Stock Market Swings Fuel Rethinking of Retirement Plans

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• JUDY WOODRUFF:

  Now, a three-part look at the fallout from the economic crisis, beginning with yet another big dive on Wall Street. Jeffrey Brown has the latest on the markets.

• JEFFREY BROWN:

  Yesterday, the Dow closed under 8,000 for the first time in years. And today, a second straight 400-plus-point drop sent it down still further.

  Liz Ann Sonders, chief investment strategist at Charles Schwab, joins us for a look at what's going on.

  Well, it seems notable now that the whole financial sector, the target of the rescue plan, continues to be hit especially hard, right, Citigroup in particular?

• LIZ ANN SONDERS, Charles Schwab:

  No question. You're starting to rival the kind of declines we saw in banks in the 1930s.

  And although I don't think that we have a very high risk of an overall economic depression, clearly what's happening in the financial system and in the banks in particular does very much mirror what happened back then.

• JEFFREY BROWN:

  Yesterday, there was that report on the sharp drop in prices, and suddenly there was a lot of concern about deflation. Now, explain that for all of us who thought we were supposed to be worried about inflation. What does that mean? And what does it impact — how does that impact the markets?

• LIZ ANN SONDERS:

  Well, you're right. I mean, it was only this summer where we had very significant concerns about inflation, a little bit less so here in the U.S., but most certainly globally. And, boy, has that changed quite dramatically.

  Probably two forces behind that. We've got a huge plunge in commodity prices. We've taken out $100 out of oil prices, and all of that has been driven by a significant slowdown in the global economy, so we lost that demand support for a lot of commodities. And that has quickly shifted inflation back down.

  And it was a record drop in the consumer price index. In a normal environment, that would be a good thing, but it does highlight the potential risk of deflation here.

  We already have asset price deflation. We're seeing it in stocks; we're seeing it in housing. What we need to try to avoid is sort of that spiral, that deflation spiral that characterized the 1930s.

• JEFFREY BROWN:

  Well, explain that, though. Why is deflation such a bad thing, if prices drop?

• LIZ ANN SONDERS:

  Because it basically defers purchases. Everybody sits back and waits. If you're anticipating a decline, it makes it very difficult to stimulate demand for anything, demand for borrowing, demand for consumption, demand for spending, demand for investment.

  It really causes kind of a grinding halt in economic activity, given that the expectation is for things to continue to decline, prices of everything.