The Stock Market Crash of 2008

Oct 10, 2008 6:03am

ABC News’ Betsy Stark reports: In 1987, it happened in a day. In 1929 it happened in two days. Now it has happened in seven days, but the result is same. The stock market has crashed. The technical definition of a crash is a precipitous decline of 20 percent. That’s how far the Dow Jones industrial average has plunged in the last seven trading days. Markets around the world have followed suit, guilty of the same over-leveraging and exposed to many of the same bad bets. This is what a global bear market feels like. The professionals say the panic-selling and naked fear are signs that a bottom to this agony could be near. But no one knows for sure. Individuals and institutions are bailing out of stocks for the safety of savings and checking accounts, treasury bills and gold. The end of the ban on short-selling Thursday may be a factor at play, allowing big investors once again to bet against stocks going up. And hedge funds and mutual funds alike are being forced to sell their investments in good companies — adding fuel to this global wildfire — as margin calls multiply and growing numbers of customers seek redemptions in this meltdown. Investors remain skeptical about the ability of the various bailout plans to work. AIG burned through $85 billion in two weeks. The Federal Reserve announced it was willing to lend directly to companies unable to get loans in the commercial paper market and the result so far is fewer loans at higher rates. The lack of trust among counterparties continues. The weeks-long process — now beginning — of trying to find a fair price for the bad assets on bank balance sheets has kept banks on edge. Until they know how much they can sell those assets for, they won’t know whether the sale of those assets will make them weaker or stronger. Ironically, the $700 billion TARP plan seems to be perpetuating the freeze in the credit markets rather than thawing it. That’s one reason Treasury Secretary Henry Paulson is now talking about doing what the British have done, which is make direct investments in big banks in return for equity stakes for the taxpayer. But this is not just a market event. The impact on the "real economy" — the one we live and work in — will grow deeper the longer the crisis goes on. The Wall Street Journal estimates today that investors have lost $8.4 trillion in wealth in the past year. We are already seeing the consequences of that. As consumers hunker down, consumer companies will suffer. Look no further than General Motors. This weekend finance ministers will meet in Washington to talk global strategy. With global markets crashing in lock-step, they will need to come up with some answers. But if they cannot or do not, will the bottom keep falling out from under? Judging from what happened in Asia overnight, what’s happening now in Europe and the grim signs of another sell-off on Wall Street today, investors are not waiting to find out.

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