Dow Falls Below 8,600 For First Time Since 2003 The Dow Jones industrial average has fallen below 8,600 points for the first time since 2003. Cary Leahey, senior economist with Decision Economics, says many of the Bush administration's moves have come too late and the market is trading off of "fear and just more fear."
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Dow Falls Below 8,600 For First Time Since 2003

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Dow Falls Below 8,600 For First Time Since 2003

Dow Falls Below 8,600 For First Time Since 2003

Dow Falls Below 8,600 For First Time Since 2003

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  • <iframe src="https://www.npr.org/player/embed/95567776/95567761" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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The Dow Jones industrial average has fallen below 8,600 points for the first time since 2003. Cary Leahey, senior economist with Decision Economics, says many of the Bush administration's moves have come too late and the market is trading off of "fear and just more fear."

MELISSA BLOCK, host:

From NPR News, this is All Things Considered. I'm Melissa Block. It was another very rough day for stocks. The Dow plunged 678 points - that's more than seven percent - ending below 9,000 for the first time in more than five years. The pattern has been the same in recent days. The Dow bounces up and down in the morning, turns negative in the afternoon, and takes a dive in the last hour of trading. Today was no different, and this on the first anniversary of the market's all-time high, over 14,000. We turn once again to Cary Leahey, senior economist with Decision Economics. Thanks again for being with us.

Dr. CARY LEAHEY (Managing Director & Senior Economist, Decision Economics): You're very welcome.

BLOCK: Cary, I spoke with you just two days ago, and then we were saying the Dow fell below 10,000 for the first time in four years. Two days, and now we're below 9,000. What's going on?

Dr. LEAHEY: Well, you continue to have very serious efforts made by the global central banks. They did a coordinated rate cut sooner than I expected, and it even included players like China in there. You have a partial nationalization of the British banking system and talk from a conservative Republican administration of a partial nationalization of our own banking system by direct purchases of bank stock. I mean, once again there you have a situation where the market just cannot wait for an auction plan which was to kick in sometime in early November. Can't wait that long. And the only way you can give money to people quickly is to write them checks, and the Bush administration may have to write checks to banks right now.

BLOCK: And all those things that you mention - the interest rate cuts, everything else - were supposed to stabilize markets. But clearly it's not working.

Dr. LEAHEY: Well, the difficulty you have with this situation is people are saying that it's a panic move rather than a sign of resolution, or they should have done this long ago. Or you can make an argument that they should have gone at the root cause of the problem which is homeowner foreclosures. Ten years ago they should've gotten at the root cause of the problem which was lax standards in mortgages to begin with. So it's a little bit too late, and the market is just trading down off of fear and just more fear.

BLOCK: And what's going on at the very tail end of the trading day? I mean, it had been tapering down throughout a good chunk of the day, but then in the last little - in the last half hour or so, it just takes a dive.

Dr. LEAHEY: Well, you probably have two things going on. Probably the individual investors like you and me out there probably called their brokers and they're putting in those trades. And also there probably are some mechanical programs that are triggered late in the day. And so you're getting both some very large institutions doing selling and some little people doing some selling as well. But everyone is trying to head to the door in the last half hour.

BLOCK: And what could possibly turn this around? I mean, how many more days dropping 500, 600 points are we likely to see here?

Dr. LEAHEY: Well, I would have said you should get some bottom, whether it's false or not, and have a very strong recovery which tends to happen. And even though you could talk about the horrors of the '30s where the markets fell by over two-thirds, but that happened over a three-year period. Now we're talking about it happening at hyper speed in one year. I think it's time, and I think once again - and I hope people don't think I'm being facetious when I say it - to use an analogy that's springing up around here, you really do have to treat this kind of like a situation at a burger drive-in where you're going to give your money for your Big Mac, but you're afraid at the next window they won't give you the Big Mac. So you won't give them the money, and they won't make the Big Mac. I think the government is going to have to, in some sense, guarantee all transactions so you know at the next window you're going to get the Big Mac that you ordered just two minutes ago.

BLOCK: Cary, are you among those who think we are either headed for a recession or in one right now?

Dr. LEAHEY: Unfortunately, I felt we were in a mild recession starting at the beginning of the year, and unfortunately things intensified in September even before the markets melted down. Now, we did have a lot of lousy weather in that month, but I think things got worse. And people are scared that, A, the credit crisis is global and, B, that the U.S. recession has intensified and is also spreading quite significantly among the rest of the world.

BLOCK: Well, Cary Leahey, senior economist with Decision Economics, thanks very much.

