World markets fall as investors weigh relentless trouble

Stock markets plunged anew on Wednesday, nearly wiping out the record gains of Monday and sending another wave of wealth destruction washing over American households...

Stock markets plunged anew on Wednesday, nearly wiping out the record gains of Monday and sending another wave of wealth destruction washing over American households, The New York Times reported.

The government’s rescue of the banks has been widely embraced, but the frenzied selling, which pushed the Dow Jones industrial average down 733 points, underscored how the economy’s troubles are too broad to be fixed by the bailout of the financial system.

In early trading in Asia on Thursday, the markets followed Wall Street’s lead. The Nikkei was down 10.03 percent, or 957.90 points, the Hang Seng dropped 1,204.27 points, more than 7.5 percent, the South Korean Kospi fell 6 percent, the Standard and Poor’s/Australian Stock Exchange 200 index shed 5.5 percent and Taiwan opened down 3.8 percent.

Investors are recognizing that the financial crisis is not the fundamental problem. It has merely amplified economic ailments that are now intensifying: vanishing paychecks, falling home prices and diminished spending. And there is no relief in sight.

Wednesday’s rout began in the morning with the latest evidence of the nation’s economic deterioration — reports showing that retail spending slipped in September and broader signs of a pullback among suddenly thrifty American consumers.

Selling picked up momentum in the afternoon as the Federal Reserve’s chairman, Ben S. Bernanke, cautioned Americans that the bailout would not swiftly lift the economy and that continued weakness was certain.

“Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away,” Mr. Bernanke said in a speech to the Economic Club of New York. “Economic activity will fall short of potential for a time.”

By day’s end, the Dow had surrendered most of Monday’s 936-point gain, dropping 7.87 percent. The broader Standard & Poor’s 500-stock index was down 9 percent, and the technology-heavy Nasdaq was down 8.47 percent. Expectations that a worldwide slowdown will reduce demand for oil pushed prices below $75 a barrel. Signs of improvement continued in the credit markets, making it somewhat easier for companies and states to secure financing, but interest rates remained elevated.

Mr. Bernanke’s remarks — offered in the sober tones of a man cognizant that a stray syllable may prompt the loss of more billions on Wall Street — underscored the reality that the economy’s troubles go well beyond the financial crisis. The United States and many other major economies are almost certainly headed into a slog through economic purgatory, one that could last many months.

“People have focused so much on the immediate financial crisis that they haven’t realized how much the real economy is going down, largely independently,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. “I don’t think there’s a way we can get out of this without a full-fledged recession and a lot of people losing their jobs. All we can really talk about is ameliorating it, making sure the people who are hit have support.”

On Monday, as the Dow posted its fifth-largest one-day percentage gain in history, some investors found quantifiable proof that the crisis was solved. Yet an unpalatable historical detail complicated that idea: The four previous largest percentage gains occurred from October 1929 to March 1933, in the early days of the Depression.

Then, it must be noted, the markets swung far more widely than they do in this era, and an epic collapse would still be required to bring the United States anywhere near a comparable depression.

Mr. Bernanke, a leading academic expert on the Depression, offered pointed assurances that no repeat of that disaster would unfold on his watch. The Fed stands ready to use all its tools to battle the financial crisis, he said. He exuded confidence that the American economy “will emerge from this period with renewed vigor.”

But when? Mr. Bernanke could not say. That uncertainty added to the gnawing worry gripping the economy.

“Ultimately, the trajectory of economic activity beyond the next few quarters will depend greatly on the extent to which financial and credit markets return to more normal functioning,” he said.

Strikingly, Mr. Bernanke expressed concern about how huge amounts of capital are increasingly concentrated in a handful of enormous financial institutions.

“The real concern that we have is that we have got and developed, in this country, a very serious ‘too big to fail’ problem,” Mr. Bernanke said. “And that problem, we’ve just recognized now in the current situation, how severe it is.”

It seemed a curious concern for a man whose central bank has worked with the Treasury to engineer a series of shotgun corporate weddings, such as Bank of America’s purchase of Merrill Lynch and JPMorgan Chase’s acquisition of Bear Stearns — deals that have further concentrated money in fewer hands.

Mr. Bernanke’s prognosis and the latest carnage on Wall Street lent urgency to the debate over what the government should do now to soften the blow to the economy.

In Washington, and on the campaign trail, conversation centers on putting together a second round of so-called government stimulus spending, following the $152 billion unleashed this year via tax rebates to households and tax cuts for businesses.

Democrats in the House are drafting a roughly $150 billion package of spending measures aimed at spurring the economy, according to senior aides, including aid for states, large-scale construction projects to generate jobs and the expansion of unemployment benefits. Senator Barack Obama of Illinois, the Democratic presidential nominee, is urging $175 billion worth of relief measures.

The Republican nominee, Senator John McCain of Arizona, has declined to outline his own proposal, though his senior economic adviser, Douglas Holtz-Eakin, said he is “open to any measure that genuinely stimulates the economy.”

Republicans on Capitol Hill have emphasized tax cuts for businesses in any stimulus package, a stance that puts them at odds with Democrats, though recent signs suggest greater potential for a compromise.

“We need fiscal stimulus,” said Douglas W. Elmendorf, a former Treasury and Federal Reserve Board economist, and now a fellow at the Brookings Institution in Washington. “The outlook is much darker than it was even a few months ago.”

The checks the government sent to households last summer appear to have kept the economy growing, but economists are skeptical such a course could work again.

“The spend rate will be really low because people are scared to death,” Mr. Baker said.

When economists met with House leaders on Monday to suggest a course, the favored means appeared to be aiding state and local governments, whose property tax revenues are diminishing as home values fall. Local governments are a crucial source of employment and social services relied upon by the poor.

“The states are taking steps right now that are deepening the recession, through no fault of their own,” said Jared Bernstein, senior economist at the Economic Policy Institute in Washington. “They’re forced to either raise taxes or cut services. Neither of those are where we need to be right now.”

The crisis on Wall Street has sown fears that banks would hold tight to their dollars and starve the economy of capital, preventing businesses from securing finances to hire people and expand. If the bailout succeeds in restoring confidence, that should eventually get money flowing and lift economic activity.

But regardless of Wall Street’s travails, a broader set of difficulties has been taking money out of the economy, putting the squeeze on American households and businesses.

The economy has lost 760,000 jobs since the beginning of the year, and millions of workers have seen their hours cut, shrinking paychecks just as plunging real estate prices prevent households from borrowing against the value of their homes.

In short, American spending power is declining, and this has become a downward spiral: As wages shrink, workers spend less, and that limits demand for workers at the businesses that once captured their dollars.

Many economists now assume that unemployment, currently at 6.1 percent, will climb to 9 percent by the end of next year. Some now envision it could reach 10 percent — a level not seen in 25 years.

“At this point, the thing has probably just got to play out,” said Martin N. Baily, a chairman of the Council of Economic Advisers under President Bill Clinton and now a fellow at the Brookings Institution. “I don’t know that there’s anything that we can do to avoid a mild recession. The question is what can we do to avoid a very severe recession.”

By Peter S.Goodman,The New York Times

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