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Bailout Fails to Stem Credit Fears in Financial Markets

Despite the approval of a sweeping $700 billion bailout bill on Capitol Hill, the downward march of the financial sector continued Monday as major world and U.S. markets plummeted.

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    It was a day when the global nature of the financial crisis hit home: deep drops in foreign markets, followed by more on Wall Street, where the Dow has now lost more than 10 percent of its value in the past week, the S&P 500 more than 15 percent.

    We look at what's happening now with Scheherazade Rehman, director of the European Union Research Center and professor of international finance and international affairs at George Washington University; James Angel, an associate professor of finance at the McDonough School of Business at Georgetown University; and Ed Yardeni, president of Yardeni Research, an independent investment research firm.

    Well, Ed Yardeni, it was just Friday that the financial rescue plan was passed. What accounts for today's drop on Wall Street?

  • ED YARDENI, Yardeni Research:

    I think in some ways it's a bit of a disappointment with the plan, a confusion about how it's going to work. It's an impatience.

    But, you know, I think at the end of the day it was just panic selling by institutional investors, particularly hedge funds, that have been facing redemption requests from their investors.

    Some of them may just want to get out of the business, because, you know, once you fall below the so-called high-water mark of your fund, if you don't get back to it, you don't earn those kind of big fees. So that may be part of it. And I think the public is genuinely scared.


    Oh, so you see — I was going to ask you about small investors and depositors. You see it starting to hit them, as well? I should say us, as well?


    Well, yes. In a perverse way, the way the rescue package was sold was with a great deal of fear. It was sold with the idea that, if we don't pass the Troubled Assets Relief Program, then it could lead to economic catastrophe. And I think a lot of people weren't aware that we were that close to catastrophe.


    Professor Angel, you were just nodding your head as he was talking. What do you see happening here today?

  • JAMES ANGEL, Georgetown University:

    Well, we live in a global market. We live in a global economy. And today we saw not only impatience with the rescue package, but we also saw reaction to what's going on in Europe.

    As was pointed out in the introduction, there's a lot of economic problems over there, as well. And when the European markets go down, the U.S. markets often go down in sympathy.


    We're using the term "volatility." And Ed Yardeni used the word "panic," I think. Panic? Is there an order to what we saw today? At one point, the Dow dropped 800 points and then it came back to close around 370 or so. How do you describe it?


    Well, this is a classic financial panic. And I actually am teaching a course in financial panics at Georgetown University.

    And this is like the kind we are reading about in the history books, in which you have some economic bad news, and people don't really know what's going on, who's solvent, who isn't. So what we see happening is people running for the fire exits at the first hint of trouble.

    But on the other hand, people know that, when the turnaround comes, it often comes very quickly. As a matter of fact, the best year in U.S. stock market history was 1933 during the depths of the Great Depression. In that year, the U.S. stock market went up 67 percent.

    So as — so you often have very high volatility at times like this, where some people think, "OK, the worst is over. Time to get in." Oops, too early, time to get out again. So that's what we see.