Bush, Fed pleas fail to sway markets
A presidential pep talk and a dramatic move by the Federal Reserve to boost business lending could not shore up sagging U.S. markets as the Dow Jones Industrial Average plunged more than 500 points Tuesday to a four-year low.
The economic woes spilled over into the political realm before the second presidential debate. The House Oversight and Government Reform Committee released documents showing that top executives of American International Group Inc. spent $440,000 on a company retreat just days after the government’s $85 billion takeover of the insurance giant, including room charges of up to $1,000 a night and $25,000 for pedicures, manicures, facials and massages.
The expanding global scope of the credit crisis is expected to dominate a previously scheduled meeting of finance ministers of the Group of Seven industrial powers over the weekend, being held on the sidelines of the World Bank and International Monetary Fund (IMF) annual meetings in Washington.
President Bush spoke with a number of his Western European counterparts by telephone about the global credit crunch, and White House press secretary Dana Perino said Mr. Bush would be “open” to a summit of G-7 leaders struggling to resolve the emerging economic crisis.
“I wish I could snap my fingers and make what happened stop,” Mr. Bush said on a morale-boosting trip to a Guernsey Office Products outlet in Chantilly, Va., on Tuesday, “but that’s not the way it works.”
The colossal failures of U.S. financial titans are having a big impact on Americans’ retirement plans, which have lost as much as $2 trillion in the past 15 months, the Congressional Budget Office estimated Tuesday.
Wall Street reacted to growing fears that policymakers have yet to get control of the economy’s many weaknesses.
“We are to the point of fearing fear itself,” Bill Gross, manager of California-based Pacific Investment Management Co., wrote in a note to clients. “America in all its resplendent free market capitalistic glory is on the auction block with few bidders.”
Sellers far outnumbered buyers on Wall Street, where all three major stock indexes fell to levels not seen since 2004.
The Dow industrials shed 508 points (5.11 percent) to 9,447.11, after a 369-point decline Monday.
The tech-heavy Nasdaq Stock Market lost 108 points (5.8 percent) to 1,754.88, while the broader Standard & Poor’s index of 500 stocks slid 60.66 points (5.73 percent) to close below the 1,000 mark at 996.23.
“The financial panic of the past month has sent the economy into a tailspin,” said market analyst Mark Zandi at Moody’s Economy.com. “The question is no longer whether there is a recession, but how severe it will be.”
Adding to the pessimism, the Congressional Budget Office announced late Tuesday that the U.S. budget deficit hit a record $438 billion in fiscal 2008, which ended Sept. 30, the result of rising government spending for defense and lower revenues because of the troubled economy. The Wall Street bailout will only widen the shortfall, at least in the short term, budget analysts said.
The drumbeat of bad news came despite a $700 billion Wall Street rescue package approved by Congress last week and clear signals from Federal Reserve Chairman Ben S. Bernanke that the central bank is ready to take extraordinary measures to get banks back into the lending business.
The Federal Reserve, invoking an obscure Depression-era emergency law, said it will begin purchasing “commercial paper” — the short-term money companies borrow to meet basic needs such as payroll and inventory.
Huge inventories of “toxic” loans on the books of the nation’s banks has caused the commercial paper and other major loan markets to seize up in recent weeks. The Fed said it is prepared to buy both secured and unsecured commercial paper.
Mr. Bernanke sent a clear signal the U.S. central bank was prepared to go beyond the bailout package and Tuesday’s actions to prop up the economy.
But Wall Street turned sharply lower after Mr. Bernanke stopped short of promising an interest rate cut.
Addressing the National Association for Business Economics, Mr. Bernanke said the world financial system remains under “extraordinary stress.”
“The Federal Reserve will need to consider whether the current stance of policy remains appropriate,” he added, a comment many took as a green light for the Federal Reserve to cut interest rates during its Oct. 28-29 meeting.
The Fed’s commercial paper announcement helped to bolster European stock markets, with both the main British and French stock markets posting modest gains. But the losses resumed when the U.S. markets opened.
Treasury Secretary Henry M. Paulson Jr. and other G-7 finance ministers will be trying to improve policy coordination to stem an economic implosion that has rocked stock and credit markets from Reykjavik and London to Moscow and Sydney. Banks and financial firms around the world are still reeling from asset problems that began with the troubled in the U.S. home mortgage market.
Russia, whose banks and stock market have been particularly hard hit, will pump another $36 billion into the banking system, President Dmitry Medvedev announced, on top of some $170 billion in loans and other aid the government has already put up.
In Luxembourg, finance ministers of the 27-nation European Union agreed to guarantee private savings of up to $68,000 in EU-based banks and set up blocwide guidelines to deal with the crisis. The European Union has been under heavy criticism as individual governments have announced policies and bailed out national firms with little apparent coordination from Brussels.
The IMF, in a sobering report on world financial stability, said policy coordination across the globe is vital is the economic downturn is to be checked.
“The time for piecemeal solutions is over …,” IMF Managing Director Dominique Strauss-Kahn said. “National governments must closely coordinate these efforts to bring about a return to stability in the international financial system.”
In an apparent bid to do just that, the White House said Mr. Bush discussed the crisis by phone with British Prime Minister Gordon Brown, French President Nicolas Sarkozy and Italian Prime Minister Silvio Berlusconi. Mrs. Perino said the administration’s efforts are focused for now on the meeting of financial ministers Friday, but she said Mr. Bush had not ruled out a proposal by Mr. Sarkozy for a summit of global leaders to address the crisis.
“It is critical that everybody gets on the same page,” she said, although she did not say whether the leaders had talked about coordinating interest-rate cuts.
• Jon Ward contributed to this article, which was based in part on wire service reports.