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Dow Jones Industrial Average Suffers

The Dow Jones Industrial Average suffered its second worst day of the year earlier this week. Financial expert Thomas Lawler and market economist Diane Swonk discuss the dip and its relationship to the national economy.

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  • JIM LEHRER:

    Ray Suarez has our stock market story.

  • RAY SUAREZ:

    The Dow Jones' fall came on a day with record volume and lots of volatility. At one point this afternoon, stocks were down nearly 450 points. For the second session in three days, housing worries were a big drag on the stock market. New home sales were worse than expected today, while two key homebuilders reported disappointing results.

    On Tuesday, the chief executive of one of the nation's largest mortgage lenders, Countrywide Financial, said the housing market may not recover until 2009.

    To explain what's happening, we turn to Thomas Lawler, a housing economist who runs his own consulting firm outside Washington, D.C.; and Diane Swonk, who watches the markets as chief economist for Mesirow Financial in Chicago.

    Diane Swonk, let's start with you. Take us inside what happens during a sell-off. By late morning, huge numbers of shares were changing hands, and great big chunks were being taken out of the levels of the indices. So what was happening?

  • DIANE SWONK, Chief Economist, Mesirow Financial:

    Well, what we really saw was a lot of things happening simultaneously. What we saw was not only were people unsure of what credit people would be paying for — price they'd be paying for their credit, so they didn't know how to value a lot of stocks out there, particularly financials.

    People weren't sure, all of a sudden they would have to pay a lot more for their credit or many of the big banks would be stuck with all this debt on their balance sheets that they thought they'd be able to sell into the market, and they've not be able to place in recent days. All of those fears culminated at the same time that we got the bad economic news on the housing market, which although was kind of expected, I think got blown up by this prism of subprime and mortgage defaults that we've seen out there.

    And the result was, in that kind of uncertainty, it's just safer to get out and run away and hide then try to buy.