Dr. LEAHEY: You're very welcome.

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Markets Wilt On Worries About Credit Woes

In Depth

Your questions answered on:

Stocks went into a tailspin in late trading Thursday. The Dow closed down 678.91 points, to 8579.19, marking the first time in five years that the benchmark index closed below 9,000. Exactly a year ago, the Dow was at its all-time high of 14,164. It has lost 39 percent since then.

The bulk of the sell-off happened in the last hour of trading as investors grew increasingly convinced that a global recession was inevitable. To now, most of their gloom had been centered on financial companies caught on the wrong side of the financial crisis. On Thursday, that concern spread to companies investors perceived vulnerable to the credit crunch the financial crisis has sparked.

GM Hit Hard

General Motors, one of the Dow's component stocks, was hammered. Its share price fell more than 30 percent after ratings agency Standard & Poor's said it had put the automaker on a watch list to possibly downgrade its credit rating.

That was enough to spook investors to drive down prices. The sell-off comes in spite of a roster of moves aimed at building investor confidence. Earlier this week, the Treasury announced that it would give credit markets a boost by buying short-term loans known as Commercial Paper. Businesses buy commercial paper to help with cash flow — they are like short-term IOUs that allow them to pay for raw materials or for payroll. The commercial paper market has dried up as banks have held onto the cash. The Treasury was trying to help. That did little to thaw the credit markets.

On Wednesday, the Fed announced a coordinated half-point interest rate cut with five other central banks. The thought was that making borrowing cheaper would free up credit. Instead it only seemed to rattle investors more. They couldn't decide if the rate cut was an indication that central banks were prepared to do whatever it took to prevent a global recession or whether it meant central bankers were trying to stave off something worse.

Will U.S. Invest Directly In Banks?

Thursday morning, U.S. investors woke to the news that the Treasury Department was considering taking ownership stakes in U.S. banks. NPR reported last week that Treasury Secretary Henry Paulson was weighing a plan in which the U.S. government would directly inject cash into struggling firms in exchange for an ownership share. The money to do that would be taken from the $700 billion financial rescue package Congress passed and President Bush signed last week.

Many economists have said a cash injection plan would be a better way to address the financial crisis than just taking distressed assets off their books at firesale prices. "These capital injections are something that Secretary Paulson is actively considering," said White House spokeswoman Dana Perino at a press conference Thursday.

All this was still not enough to get credit markets moving. The difference between what banks and the Treasury pay to borrow three-month money, the so-called TED spread, widened to 4.0 percentage points on Thursday, according to Bloomberg figures. That is biggest spread since Bloomberg began compiling data in 1984. To give an idea of just how much the financial crisis has affected credit — the Ted spread was 1.16 percentage points a month ago.

Thursday also marked the return of short sellers to the market following the expiration of a three-week Securities and Exchange Commission ban on short selling more than 950 financial stocks. Short sellers "borrow" shares that they expect to lose value and sell them. When the price does drop, they buy the now cheaper shares to pay back the ones they borrowed at the higher price — and make a profit on the difference. It is unclear what effect their return had on the markets.

Fed Gives AIG New Loan

After the market closed on Wednesday, the Fed announced that it decided to extend a second loan of nearly $38 billion to American International Group, the giant insurer that it had seized and rescued just last month. In exchange for an $85 billion loan, it took over AIG and fired its management.

The bailout was supposed to give AIG time to sell off its assets in an orderly fashion. Now, it seemed the $85 billion wasn't enough. AIG has already tapped $70.3 billion of the initial emergency loan issued three weeks ago. The decision to issue a second loan has raised questions about just how deep a hole AIG is in. In this second loan, the Fed will take some of AIG's highly-rated investment-grade securities and give the company cash.

While the securities AIG is borrowing are considered very safe, it still means the Fed is on the hook to AIG for as much as $123 billion. A Fed spokesman told NPR that AIG is just having the same credit crunch trouble as many other companies are having right now. No one wants to buy securities from anyone because everyone is hoarding their cash. Because of that, the Fed has had no choice but to become the lender of last resort.

Some investors worry that if the Fed underestimated the scope of AIG's problems, perhaps it has also undershot the mark with its $700 billion bailout package, and it will end up needing more money to rescue the financial industry. What it is important to remember, however, is that even if the government ends up spending more than $700 billion, it won't necessarily be a dead loss. That money will be going to shore up banks and to buy assets — and those assets will have some value. It just isn't clear right now what exactly that value will be.

With reporting by Dina Temple-Raston