Black Friday? Markets brace for worse, and cry for help

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If ever there was a setup for a Black Friday on Wall Street, this is it.

We can hope it doesn’t happen. But better that investors are realistic about the risks. Global markets and the world economy are at a dangerous point in this debt-fueled debacle, and anyone who says otherwise is a liar.

On Thursday the U.S. stock market suffered its seventh straight loss, and the 7.3% drop in the Dow Jones industrial average -- down 678.91 points to a five-year low of 8,579.19 -- was the biggest yet in this latest sell-off.

In other words, the get-me-out-at-any-price mentality is more intense than even a few days ago. Many people are morose, demoralized, desperate. They can’t take any more.


‘Investors are in survival mode,’ said Robert Bissell, chief investment officer at Wells Capital Management in Los Angeles. ‘Stocks of major companies are at ridiculous prices,’ he said, but no one cares. ‘This is what panics are all about.’

Much of the selling now is forced: Hedge fund managers may not want to let stocks go at these prices, but their clients want their money back. Ditto for mutual fund managers, who are facing a surge in redemptions. Selling begets more selling.

There wasn’t much new in U.S. markets Thursday, and that was the problem. Credit markets remain mostly frozen, as wary banks still refuse to lend to one another despite the federal government’s attempts to break that logjam.

The plan for the Treasury to buy up $700 billion in bad loans from banks now is roundly viewed as too little, too late, or just wrong-headed. Critics say it won’t get the banks to lend again any time soon.

New reports from Washington on Thursday said the Treasury might try another approach: injecting capital directly into banks. Yet that revelation also failed to lift market sentiment.

Coordinated, but modest, interest rate cuts by the world’s major central banks Wednesday didn’t work either.

Maybe it’s time to start listening to people other than the same ones who let things get to this point.

Nouriel Roubini, an economics professor at New York University and head of Roubini Global Economics, over the last two years has predicted much of what has since come to pass. His critics dismissed him as Dr. Doom; now they wish they had heeded him.

Roubini is warning that the world has reached the brink of financial and economic calamity. This is from an e-mail he sent to clients late Thursday:

At this point the risk of an imminent stock market crash -- like the one-day collapse of 20%-plus in U.S. stock prices in 1987 -- cannot be ruled out as the financial system is breaking down, panic and lack of confidence in any counterparty is sharply rising and the investors have totally lost faith in the ability of policy authorities to control this meltdown. When in markets that are clearly way oversold, even the most radical policy actions don’t provide rallies or relief to market participants. You know that you are one step away from a market crash and a systemic financial sector and corporate sector collapse. A vicious circle of deleveraging, asset collapses, margin calls and cascading falls in asset prices well below falling fundamentals, and panic is now underway.

He says governments have no choice but to take much more dramatic steps -- in unison -- to try to restore confidence. His list includes:

-- another round of interest rates cuts by central banks, at least 1.5 percentage points in size.

-- a temporary blanket guarantee of all bank deposits.

-- a ‘rapid reduction of the debt burden of insolvent households preceded by a temporary freeze on all foreclosures.’

-- a ‘massive direct government fiscal stimulus package that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower income households and provision of grants to strapped and crunched state and local government.’

-- government recapitalization of financial institutions and a reduction of the debt burden of distressed borrowers.

Economic policymakers of the G-7 industrialized nations meet in Washington this weekend. If they don’t have their own blueprint for action, Roubini just gave them one.