The White House Tried to Calm Investors

A series of new data indicating a strengthening recession and investor fears of the nationalization of American banks caused a sharp decline in stock prices on global exchanges last week, with the Dow Jones index falling to its lowest level in six and a half years.

On Wall Street last week, the Dow Jones index plummeted 6.2 percent to 7,365 points, reaching levels not seen since October 2002. The S&P 500 index fell 6.9 percent to 770 points, and on Friday it faced a drop to its lowest levels in the last 12 years. The Nasdaq index lost 6.1 percent, diving to 1,441 points. The drop of the Dow Jones index below the level of November 20 of last year, which was considered the bottom of the current ‘bear market’, breached a psychologically significant barrier. "This is definitely a strong psychological blow because the Dow Jones index represents the entire American economy for the average investor.

There is widespread pessimism in the market regarding when the economy will begin to recover," says Quincy Krosby, a strategist at The Hartford. The banking sector was under the greatest pressure last week as investors feared that cleaning up banks’ balance sheets from bad debts would actually mean the nationalization of banks. This, in turn, would mean the ousting of shareholders. Consequently, the stock prices of Citigroup and Bank of America sharply declined, causing the KBW bank index to plunge to its lowest level in 17 years. Since the beginning of the year, shares of Citigroup and BofA have fallen by more than 70 percent, with Citigroup’s price, for the first time since 1991, dropping below the $2 mark.

The White House tried to calm investors.

"The government firmly believes in the privately owned banking system, ensuring that this system is sufficiently regulated by the government," said White House spokesman Robert Gibbs at a press conference on Friday. This somewhat reassured investors, but not entirely, as Gibbs did not want to definitively answer a reporter’s question about whether the government would ever nationalize banks. The market was also negatively impacted by the data showing that the number of people receiving unemployment assistance surged to a record 5 million. There are still no signs that recessionary pressures are easing, which the Fed also warned about last week.

The American central bank has indeed lowered its estimates, now expecting that the U.S. economy will contract between 0.5 and 1.3 percent this year, whereas it previously estimated that the gross domestic product would decline by 0.2 percent or even grow by up to 1.1 percent. The unemployment rate could, the Fed estimates, reach 8.8 percent by the end of the year, while it currently stands at 7.6 percent, its highest level in 16 years. Additionally, the Fed warned that there are still no signs of stabilization in the real estate market, which fell into crisis more than a year and a half ago, which is the main cause of the subsequent credit crisis and then the recession.

As a result, investors had high expectations from the new $75 billion U.S. government plan to subsidize mortgage loans to prevent foreclosures on homes of citizens who can no longer afford to pay their mortgage installments. However, this plan did not cheer up investors either. "More than anything, even more than the crisis in the real estate and mortgage markets, the current concern is the crisis of confidence. This is the biggest problem in efforts to analyze the state of the market. Because you cannot analyze psychology.

The market has been built on hope in recent months, and now investors are losing that. Many believed that Washington would pull us out of the mud. But I don’t know if Washington can do anything more," explains Todd Salamone, vice president of Schaeffer’s Investment Research. European stock prices also sharply fell last week. The London FTSE index dropped 7.2 percent to 3,889 points, while the DAX index of the Frankfurt Stock Exchange plummeted 9.1 percent to 4,014 points. On the Tokyo Stock Exchange, the Nikkei index fell 4.7 percent to 7,416 points. (H)