Panic spreads as the financial crisis goes global

What happened

The federal government this week took extraordinary steps to try to stem the spiraling financial crisis, but they had little impact as global markets plunged and investors in the U.S. appeared to be in a full-blown panic. The Dow Jones Industrial Average continued its sharp slide, losing 1,400 points over the course of five days. That’s the Dow’s biggest five-day drop ever, representing more than

$2.2 trillion in losses and putting it below 10,000 for the first time since 2004. “How bad can it get?” said economist James Stack. “One has to ask where the bottom in confidence is.”

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The stock slide came despite congressional passage last week of a historic $700 billion bailout package that allows the Treasury to buy toxic debt from financial institutions. In another unprecedented move, the Federal Reserve said this week it would buy large amounts of short-term debt directly from companies caught in the credit crunch, essentially making the U.S. government the lender of last resort. The Fed also announced another dramatic, half-point cut in interest rates, as did central banks around the world. “These are momentous steps,” said Fed Chairman Ben Bernanke, “but they are being taken to address a problem of historic dimensions.”

The Congressional Budget Office reported that the market drop has erased 20 percent of the value of Americans’ retirement accounts, wiping out $2 trillion since last year. “This is a financial panic right now,” said financial planner Kurt Brouwer of San Francisco, “and one reason it feels so bad is that everything is going down.”

What the editorials said

The most important remedy right now, said the Chicago Tribune, is to avoid panic. As dire as the situation is, fear is making it far worse, cutting into consumer spending and commercial lending. Remember, no one ever said the bailout alone was going to solve this crisis. It “was designed to avert the worst, not prevent the bad.”

But it will only get worse, said The Economist, unless leaders devise a global response. A week ago, Europeans were smugly assuring themselves that the U.S. made this mess and it would be confined to America’s shores. Now it has spread not only to Europe but Hong Kong, Russia, India, and Latin America. “Governments need not just to communicate but also to coordinate.”

What the columnists said

The Fed’s move to buy commercial paper “might actually be a bigger deal than the bailout bill we just spent the past two weeks going berserk over,” said Kevin Drum in Motherjones.com. The bailout allows assistance only to banks and investment houses. This new plan injects money directly into the economy. Still, investors are waiting for a clear and consistent government strategy, said Felix Salmon in Portfolio.com. The latest steps seem “confused, ad hoc, and panicked.” No wonder the market tanked.

Actually, the reason the market tanked, said Mark Corallo in National Review Online, is that most investors are not ready to give up on the free-enterprise system. We were assured that the bailout package would shore up the market. In fact, a sell-off was the only logical response to this misguided stab at government intervention; investors now have good reason to fear that the future of America is one with markets strangled by government. “We have basically socialized the economy.”

Get used to it, said Jay Bookman in The Atlanta Journal-Constitution. Like 9/11, the financial crisis will change everything, starting with the role the government plays in curbing the sort of financial shenanigans that got us into this mess. America has kept its economy humming on money from foreign countries that were happy to lend it to us, or invest it in our institutions, because they saw us as “all but invulnerable economically.” It will take years of genuine systemic reform before we regain that confidence.

What next?

The annual meetings of the World Bank, the International Monetary Fund, and the Group of Seven industrialized nations, scheduled to begin in Washington late this week, were being touted as a de facto summit on the crisis. But with important economies like China and India left out of the G-7, seen as the global financial command center, any impact could be limited. “For all the institutions we have,” said C. Fred Bergsten, director of the Peterson Institute for International Economics, “we don’t have the right institutions to do this.”