The U.S. financial crisis spread around the world Monday as stock prices plunged here and abroad amid eroding confidence in the world's banking system.
Simply put, the world Monday suffered a modern-day equivalent of a bank run as investors panicked and nervous traders everywhere ran for cover.
They shifted capital to safe instruments such as gold, which rose $33.00 to $866.20 an ounce. And they flocked to Treasury bonds. The yield, or interest payment, on a three-month Treasury was just over four-tenths of a percent, meaning investors were willing to take almost no profit in hope of simply not losing money in stocks.
The Dow Jones industrial average plummeted 800 points before a late rally let it close down 369.88 points, at 9,955.50. That's the first time the Dow closed below 10,000 in almost four years.
The Dow first crossed 10,000 on March 16, 1999.
Monday's drop on all three major U.S. indices to levels first reached a decade ago was a sobering reminder that Wall Street and the retirement plans of ordinary Americans are spiraling downward together. The S&P 500 was off 42.34 points to 1,056.89, and the Nasdaq sank 84.43 points to 1,862.96.
“This is not the Great Depression. People should not get panicked,” said Lyle Gramley, an investment adviser and former Reagan-era Federal Reserve governor who has followed markets for more than five decades.
The Fed on Monday took more bold steps to keep the widening financial crisis from growing out of control. Before U.S. markets opened, the Fed announced that it would again expand its short-term emergency lending, bringing to $600 billion the amount it has made available to lenders. Its auction of short-term loans to lenders is designed to lubricate the wheels of global finance that are seizing up.
Yet from well-heeled Europe to emerging upstarts Mexico and Brazil, depositors fled banks and traders fled local stock markets in a panicky stampede to the exits.
What sparked the global selloff in part was the German government's announcement Sunday that it would backstop all bank deposits following the collapse of a rescue plan for a troubled German mortgage lender. This led to worries that problems outside the United States were worse than feared and a global panic ensued.
In Europe, many exchanges posted their worst day ever. France's CAC-40 index fell 9percent, Germany's DAX-30 fell by more than 7 percent, and London's FTSE was off 7.9percent. Russia's stock index fell by more than 19 percent before trading was halted in what is becoming a near-daily occurrence. Asian stocks were off Monday by about 5percent, led by Indonesia, whose exchange fell by 10 percent. Today, Japan's stocks tumbled, sending the Nikkei 225 Stock Average to its lowest level in five years.
Financial contagion also spread quickly to big emerging economies that helped fuel global economic growth in recent years as the U.S. economy slowed.
In Brazil, until recently a darling of global investors, trading on the Bovespa exchange in Sao Paulo was halted twice before noon, as panicky investors pulled out en masse, triggering so-called circuit breakers to halt rapid declines. Wiping out almost two years of gains, the Bovespa closed down 13.54 percent.
Mexico saw its stock market fall 9 percent shortly after the opening bell, before recovering to close off 5.4 percent. It was a volatile day in which finance ministry officials urged citizens to begin saving in case a global crisis unfolds.
Oil prices, which hit a record high of more than $147 a barrel in July, fell $6.07 a barrel, or 6.4 percent, to settle Monday at $87.81 a barrel on the New York Mercantile Exchange. The slide in oil prices is likely to mean much cheaper gasoline prices for American motorists in weeks ahead, one of the rare reasons for cheer as recession almost certainly spreads. The average price nationwide for a gallon of unleaded gasoline stood at $3.50, down 17 cents from a month ago, according to AAA.
“Clearly the Fed has exercised authority that goes well beyond what I thought normal for a central bank,” said Paul Volcker, who was Fed chairman from 1979 to 1987, during presentation of a report in New York on Monday.
Asked by McClatchy Newspapers if there's ever been a time when a Fed chairman has taken more action in a shorter period of time, Volcker was succinct. “The answer is no,” said Volcker, who's known best for raising interest rates so high to choke inflation that they pushed the U.S. economy into a deep recession in 1981-1982, but the economy emerged to a long boom without parallel.