Stocks plunge around the world

Stocks plunge around the world
By Kevin G. Hall | McClatchy Newspapers
10/6/08

WASHINGTON " In an incredibly volatile Monday, Asian and European financial markets slumped deeply, U.S. stocks plunged below an important psychological barrier, oil prices fell below $90 a barrel and the Federal Reserve took muscular new actions in a desperate bid to keep credit markets functioning as a widening financial crisis gripped the globe.

Within an hour of the opening bell, the Dow Jones Industrial Average fell by more than 500 points to 9823, plunging below the psychological barrier of 10,000 and returning stocks to the value of nearly a decade ago. The Dow briefly flirted with these levels in October 2004, but rebounded.

European and Asian markets plunged by about 5 percent Monday, as a crisis in confidence in banks is now taking firm root around the world. On Sunday, German Chancellor Angela Merkel said her country would backstop all private bank accounts, a move designed to discourage savers from withdrawing their money.

That came after a government plan to rescue a giant German mortgage lender collapsed, and after banks failed in Belgium, Luxembourg and elsewhere.

Nervous traders on Wall Street ran for cover Monday, shifting capital to safe instruments such as gold, which rose by more than 5 percent, and Treasury bonds. The yield, or interest payment, on a one-month Treasury was .05 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 to $89 a barrel in early morning trading on the New York Mercantile Exchange, as oil and other commodities no longer seem a safe place to park investors' money.

Ahead of the Monday opening of the New York Stock Exchange, the Federal Reserve issued a statement saying 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 banks and other lenders, in which 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 raises the total that the Fed has made available through this facility alone to a once unimaginable $600 billion. That's nearly the sum of the entire congressional bailout approved last week. By year's end, term auctions could exceed $900 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, the legendary 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 then emerged to a long boom without parallel.

The Fed, in a statement, also said it was consulting with the Treasury Department about supporting "unsecured" term lending. This was seen as a reference to the market for commercial paper, a sort of promissory note issued by major U.S. corporations to fund their short-term needs such as purchasing inventory and making payroll.

This market in September fell by about $154 billion, its largest plunge ever as investors shied away from anything that wasn't guaranteed by the government. The Fed or Treasury could step in to buy this commercial paper to keep these markets functioning.

Volcker also said that the Treasury Department is taking over the traditional Fed role as lender of last resort, moving in equally aggressive action to fight fires before they inflict even greater damage on the U.S. and world economies.

"It's been sort out on the fly, but not without any feeling of consistency and longevity I suppose," said Volker, who was part of a group issuing a report on the challenge of financial regulation in today's world. In other action on a volatile Monday, the Fed also announced that it would immediately begin paying interest on deposits held in banks and other depository institutions. This interest on the amounts lenders are required to keep on hand and in reserve was not supposed to be paid until 2011, but last week's congressional bailout gave the Fed the authority to do this.

The action means that the Fed will transfer less money to the Treasury, but the idea behind paying interest is to encourage 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.

It was only last Friday that Congress passed and President Bush signed a Wall Street rescue package. That is now yesterday's news, as investors everywhere fear that a sinking global economy will make it even harder to keep the ailing global financial system afloat.