- The Washington Times - Tuesday, March 3, 2009

UPDATED:

Wall Street fell moderately on gloomy forecasts for the economy Tuesday, with the Federal Reserve cautioning that stability must return to the financial industry before there can be an economic recovery. The benchmark Standard & Poor’s 500 dropped below 700 for the first time since 1996.

At the close, the Dow Jones Industrial Average declined 37.27, or 0.55 percent, to 6,726.02. The tech-heavy Nasdaq dipped 1.84, or 0.14 percent, to 1,321.01. The S&P 500 sagged 4.49, or 0.64 percent, to 696.33, its first drop below 700 since it hit 697.26 on Oct. 28, 1996. The Russell index of small companies fell 4.14, or 1.1 percent, to 363.66.

The markets opened higher and fluctuated throughout the day, giving up their gains in the final hour.

The shakiness of the financial industry came into focus on Capitol Hill when Fed Chairman Ben S. Bernanke told the Senate Budget Committee that the economic recovery depends largely on how effective the government can be in restoring stability to the financial system, and when.

“The effectiveness of the policy actions taken by the Federal Reserve, the Treasury and other government entities in restoring a reasonable degree of financial stability will be critical determinants of the timing and strength of the recovery,” he said.

His remarks came less than a day after the Dow slid nearly 300 points because of further investor anxiety over the solvency of the financial industry that surfaced when insurance giant American International Group declared a $62 billion loss for the fourth quarter of 2008 and the government said it could be eligible to receive another $30 billion in bailout money.

As Mr. Bernanke spoke, the National Association of Realtors announced that its index of pending home sales dropped 7.7 percent in January to a new low of 80.4, far below the 85.1 that economists surveyed by Thomson Reuters had expected. The reading exceeded the 83.1 showing in November.

Also, Ford Motor Co. announced that its sales in February declined 48 percent, proof that people were avoiding the purchase of major items as the jobless picture and the economy generally worsens. Ford said it sold 99,060 vehicles last month compared with 192,248 sold in February 2008.

In good news, the Fed announced that its loan program, called the Term Asset-Backed Securities Loan Facility, or TALF, will begin March 25 with $200 billion for investors in order to spur lending to consumers so they can buy cars and pay their credit-card debts and college tuition. Loans also will be made available to small businesses.

But much depends on whether people will take advantage of the program so that it can help stimulate the economy, Steven Goldman, chief market strategist for Weeden & Co. of Greenwich, Conn., told The Washington Times.

“It’s going forward,” he said of TALF, which had been announced earlier this year. “But what interest there will be from the private sector, we still don’t know yet.”

The program originally was to have begun in February, and the Fed said it has the potential to generate up to $1 trillion in lending to businesses and households.

Tightened credit by the banks and the inability of consumers to get loans for everything from cars to mortgages has been one of the major choke holds on the economy.

The Dow closed Monday at 6,763.29, the lowest point since April 25, 1967, before the dot-com bubble expanded in a wild bull market in what then-Federal Reserve Chairman Alan Greenspan warned was a period of “irrational exuberance.” The Dow’s 30 industrials hit their record high of 14,164.53 more than a decade later, on Oct. 9, 2007.

Monday’s sell-off triggered a downward slide to the markets in Asia, with Japan’s Nikkei sinking 0.69 percent and Hong Kong’s Hang Seng dropping 2.30 percent. Asian markets generally follow Wall Street’s lead.

European markets turned in mixed results. Britain’s Financial Times Stock Exchange 100 index fell 1.18 percent, Germany’s DAX rose a mere 0.01 percent and France’s CAC 40 went up 0.32 percent.

All of the overseas markets started their days lower, severely troubled by the nearly $62 billion loss reported for the fourth quarter of 2008 by American International Group, the worldwide insurance giant that has offices in dozens of countries.

The U.S. government has made another $30 billion in bailout money available to AIG after having lent it $150 billion. The company is trying to raise nearly $18 billion from its shareholders and cut its dividend.

In Japan, Toyota Motor Corp. is negotiating with the government for a $2 billion loan for its financing arm, Toyota Financial Services. Fully 70 percent of the lender’s business is in the United States.

Toyota, the world’s No. 1 automaker and manufacturer of the popular Prius hybrid car, plans to lay off thousands of employees in the face of tens of millions of dollars of losses because of plunging sales.

But its financial position is far better than that of General Motors Corp. and Chrysler LLC, which together have received $17.4 billion in U.S. government loans and have asked for another $21.6 billion.

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