The Irish Independent reports that the employers' body IBEC has joined the growing ranks of economists who say the economy could shrink by a huge 4pc next year.
In an assessment for IBEC members, director of policy Danny McCoy said the possibility that 100,000 people have left the country would be "a calamity" for the Irish economy.
"We don't know if it is true yet, but we need to find out," he said last night. "It could explain the extraordinarily bad retail sales figures, and it could have catastrophic effect on domestic Irish business."
He said that policies to steer the country through the downturn would be quite different if much of the influx of people during the boom had been reversed. "I don't have answers yet myself, but I am more and more convinced that this is not a cyclical downturn, but a structural break which will take us to a different level.
"This recession will affect middle-class, white-collar workers much more than previous downturns, and we may need different policies for assistance and incentives to deal with it," Mr McCoy said.
A more upbeat forecast came from National Irish Bank, whose economist Ronnie O'Toole sees the economy contracting by 2.8pc next year.
But the effects will still be severe, with a net loss of 10,000 jobs in multinational companies, to add to the woes of a domestic industry hit by slumping demand and the fall in sterling against the euro.
He expects unemployment to average 8pc next year, and that it will still be rising in 2010. "Experience elsewhere suggests that downturns caused by banking crises tend to be deeper and last longer than the more usual ones led by consumers," he said.
Deterioration
The huge deterioration in the public finances meant the Government could not provide a fiscal stimulus. Instead, taxes would have to be broadened to make up the gap caused by the property collapse.
"The principle of charges for household services has been established. They are introducing water charges in the North and we need to look at this kind of revenue source," Dr O'Toole said. Mr McCoy said that measures announced in the Budget were inadequate. More action would be needed before the next Budget in December 2009.
"Whether it comes in the form of a 'min-budget' or not, the Government will have to take decisive action. But it should take some time to assess the situation and think about what to do before rushing into actions which may not address the real problem."
Independent Group Business Editor Brendan Keenan writes today: A comment from a senior stockbroker the other day may have summed up the banking problem. "While banks say publicly that they don't need fresh funds, most are privately resigned to the fact that it's inevitable."
The situation is probably now too grave for that kind of dissembling. The time for negotiating has passed and the time for agreement and action has arrived. By the time you read this, the Government may have announced plans to offer fresh capital to the banks. If not, it soon will.
The details will be vital, as will the other measures which accompany the capital injections. New capital of itself will help the receiving banks, but do little or no good for the general economy. For that to happen, something wider and more ambitious will be required.
Thanks to the government guarantee of deposits and debts, no Irish lender has failed. But the system itself has failed. The principle that bad money drives out good is now being extended to the phenomenon that bad borrowing drives out good. Healthy companies are being starved of funding, and credit-worthy house buyers turned down, because of the huge reduction in both the banks' capacity, and willingness, to lend.
It is a bit of both, according to the recent ECB survey of banks in the 15-nation euro area. The bad news from the survey was that, as well as tightening credit in the third quarter of the year, a majority of eurozone banks expected to tighten it further in the current quarter. A lot of businesses say they have already noticed that.
The worrying result, it seemed to me, was the survey's findings -- including those from five Irish banks -- that unwillingness to lend had overtaken funding problems as the main reason for further credit restriction. Bankers cite the general economic situation and doubts over the outlook for customers as having more of an impact on their decisions than lack of capital or access to funds.
It is a classic vicious circle. Banks do not lend because they are worried about the dangers faced by their customers. By not lending, they increase those dangers and make bankruptcies more likely.
The economic argument for action to break this circle is unassailable. Unfortunately, the public may have been left with the impression that all that is required is for the Government to put investment capital into the banks, watch the flow of credit increase, and in due course get its money back with profit.
If only. Such simple optimism ignores the fact that recapitalisation in other countries has not restored the availability of sound credit to levels that governments expected.
There has been a war of words between British banks and the UK government, over how much government should try to direct the flow of credit. Big German companies complain that their medium-sized suppliers are being forced to the wall by lack of credit. And so on.
Hearings
The Americans have their wonderful system of Congressional hearings, where wars of words can be carried out in public. Four of the biggest US banks have asked by to the Senate Banking Committee to explain why the huge support from taxpayers has not produced the effects those taxpayers desire.
This comes as the US bank survey showed a similar picture to that of the eurozone (and, no doubt, elsewhere). It found that 85pc of US banks tightened lending standards on commercial and industrial loans to large and mid-size firms in the third quarter. That was the biggest percentage increase since the survey began in the recession of 1991.
Any Irish recapitalisation policy must try to achieve better results than appears to have been the case elsewhere. By definition, that is a tall order, and in any case, we must we be under no illusions as to what can be achieved.
The Irish crisis, like the global one of which it is but a part, has been caused by excessive borrowing. Some of it has been unwise borrowing to buy a home; more if it has been unwise borrowing to buy investment property. Some of it has been unwise borrowing to expand businesses; much, much more has been unwise borrowing to develop commercial property.
This debt burden must be reduced, which means a loss of wealth, income and consumption. Bad borrowing must be replaced by good, not sustained by government cash.
