A Bear Market, Officially

Widespread fear about the health of the mortgage industry took hold Wednesday afternoon, and investors could not shake the jitters. The Dow Jones industrial average, already swimming deep in negative territory, dived 75 points in the final 30 minutes of trading and finished down 2.1 percent at its lowest close of the year. The sell-off marked the third consecutive day that trouble at big mortgage lenders has resulted in steep volatility in the stock markets. Slumping shares of financial firms dragged the Standard & Poor’s 500-stock index, the broadest measure of the equity markets, into its first official bear market since 2002.

How bad was it? Pretty bad, says the Times:

Freddie Mac, the big buyer of home mortgages, was the worst performing stock in the S.& P. 500. Its shares dropped 23.8 percent, or $3.20, to $10.26. Freddie’s stock has lost a quarter of its total value in the last week alone.

Fannie Mae, Freddie’s sister company, tumbled 13.1 percent, or $2.31, to $15.31 a share. Its stock is down 16 percent since last Thursday.

Weren't people saying the financials were starting to look good? Didn't I hear something like that from Larry Kudlow or one of his water-bearing guests?

So what are the Fed and Treasury officials doing? Jawboning the markets, but to little or no effect:

The steep sell-off came as a disappointment after Tuesday’s session, when reassuring remarks from Ben S. Bernanke, the Federal Reserve chairman, and Henry S. Paulson, the Treasury secretary, led to a 152-point rally in the Dow. Mr. Bernanke, in particular, had hoped to soothe fears about the mortgage crisis by announcing plans for the Fed to restrict exotic mortgages and high-cost loans, an effort to help resuscitate the ailing housing market.

And the dollar looks set to make another run south. Glad I am getting paid in an Asian currency. Nice to get a pay raise for doing nothing but being in the right place at the right time.

Sean-Paul Kelley July 10, 2008 - 3:47am

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( categories: The Markets )

On the home front...

Toyota to announce idling of S.A. plant

Copycats.

I did inhale.

Don July 10, 2008 - 8:30am

It's not going to stop anytime soon..

...given the current climate of "free trade".

Paul Craig Roberts has an excellent read on this.

How anyone over in Foggy Bottom expects the nation to make its economic way in the world by eschewing manufacturing has been a mystery to me since Reagan praised the "service economy". You create real wealth by making things and selling them. Not by shuffling bits of paper around and calling it "financial services" or by moving employment overseas or by suing people.

Petronius July 10, 2008 - 11:03am

Consuming more than we produce

Hey its a strategy, kind of like spending more than you earn or using more energy than can be produced, or destroying more cropland than is created, cutting down more trees than grow, overfishing the sea, or even destroying a large amount of middle class or developing nation's wealth to concentrate a relatively smaller amount among a few wealthy individuals.

Taking it one step further its the same kind of thinking that
pollutes the air we breathe, poisons the water we drink, destroys biodiversity, etc.

The fact is that, as a nation, we have the collective intelligence approaching brewer's yeast; approaching from below that is.

Joaquin July 10, 2008 - 3:49pm

I have a hypothesis on the intelligence of groups

And it goes like this:

The collective intelligence of a group can be approximated by dividing the average intelligence of its membership by the number of members in the group.

So even if you start with smart people, a nuclear-family-sized group is pretty dumb, a institution-sized group can't get out of its own way, and a nation-sized group just sits drooling in a pool of its own excrement.

I think this principle explains the attractiveness of rigid hierarchies for large groups-- by sharply limiting the number of people in the decision-making nucleus of a group, it is possible to have a large organization that in some regards displays the collective intelligence of an insect rather than that of a foot fungus.

chalo July 12, 2008 - 9:45pm

Nation of Whiners

Sadly, No!

In an interview with the Washington Times, Phil Gramm, a former Texas senator who is now vice chairman of UBS, the giant Swiss bank, said he expects Mr. McCain to inherit a sluggish economy if he wins the presidency, weighed down above all by the conviction of many Americans that economic conditions are the worst in two or three decades and that America is in decline.

“You’ve heard of mental depression; this is a mental recession,” he said, noting that growth has held up at about 1 percent despite all the publicity over losing jobs to India, China, illegal immigration, housing and credit problems and record oil prices. “We may have a recession; we haven’t had one yet.”

“We have sort of become a nation of whiners,” he said. “You just hear this constant whining, complaining about a loss of competitiveness, America in decline” despite a major export boom that is the primary reason that growth continues in the economy, he said.

Tina July 10, 2008 - 11:23am

Phil, I can't afford wine.

There you have it.

Synoia July 10, 2008 - 1:04pm

Phil Baby, I hear ya'

It's about time we did something rather than whining about things.

How's about we start with repealing the Gramm-Leach-Bliley Act, which, under your careful sponsorship, repealed what was left of the 1933 Glass-Steagal Act, which was designed to keep us out of the financial mess we're currently in?

I'm sure your bosses at UBS (remember them? They used to be a conservative 250-year old Swiss bank before your act helped get them into the business of "financial services" and other fiscal garbage).

I'm sure they'll have you doing some whining of your own.

