What's Driving The Market Plunge?
MICHELE NORRIS, Host:
From NPR News, this is ALL THINGS CONSIDERED. I'm Michele Norris.
MELISSA BLOCK, Host:
I'm Melissa Block. And it has been another day of woe on Wall Street. In fact, it didn't matter which stock market you looked at today, all over the world, the major indexes were down. Investors started selling yesterday, after the Federal Reserve said it saw significant downside risks to the economic outlook. And today, the mood only worsened. The Dow Jones Industrial Average lost nearly 400 points, about 3.5 percent. NPR's John Ydstie joins us to try to decipher what's happened.
And John is this really all it took, a few words from the Fed yesterday to start this sell-off?
JOHN YDSTIE: Well, that got things rolling downhill yesterday, but there was also news that China's factory output slowed for the third straight month and then some data today showing Europe barely growing, so fears that the U.S. and Europe might slip back into recession emerged again. And this recession worry also comes in the context, of course, of negotiations with Greece aimed at avoiding a debt default. That's been a source of volatility in the market for months.
BLOCK: And what about that, John? Was there any progress with Greece today?
YDSTIE: No, no agreement to get Greece the next $11 billion it needs from the IMF, the EU and the European Central Bank to pay its debts. Officials continue to say the situation is manageable, but the delay is raising big questions about the viability of the European banks that hold Greek debt. And that concern was elevated today by Mohamed El-Erian of the big bond fund PIMCO. He warned in an op-ed in the Financial Times that the European banks need to be shored up, maybe with a program like the TARP, which was used to prop up U.S. banks.
And then, this afternoon, the FT reported a senior French official saying that 16 European banks are close to failing their stress tests and will have to seek new funds at once. All this eroded confidence further. European banks were hit especially hard, for instance, shares in Credit Agricole, a French bank, dropped almost 10 percent today.
BLOCK: Wow. And John, what about the Fed's action yesterday? Along with those words we talked about, about significant downside risks to the economic outlook, the Fed decided to put in place something called Operation Twist. It was supposed to lower long-term interest rates and help the economy. Is the sell-off a judgment from investors that they think it's not going to work?
YDSTIE: Well, I think it's a judgment that the Fed's action isn't enough to ensure the U.S. doesn't slide back into recession. But the Fed's announcement to both buy longer term U.S. debt and to buy U.S.-backed mortgage securities did certainly help to push long-term U.S. interest rates lower today. The interest rate on the 10-year bond, which is a benchmark for many mortgages, is about one and three-quarters percent, a level last seen in the 1940s.
And the rates on the third-year bond are now below three percent, so the Fed's announcement had some success. Now, the Fed had a good deal of help from investors fleeing the stock market and buying U.S. bonds as they look for a safe place to put their money.
BLOCK: A safe place to put their money, John, even though, we'll remember, S&P downgraded U.S. debt in August, and there's all this rhetoric about America not being able to pay its bills.
YDSTIE: Absolutely true, Melissa. But I guess it's about finding the least dirty shirt you can if there are no clean shirts in your closet. And speaking of that, the U.S. dollar also strengthened today. It hit a seven-month high against a basket of currencies. That contributed to a big fall in the price of gold and the price of oil went below $80 a barrel. Actually, oil and other commodities also lost ground today because of fears demand will fall if there is another recession.
BLOCK: Okay. John, thanks so much.
YDSTIE: You're welcome.
BLOCK: That's NPR economics correspondent John Ydstie.
NPR transcripts are created on a rush deadline by Verb8tm, Inc., an NPR contractor, and produced using a proprietary transcription process developed with NPR. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.