U.S. Markets Down Sharply Despite Emergency Rate Cut

Despite the fact that the Fed cut the federal funds rate on overnight loans between banks to 3.5 percent from 4.25 percent in an attempt to prevent a sell-off in U.S. markets, the Dow Jones Industrial average opened down by more than 460 points.

As we look up at CNBC, the down is currently down 179 points. From the NYT:

“There can be no doubt that the timing of this morning’s move is aimed at supporting global financial markets after yesterday’s global equity meltdown,” Joshua Shapiro, chief United States economist at MFR Inc., wrote in a research note Tuesday morning.

Worldwide, markets continued yesterday’s freak out.

“At this stage, you can say there is panic selling in the market,” said Kwong Man Bun, the chief operating officer of KGI Asia Ltd., a large Asian futures broker. “We don’t think the Hang Seng index has found its bottom yet; the index will continue to go down and will only find its bottom when external markets — namely, the U.S. market — stabilize.”

Meanwhile, at the White House, press secretary Dana Perino talked stimulus packages of unknown size:

“I’m not going to close the door, but I’m not suggesting that anyone believes it has to be bigger” than the $150 billion figure already discussed.
…Perino said the White House is not proposing an even bigger economic package at this point, but she declined to rule one out, either. The sharp decline of markets in the United States and around the globe is tied in part to the perception that Bush’s outlined stimulus package would not do enough to avert a recession.

Perino said the White House does not comment on daily fluctuations in the market. But she did say that people should have confidence in the underlying strength and long-term prospects of the U.S. economy.

“We are not forecasting a recession,” Perino said. “Clearly there is a slowdown.”

Ya think?

White House Flexible on Stimulus Plan [AP]
U.S. Markets Open With a Steep Fall [NYT]
(AP Photo/Richard Drew)

Comments

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  1. headon says:

    We are in a recession. Markets go down when there is a recession. It sucks but we’ve been through it before and we will get through this one too.

  2. beavis88 says:

    Smells like Bernanke and Co are trying to keep the ship upright long enough to hand the wheel to the next President.

  3. Jamie Beckland says:

    @headon: I agree with your sentiment, but as the financial reporters keep telling me, the market has actually gone up in 6 of the past 10 recessions. You are right about getting through this, though.

    On way or another…

  4. Jamie Beckland says:

    @beavis88: I don’t think that any new president will replace Bernanke. Greenspan served through both Republican and Democratic administrations. The Fed’s job really is quite independent of politics (although, clearly in this case, influenced by politics).

  5. Rando says:

    This is the moment I’ve been telling everyone about. Inflation crisis is coming thanks to Bush spending money we don’t have. The only thing that can save it is an immediate pull out from Iraq and only two candidates want to do that; Ron Paul and Obama. McCain wants another 100 years.

  6. Pinget says:

    Memo to Dick Cheney – Deficits do matter. Especially when your loans get called.

  7. Stan LS says:

    @randotheking: Dude, recessions come and go every 10-12 years. That’s a fact.

  8. Tux the Penguin says:

    @randotheking: Pulling out of Iraq won’t solve many problems. Sure, we’ll save money from the spending in Iraq, but that’s not the real problem. The real problem is that the government, both Democrat and Republican, are spending money like its going out of style. Exactly how much spending was cut from this year’s budget? How much money is being spent on pure pork? If either side were truly serious, and demonstrably serious, about cutting spending and a return to fiscal sanity, they’d be able to stand on some high ground right now. But considering they are simply a reflection of the average US citizen who has a negative net worth due to too much debt… are we really surprised?

  9. Mr. Gunn says:

    They can smell their blood on the water, why wouldn’t they panic? We’ve spent trillions in unnecessary military expenses, weakened our dollar worse than ever, incubated a credit catastrophe as bad as the S&L crisis of last century, and all they can think to stave this off is to cut rates and give wealthy people a couple hundred dollars to spend?

    The trader they interviewed used the word recession about 5 times in the NPR broadcast today. He sounded genuinely worried. He should be, ’cause it’s going to be a while before we see the bottom.

  10. okvol says:

    1. Pull out of Iraq and Afghanistan
    2. Legalize and tax marijuana
    3. Free all inmates serving time for minor marijuana offenses

    #1 will save a tremendous amount of money
    #2b will bring in money, just like ending prohibition to end a depression
    #3 will save money at the state level, which can then be used for infrastructure maintenance that is desperately needed.

  11. mookiemookie says:

    #4 ????
    #5 PROFIT!

  12. chilled says:

    @ okvol….ron paul

  13. canerican says:

    @WillScarlett: Because he can’t… The Fed is an apolitical organization that is why there are 7 and 14 year terms to all positions…

  14. canerican says:

    @Stan LS: Not really, the trend is more like 6 years… Sometimes more sometimes less.

    It strikes me as odd that in America, the most over-educated country in the world that few people know anything about economics… IMHO, colleges should require people to minor in government, business, or economics – these are necessary skills. FYI I did an undergrad in econ and am getting my MBA.

