Mounting fears about the health of the global economy sent the Dow Jones industrial average plummeting more than 500 points, putting new pressures on financial and political leaders to find a way to prevent a double-dip recession.
The rout, which had no single catalyst, began in Europe and plunged the U.S. into near-panic selling. By day’s end, the Dow had suffered its biggest one-day point loss — 512.76, or 4.3% — since the mortgage meltdown in 2008 triggered a worldwide financial crisis.
One question looming over the drastic drop Thursday: After nearly three years of fighting economic fires, what else can governments do?
The talk on trading floors in New York was whether, after nearly two weeks of sinking share prices, Federal Reserve Chairman Ben S. Bernanke and his colleagues would launch another economic stimulus program — and whether that would be enough to quell investors’ nerves.
“Everyone is looking at big Ben Bernanke and whether he pulls out some special tools like he did last summer to help get this market rallying,” said Michael Purves, chief market strategist with BCG Financial.
With nowhere else to turn, Wall Street’s fear is that policymakers will be either unable or unwilling to launch new programs to buttress the weak economy.
Just three weeks ago, Bernanke told lawmakers the central bank was prepared to take action if the economic situation worsened significantly.
But he stressed the Fed still projected the economy would strengthen in the second half of the year, and “we’re not prepared at this point to take further action.”
The landscape has changed dramatically since then, said former Fed official Vincent Reinhart. Chances have shot up that the central bank will launch a third Treasury bond-buying program to try to push long-term interest rates lower and stimulate the economy. That had been unlikely just a few days ago because of divisions on the Fed policymaking board, he said.
“There’s a whiff of panic in the air. And in panic, power concentrates in the chairman,” said Reinhart, a resident scholar at the American Enterprise Institute. “Chairman Bernanke’s probably more inclined to do it than some of his colleagues.”
But with Treasury bond yields diving in recent days to their lowest levels since last fall, some analysts see no point in the Fed launching a third purchase program. Even with already low interest rates, banks say many creditworthy businesses have no appetite for more borrowing.
“The economic data look recessionary and the Fed looks impotent,” said Christopher Low, economist at FTN Financial in New York.
The Fed, which meets Tuesday, has some smaller moves it also could make to ease the crisis, including promising to keep short-term interest rates near zero perhaps for years, analysts said.
Other nations already were taking action.
Japan moved on Thursday to expand an asset-purchase fund to help boost its ailing economy. The European Central Bank made an intervention of its own, resuming government bond purchases and offering banks more cash to stem an escalating financial crisis.
The moves did little more than spook investors, who sent the Dow spiraling down throughout the day and moved major indexes into a market correction — a drop of more than 10% from their recent highs, reached in April. The Dow now is down 11% from its spring high.
As stocks fell so did prices of major commodities, as some investors sold whatever they could to raise cash. Crude oil prices in New York dived $5.30 to $86.63 a barrel, the lowest since February.
Even gold, which has been hitting record highs in recent days as investors sought a safe haven, fell $7.20 to $1,656.20 an ounce.
Commodity prices also were hurt as the dollar surged against other major currencies — in part because the Swiss and Japanese central banks took steps to stop the rise in their own currencies against the dollar.
That raises the specter of a global currency war: At a time of dismal economic growth, every country would prefer a weak currency to make its exports cheaper abroad.
In Europe, concerns have grown that debt-ridden Italy and Spain might be forced to follow Greece, Ireland and Portugal in seeking bailouts from the rest of the European Union. That has triggered heavy selling of European bank stocks and fueled fears of a 2008-style financial-system calamity.
“The biggest problem is that Europe is in a financial crisis, and we don’t know how their financial institutions will fare,” said Maria Fiorini Ramirez, head of economic forecasting firm MFR Inc. in New York.
Because big banks worldwide lend to each other, investors worry that a financial contagion in Europe could spread to U.S. banks.
The White House said it was closely monitoring the European situation, but tried to project calm.
“Markets go up and down,” said White House Press Secretary Jay Carney. “The president believes that the economy will continue to grow, that the economy will continue to create jobs and that we need to do everything we can to enhance that growth and enhance that job creation.”
But with federal spending slated for a cut of at least $2.1 trillion over the next decade as part of the debt ceiling deal, additional stimulus spending from Washington is unlikely.
More bad economic news, which could come as soon as Friday morning with the report on July unemployment, would change that dynamic, said Mark Zandi, chief economist at Moody’s Analytics.
“If it looks like we’re going back into a recession or the deflation threat revives, then I think the tenor and the nature of the debate will change quite rapidly,” he said. Zandi put the chances of a double-dip recession at 25%, but “rising each day as confidence fades.”
Congress could move to extend the one-year payroll tax break, set to expire in December, and extend unemployment benefits, Zandi said. But those moves simply would maintain the status quo, not provide any additional stimulus.
Bolder steps are difficult with the huge U.S. budget deficit, Reinhart said.
Similar constraints exist in Europe.
“In terms of a way out for the Euro zone, it looks very, very tricky, because none of these countries — particularly Italy — have any strategy for growth and competitiveness,” said Mats Persson, director of Open Europe, a European think tank.
European blue-chip stocks fell to a two-year low Thursday. Key indexes in the European Union have fallen between 8% and 11% this week.
“Investors are getting out of stocks massively, period. And it might take a while before they come back,” Jean-Yves Dumont of Dexia Asset Management told French journalists.
As in 2008, he said, “We’re facing the risk of another confidence crisis.”
Times staff writers Nathaniel Popper in New York, Kim Willsher in Paris and Janet Stobart in London contributed to this report.