession and a deepening credit crunch.”

Confronted with a relentless slide in financial stocks, Geithner and Fed Chairman Ben S. Bernanke are trying to counter congressional opposition to more bank bailouts. They’ve warned there’s little chance of a recovery without a revival of lending and trading in securities backed by loans.

“People are tired of the feeling that we are putting money into the process with little visibility of the outcome,” said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, and a former congressional staff economist. At the same time, “the initial dose of medicine was totally overwhelmed by the disease.”

The Standard & Poor’s Financials Index dropped 0.75 percent yesterday to 92.06, its 13th decline in the past 16 trading days. The loss came on a day when the broader market rallied, with the S&P 500 index advancing 2.4 percent. General Electric Co. hit $5.73, the lowest level since December 1991, on concern about mounting losses at the Fairfield, Connecticut-based company’s finance unit. Wells Fargo & Co. reached a 13-year low.

‘Pulling Back’

“The deepening recession is putting greater pressure on banks and in response many banks are pulling back on credit,” Geithner said in testimony to the Senate Finance Committee. “Critical parts of our financial system are working against recovery.”

The strength of an economic recovery hinges on the government’s ability to supply financial companies with fresh capital to get credit flowing again, the Treasury chief indicated.

“The first really important thing we do is to make sure that banks have the resources they need to be able to provide credit to the economy,” Geithner said at the Senate Finance Committee hearing yesterday.

Geithner appears before the House Budget Committee today at 10 a.m. in his third testimony on the Obama administration’s fiscal proposals in as many days. President Barack Obama’s 2010 budget indicated that the government’s financial rescue may need another $750 billion after an initial $700 billion.

More Money

Bernanke, at a Senate Budget Committee hearing two days ago, said more funds may be needed beyond the $700 billion already approved, depending on the results of a review of the biggest 19 banks’ capital levels.

Geithner’s assessment of a pull-back in credit was reflected in the Beige Book. Lending fell across the U.S. and credit availability “remained tight,” the Fed said.

Ten of 12 Fed district banks reported “weaker conditions or declines” in their regional economies, and respondents didn’t expect a “significant pickup” until late 2009 or early 2010, the Fed said yesterday. Housing “remained in the doldrums in most areas,” the central bank said.

The recession and financial crisis have prompted Bernanke to start a $1 trillion lending program and buy $600 billion of housing debt, while the Obama administration is betting its $787 billion fiscal stimulus will reverse the economy’s slide.

Details Coming

Geithner also said yesterday that details on a separate $1 trillion program to remove distressed mortgage assets from banks’ balance sheets will be coming within the next two weeks.

Economic data yesterday indicated little chance of a rebound soon. The Institute for Supply Management’s index of non-manufacturing businesses, which make up almost 90 percent of the economy, fell to 41.6 from 42.9 in January. Readings below 50 signal contraction. The ADP Employer Services survey showed employers cut a larger-than-projected 697,000 jobs last month.

The reports indicated that the economy’s contraction this quarter may be at least as big as the 6.2 percent annualized slide in the last three months of 2008. The ADP release reinforced forecasts for a Labor Department report tomorrow to show the highest unemployment rate since 1984.

At Congress yesterday, Geithner tempered his pessimism by noting that mortgage rates have come down, borrowing costs are lower for banks “than they would otherwise have been” and some commercial loan markets are starting to revive.

Effort Needed

Still, he said any recovery may take more time and more government aid, he said. “We’re at the beginning of that process and it’s going to take more efforts by us,” the Treasury chief told senators. “It’s going to require more carefully designed, appropriately conditioned capital from your government, as well as a much more powerful set of direct credit support to the markets that are critical for consumers and small businesses.”

The start of an economic recovery by year-end will depend on policy makers’ success, said Dean Maki, co-head of U.S. economic research at Barclays Capital Inc. in New York who formerly worked for the Fed.

“There is the risk that the policy moves aren’t successful and financial markets take another leg down if policy is perceived as not helpful,” Maki said.

To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.netScott Lanman in Washington at slanman@bloomberg.net.

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net