WASHINGTON — The U.S. financial crisis spread around the world like a wildfire on Monday as stock prices plunged here and abroad amid eroding confidence in the world’s banking system.
The Dow Jones Industrial Average plummeted 800 points before a late rally let it close down "only" 369.88 points, at 9955.50. That’s the first time the Dow closed below 10,000 in almost four years.
The Dow first crossed above 10,000 on March 16, 1999.
Monday’s drop on all three major U.S. indices to levels first reached a decade ago was a sobering reminder that Wall Street and the retirement plans of ordinary Americans are spiraling downward together. The S&P 500 was off 42.34 points to 1506.89 and the Nasdaq sunk 84.43 points to 1862.96.
"This is not the Great Depression. People should not get panicked," said Lyle Gramley, an investment adviser and former Reagan era Federal Reserve governor who has followed markets for more than five decades.
The Fed Monday took more bold steps to keep the widening financial crisis from growing out of control. Before U.S. markets opened, the Fed announced that it would again expand its short-term emergency lending, bringing to $600 billion the amount it has made available to lenders. Its auction of short-term loans to lenders is designed to lubricate the wheels of global finance that are seizing up.
Yet from well-heeled Europe to emerging upstarts Mexico and Brazil, depositors fled banks and traders fled local stock markets in a panicky stampede to the exits.
What sparked the global selloff in part was the German government’s announcement Sunday that it would backstop all bank deposits following the collapse of a rescue plan for a troubled German mortgage lender. This led to fears that problems outside the United States were worse than feared and a global panic ensued.
In Europe, many exchanges posted their worst day ever. France’s CAC-40 index fell 9 percent, Germany’s DAX-30 fell by more than 7 percent and London’s FTSE was off 7.9 percent. Russia's stock index fell by more than 19 percent before trading was halted in what is becoming a near-daily occurrence. Asian stocks were off by about 5 percent, led by Indonesia, whose exchange fell by 10 percent.
Financial contagion also spread quickly to big emerging economies that helped fuel global economic growth in recent years as the U.S. economy slowed.
In Brazil, until recently a darling of global investors, trading on the Bovespa exchange in Sao Paulo was halted twice before noon, as panicky investors pulled out en masse, triggering so-called circuit breakers to halt rapid declines. Wiping out almost two years of gains, the Bovespa closed down 13.54 percent.
Mexico saw its stock market fall 9 percent shortly after the opening bell, before recovering to close off 5.4 percent after a volatile day in which finance ministry officials urged citizens to begin saving in case a global crisis unfolds.
Simply put, the world on Monday suffered a modern-day equivalent of a bank run as investors panicked and nervous traders everywhere ran for cover. They shifted capital to safe instruments such as gold, which rose $33.80 or 4.1 percent, to $862.70 an ounce. And they flocked to Treasury bonds. The yield, or interest payment, on a three-month Treasury was just over four-tenths of a percent, meaning investors were willing to take almost no profit in hope of simply not losing money in stocks.
Oil prices, which hit a record high of over $147 a barrel in July, fell $6.07 a barrel, or 6.5 percent, to settle Monday at $87.81 a barrel on the New York Mercantile Exchange.
The slide in oil prices is likely to mean much cheaper gasoline prices for American motorists in weeks ahead, one of the rare reasons for cheer as recession almost certainly spreads. The average price nationwide for a gallon of unleaded gasoline stood at $3.50, down 17 cents from a month ago, according to AAA.
President Bush went before cameras in San Antonio, Texas, and said the $700 billion rescue package passed by Congress last week will soon help restore confidence to the U.S. financial system.
"It's going to take a while to get in place a program that, one, is effective and, two, doesn’t waste taxpayers' money," said Bush. He pleaded for patience. "It’s going to take awhile to restore confidence in the financial system, but one thing people can be confident of is the bill I signed is a big step toward solving the problem."
Banks are unwilling to lend to each other, or to many consumers and companies. To break this freeze on credit, the rescue plan seeks to take bad assets like distressed mortgage bonds off the balance sheets of banks so they can again begin loaning money.
Treasury announced Monday that Neel Kashkari, the agency's assistant secretary for international economic issues, will run the rescue program and market stabilization efforts.
Like Treasury Secretary Henry Paulson, Kashkari is a veteran of investment bank Goldman Sachs, where he headed the San Francisco-based information-technology investment-banking division.
Kashkari will oversee a complex start-up program to take a wide range of assets no one in the private sector wants, and over time sell them back into financial markets. Late Monday, Treasury announced it would begin taking bids Wednesday for asset-management companies, auction managers and accountants needed to help run the rescue plan. It will announce bid winners next week.
The Federal Reserve was also busy Monday trying to slow the global bleeding. Even before the opening bell rang on the New York Stock Exchange, the Fed announced it was yet again expanding its Term-Auction Facility — a short-term emergency lending program for banks and other financial firms — to ensure that money continues to flow through the banking sector.
The Fed’s 28-day and 84-day loans to lenders — companies bid for these short-term loans since they are unwilling to lend to each other — were each raised by another $150 billion. The move raised the total that the Fed has made available through this facility alone to a once unimaginable $600 billion.
This huge sum in short-term lending reflects the training of Fed Chairman Ben Bernanke, whose academic career was dedicated to the study of the Great Depression and other financial calamities. He has long said that the Fed failed to act aggressively in the financial crisis following the 1929 stock market crash, and he's determined not to repeat that mistake.
"Clearly the Fed has exercised authority that goes well beyond what I thought normal for a central bank," said Paul Volcker, who was Fed chairman from 1979-87, during presentation of a report in New York on Monday.
Asked by McClatchy if there's ever been a time when a Fed chairman has taken more action in a shorter period of time, Volcker was succinct.
"The answer is no," said Volcker, who's known best for raising interest rates so high to choke inflation that they pushed the U.S. economy into a deep recession in 1981-1982, but the economy emerged to a long boom without parallel.
In other action Monday:
- The Fed said it was consulting with Treasury about possibly venturing into the market for commercial paper, a sort of promissory note issued by major U.S. corporations to fund their short-term needs such as making payroll. This market in September fell by about $153.5 billion, its largest plunge ever, underscoring how much business is slowing down.
The move encourages banks to keep their required reserves and perhaps excess reserves deposited at Fed district banks. The Fed would then operate as a bank, loaning that money out in short-term loans to further grease the gears of a financial system that is seizing up.
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