  15. ARP says:

    @beavis88: I have to agree here. Bush made it clear that he’d do just about anything to prevent recession on his watch. The problem with that is the long terms affects it has on artificially keeping the economy propped up. The recession (when its comes, not if) will be longer and more severe despite more recent recessions being shorter and faster due to the reduced dollar, stagnant wages, inflation, etc.

  16. tinmanx says:

    @okvol: Politicians like putting people in jail, it makes them look tough on crime. But they never think what happens in jail and what affect it can have on a person. It can very well turn someone who just made a bad decision (or someone who can’t afford a lawyer) into a real criminal.

    I don’t know anything about the law and such, but it always makes me wonder when I hear people get sentenced to a year in jail and a $500 fine. So which is the real punishment, the jail time or $500?

  17. ARP says:

    @canerican: Completely agree that people should be taught both personal economics and macroeconomics.

    Personal economics is sort of obvious. As for macroecon:

    Sometimes stuff is complicated and doesn’t fit on a bumper sticker (e.g. lower taxes= healthy economy). We seem to be fed talking points (from both sides) without ever really analyzing them. Is having a big deficit a problem, does trickle down work, do lower taxes mean you’re paying less taxes (it’s not a trick question, often the tax burden gets shifted to state/local or you pay more in goods), do wages need to be increased to maintain consumer spending, how are we measuring inflation, etc. I guess its a allegory to our current political climate: rather than discuss/debate what’s the best system, we use taling points and then assume the person is a communist or facist if they don’t agree.

  18. Ben Popken says:

    I look forward to my next paycheck so I can buy some cheap stocks.

  19. Stan LS says:

    @canerican: okay, when did the previous 2 recessions occured then?

  20. unklegwar says:

    Yay. Protect the stock portfolios of the rich and greedy at the expense of the little guy’s bank accounts.

  21. m4ximusprim3 says:

    @mookiemookie: Oh, Oh, I know what #4 is!

    4) Grow Pot! Or open a hydroponics store!

  22. mmcnary says:

    Every 2 weeks my 401k money buys more shares than before. How can this be a bad thing? When the stock market goes back up, I’ll be in great shape.

    See, everyone talks about this decline in the DOW and NASDAQ as if it was the end of the world. Not so! The current decline is the result of lots of scared people making decisions while they’re scared. If these investors would stop and take a deep breath, they would find that the sky is not falling. Factories are still producing goods, McDonalds is still making burgers, people are still collecting paychecks. Consumers are still buying big screen TVs. There will be adjustments as we fine tune our expectations based on the current financial situation.

    But th is not the end.

    Every recession since 1900 has ended. Eventually people come to realize that the low price of stocks is a tremendous buying opportunity, so they buy them. This leads to higher stock prices, and what do you know, we’re out of the recession.

    Keep the faith people.

  23. DanPVD says:

    Seriously? Have the previous rate cuts done anything to slow down this issue? Not really. When will people learn from Japan’s recession? They had incredibly low interest rates for years yet their economy stayed in recession.

    Oh right, it’s an election year, and no matter how pointless/stupid/hurtful an economic action is doing something rather than doing nothing looks better to voters who don’t pay attention.

  24. Morton Fox says:

    The last time the Federal Reserve cut interest rates to 1%, we got a housing bubble that led to this mess. What will cutting rates to 1% do this time? It’ll likely destroy the dollar.

  25. Stan LS says:

    @Morton Fox: Are you saying that the housing bubble is due to the rate cut? LOLOLOL!@DanPVD: “Have the previous rate cuts done anything to slow down this issue? Not really.”

    Is that your final answer?

  26. @Stan LS: The Markets do go through a cycle, but this time some things are different.

    1. The subprime “problem”. Nobody knows really what the real impact is the banks probably don’t even know.

    2. The concern over what this means for the consumer. An economy that consits to 70% of consumption is really rather vulnerable when the cash suddenly stops flowing.

    3. The savings rate in the US is NEGATIVE, what that means is people either dipped into their savings or used loans to cover their day to day living.

    And btw, the normal cycle isn’t a recession, it is a depression.

    Having said this, the problem is that people seem to think the stock value has anything to do with the validity / capability of the company, most stocks are so hugely overvalued that all the money that gets destroyed right now is sad to see (especially for those people that shouldn’t have invested in the first place) but it doesn’t mean the companies are on the brink bankruptcy. Having said this, if nobody can afford to buy their products they my still be up the creek without a paddle.

  27. Morton Fox says:

    @Stan LS: That’s exactly what I was saying. In 2000, the Fed Funds rate was 6.25%. Greenspan cut that all the way down to 1% over the next few years. It’s no coincidence that at the same time, we had a housing bubble and all the housing speculation that came with it.

  28. Jamie Beckland says:

    @canerican: You are correct that the Fed has terms of 7 and 14 years.

    However, you are incorrect that a new president could not replace Bernanke.

    The position of Chairman is held as part of the 14-year term of one of the Board of Governors, but any president is able to change who is the Chairman at any time he (or she) wants.

    The president can choose any member of the current Board of Governors.

    [www.federalreserve.gov] for more information.