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.
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