財經觀察 1310 --- The Markets Are Terrified: Should We?

The Markets Are Terrified: Should We?

The "sum of all fears" scenario became reality Monday after the House rejected a $700 billion bailout package.

The Dow suffered its largest-ever point decline in history, 778 points, while the S&P was off 8.75%, its worst decline since 1987, and the Nasdaq lost over 9%, which will certainly grab headlines -- and rightfully so.

But the real crisis remains in the credit markets,:

• Rates on three-month Treasury bills declined 55 basis points to 0.29%, not far above the levels hit on Sept. 17 when they hit their lowest level since WW II.

• The three-month London interbank offered rate (LIBOR) -- a key measure of lending rates between banks -- climbed to 3.88%, the highest level since Jan. 18 and up from 2.81% a month ago.

• The so-called TED Spread -- the difference between what banks and the Treasury pay to borrow for three months, widened to 3.59%, the most since Bloomberg began compiling data in 1984. The TED Spread was 1.10% a month ago and has averaged 0.56% over the past five years.

In plan English, those figures mean banks are extremely reluctant to lend to each other, which means they're not going to lend to you and I as consumers, or businesses either. The Fed is injecting tremendous amounts of liquidity into the financial system to get banks lending again, to little avail so far.

This isn't just a long-term concern: corporate America relies on overnight lending and short-term commercial paper markets, and an inability to tap those sources of liquidity could result in mass layoffs in the "real" economy, which is something to fear.

Treasury Secretary Hank Paulson warned about such dire consequence before, during and after the House vote on the bailout package Monday.

"Markets around the world are under stress and that reduces the availability of credit that businesses across America depend on to meet payroll and to purchase inventories," Paulson said Monday afternoon. "We've got much work to do and this [rescue package] is much too important to simply let fail."

On Monday, investors got a taste of just how important the absence of a plan can be. I wouldn't recommend anyone sell after a day like Monday but wouldn't be in a rush to buy stocks either. Monday's point decline was the worst in the Dow's history but it didn't make the top 10 on a percentage basis. Notably, three of the Dow's five worst percent drops occurred within a 6-week period in 1929 and two of the top 10 occurred in October 1987, meaning things can get worse and really big declines tend to occur in clusters.

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Paulson vows continued efforts on rescue plan
Monday September 29, 6:06 pm ET
By Martin Crutsinger, AP Economics Writer

Paulson says administration will continue to work to get rescue package approved by Congress

WASHINGTON (AP) -- Treasury Secretary Henry Paulson said his agency would use "all the tools available to protect our financial system and the economy" in response to Monday's stunning defeat of the government's proposed $700 billion bailout.

Paulson, speaking with reporters after meeting with President Bush at the White House, said, "our toolkit is substantial but insufficient" without a bailout, and that the Bush administration will continue to seek congressional approval for a rescue package.

He warned that the same stresses overwhelming the banking industry, including last week's collapse of Washington Mutual Inc. -- the biggest bank failure in history -- and the purchase of troubled Wachovia Corp.'s banking operations by Citigroup on Monday, were also being felt by ordinary families.

"Families, too, feel the credit crunch as it becomes more difficult to get car loans or a student loan," Paulson said.

The Treasury secretary spoke after the House had rejected the $700 billion bailout plan on a 228-205 vote and after the Dow Jones industrial average had plunged by 777 points, the largest point-decline on record.

"We need to put something back together that works," Paulson said, facing reporters on the White House driveway. He said the administration still believed that its plan could work.

Treasury spokeswoman Michele Davis said Paulson would be consulting with President Bush, Federal Reserve Chairman Ben Bernanke and congressional leaders on what next steps to take.

Davis did not specify what the administration will do next to stabilize the economy.

Treasury was expected to continue working with other government agencies including the Federal Reserve and the Federal Deposit Insurance Corp. to deal with problems facing the financial system on a case-by-case basis.

At the White House, deputy press secretary Tony Fratto said the administration will talk with congressional leaders before deciding what to do.

Paulson had spent the day before the House vote on the telephone speaking to lawmakers, seeking their support.