Petronius July 10, 2008 - 4:36pm

Phil Gramm almost gets the point

One critical problem with the global economy is the lack of confidence in the credit system. Specifically, creditors are doubting that debtors will pay back their debts, and now shareholders and bondholders are doubting whether certain creditors will survive the losses they are about to experience from these bad debts.

This crisis of confidence - a collapse of trust - is a very rare event last seen in the 1930s and part of Keynes' analysis of the liquidity trap facing central banks during the Depression. No matter how much liquidity is pumped into the economy, output will continue to shrink if banks have no confidence to make loans. They will just sit on the liquidity.

McCain has made some general references to this phenomenon by talking about the psychological aspect of the economy, and it does appear as if his adviser Gramm has been in on the conversations about what is really ailing the economy.

For Gramm to complain, however, that people are whining and ignoring the growth in GDP and exports is mind-bogglingly stupid. What is it about these Texas politicians and their tone-deaf rhetoric (Bush to G8: "Good-bye from the world's biggest polluter!)

Obama had some very effective retorts today for Gramm, but Obama will inevitably have to face up to the credit confidence issue if elected.

Numerian July 10, 2008 - 6:01pm

Not just a "confidence" issue

There's a real empirical reason for the "mental" lack of confidence, namely, the ability to repay. This is forcing a repricing of risk as the Fed tries to hold down rates to avoid a pullback. Who in their right mind is going to continue to give credit at low rates (now negative rates in real terms) on risky terms? Now that the bubble has broken, the Ponzi scheme is collapsing on itself as money runs for safety instead of accepting unreasonable risk for dubious gain.

tjfxh July 10, 2008 - 7:01pm

Take your Prozac and the crisis will go away.

I think, that's the message.

creativelcro July 10, 2008 - 9:11pm

Bernanke and Paulson call for new regulatory powers over Wall St

Bernanke calls for new regulation

Ben Bernanke has called for extra powers to protect the US economy

The heads of the Federal Reserve and the US Treasury have called for new regulatory powers to shield the economy should a Wall Street firm collapse.

Ben Bernanke and Henry Paulson told congress it needed to modernise the regulatory system so it could deal with modern crises.

Bear Stearns was the most high profile victim of the credit crunch - facing near collapse before it was bought out.

The calls came during a hearing of the House Financial Services Committee.

Mr Bernanke said that while current efforts were being concentrated on steadying the state of the US economy, it was not too early to consider measures to ensure the "orderly" liquidation of finance firms on the verge of bankruptcy in the future.

Tina July 10, 2008 - 12:17pm

Bernanke keeps pushing for more powers

He's counting on the Fed's reputation in Congress for professionalism to help achieve Fed oversight of all major financial institutions, pushing the SEC and CFTC aside. He may get his way, especially if the Congress looks only at the professionalism of the Fed and ignores its massive policy failures of the past ten years.

Numerian July 10, 2008 - 6:04pm

as long as they wear ties

and look like nerds, then hey, they must be professionals. Who cares if fractional reserve banking is doomed?

"We're professionals." the motto of the generation of swine.
--
Hongpong.com

HongPong July 10, 2008 - 7:08pm

The bigger the front, the bigger the back

There is an old Oriental proverb that says: The bigger the front, the bigger the back. It's corollary is the Chinese character for "crisis" that combines the roots for "danger" and "opportunity."

The positive side of the crashing of the economic status quo is that it presents the opportunity for decentralization. This was realized by the DFH's back in the Sixties and Seventies, when "the younger generation" rejected their parents' model of the American Dream in favor of counter-cultural values. Although this was latter misrepresented by the Establishment as a "pipe dream" of the narcissistic "me-generation," the historical evidence reveals that this was a time of reorganization of national purpose, values, and policy, together with translating it into strategy and tactics, based on what could broadly be called "naturalism" in contrast to the artificiality of Establishment hype, be it religious, political or cultural conventionality. A cornerstone of this philosophy was decentralization.

Without going to far into the details, suffice it say that the counter-cultural movement "won" in the sense that it was co-opted. The wildly unpopular draft was replaced with a professional military, dope became the new beer even though prohibition continues in a wink-wink sort of way, the sexual revolution went mainstream, and the counter-cultural icons became the new media stars. However, once the pressure was off, the push for philosophical principle waned as many of the former DFH's became Yuppies.

Some of the lessons learned, however, were those of the underground economy (now become the drug economy that sustains northern California, for instance, and burgeoned into EBay and Craigslist), the Samizdat style alternative news and communications networks that morphed into the Interest through technology, and the ensuing availability of digital social networking.

As manufacturing inevitably seeks the least common denominator in labor cost and formerly high-wage jobs disappear from the US, there is now greater opportunity for alternative contributions to the economy that encourage decentralization. Smart entrepreneurs are picking up on this. "Thar's gold in them thar hills." And a lot of satisfaction knowing that one one is joining others of good will in making the world a better place by joining ingenuity with honesty, fairness, and the spirit of sharing that characterizes true friendship.

tjfxh July 10, 2008 - 3:51pm

S-P, how does health care work there?

Is there a single payer system? How does it work for foreign workers?

PS. Ha! http://healthcare-economist.com/2008/01/14/singapores-health-care-system/

creativelcro July 10, 2008 - 5:19pm