Many firms will fail, and many investments in property and shares will never produce the gains which the purchasers hoped for. Unemployment, alas, will rise. There is convincing evidence that perfectly sound companies are being starved of credit, but many of those complaining probably are bad risks in the current climate.
So can the frozen credit tap be turned on for those who deserve to sup from it? A good place to start is in ending that stockbroker's dichotomy between what banks say and what markets believe. The opportunity presents itself with the analyses by PricewaterhouseCoopers and Merrill Lynch on the real state of the Irish banks.
Every bone in every body in Merrion Street and Dame Street will want to keep as much as possible of their findings private. It is in their gene pool that secrecy about the financial position of banks is the core of policy. Right now, that attitude could be one of the most damaging of all.
Not only do we need to know how much the banks are likely to have to write off, we need to do something about it.
The original, normally sensible, idea to spread the pain over three years or so, and share it among the banks by merging weaker ones with stronger, no longer looks sensible in what are highly abnormal conditions.
The best chance -- perhaps the only chance -- may be to write off those billions in losses in one fell swoop and then supply the shrunken banks with the capital needed to restore their ratios to good international levels.
There are lots of difficulties in such a plan, such as how to calculate losses on loans, and apply accounting principles to such drastic measures.
The amount of initial taxpayer funding may also be greater than if it were possible to string things along until there are some signs of recovery.
Damage
By then, though, the economic damage could be so great that the final cost would be even higher. Unfortunately, it looks already as if the main aim of the Department of Finance is to limit the size of Exchequer borrowing.
Even if it were done, one wishes one could say with confidence that such a cleaned-up banking system would definitely begin to supply credit to where it ought to go.
All one can say - with increasing confidence - is that a banking system burdened with years of loan losses most certainly will not.
The Irish Times reports that a government plan to keep down the cost of health insurance for older people could lead to significant increases for those in younger age groups.
The plan contains a new levy for subscribers which, if passed on in full, would see a family of two adults and two children paying over €400 more for cover.
For those on some of the more popular plans, this would represent an increase of about 25 per cent.
The levy is to finance the provision of €300 million in additional tax relief for older subscribers, which is aimed at keeping health insurance affordable for this group of people.
The Government feared that following a Supreme Court decision to strike down a risk equalisation scheme, older people would have to pay substantially more for their cover.
The Cabinet was told by the departments of health and finance that if nothing was done, the bill for an 80-year-old subscriber would rise from €600 to €2,400.
Under the Government plan the additional tax relief will offset the higher gross cost charged to older people, so that in net terms they will pay the same as younger subscribers.
But health insurance companies will have to pay €160 for each adult on their books and €53 for each child.
Minister for Health Mary Harney said yesterday that she hoped the cost of this levy would not be passed on to consumers. "We believe that there is a lot of scope for the companies to subsume some of this, if not all of it," she said.
The plan was welcomed by the country's largest health insurer, VHI, as a means of bringing stability to the market while also helping to ensure that health insurance remained accessible to as many people as possible.
However, Quinn Healthcare said it was concerned about the implications of the Government move - particularly for those on lower-price plans. "Quinn Healthcare will do everything possible to minimise price increases, but at this stage increases are inevitable because of this announcement by the Government," it said.
The company claimed the plan merely reinforced the dominant position of VHI. It is taking legal advice on the measure.
Hibernian Health said that the proposals were "blunt in nature and short-term in outlook" and said that they were aimed at propping up the finances of the VHI.
VHI said that while its prices would rise next year, this would be due to increasing demand and medical costs rather than the impact of the levy. Hibernian Health said that it had no plans to increase prices.
Government sources described the levy and tax relief proposals as "interim measures" to last for three years pending the implementation of a new risk equalisation framework.
Separately, the Government said that it is also to introduce measures to penalise those who take out health insurance cover later in life.
There was a mixed reaction to the move from the Opposition parties. Labour welcomed the principle, while Fine Gael attacked the plan.
"Without some intervention elderly people would face penal rates for private health insurance, and it is vital that they should be protected from this - particularly against the background of the Government's decision to withdraw the automatic entitlement of the over-70s to a medical card," said Labour Party health spokeswoman Jan O'Sullivan.
She added that while the Labour Party supported the principle of what was being done, there were many questions that would only be answered when the detailed legislation was published.
However, Fine Gael health spokesman Dr James Reilly said the new health insurance plan meant that consumers would now be paying for the Minister's botched legislation on risk equalisation. "Only one thing is certain about the Minister's announcement today: the proposed measures will inflate the cost of private health insurance across the board. Current subscribers who are 50 and younger may well be forced out of the market," he said.
The Irish Times also reports that a joint venture between private clients of Dublin stockbroker Goodbody and troubled Belfast developer Taggart Holdings has been given court protection in Northern Ireland from its creditors.
Last month, Taggart Holdings, owned by brothers John and Michael Taggart, was placed in administration, a company rescue mechanism, at the request of Bank of Ireland and Ulster Bank, to which it is said to owe €150 million.
Yesterday it emerged that Taggart Homes Belfast Number One Ltd and a subsidiary, Taggart Estates Ltd, part of a €300 million property development joint venture between Goodbody clients and Taggart involving three companies, has been placed in administration at the request of its directors.
Under Northern Irish and English law, a company that is having difficulty paying its debts, meeting financial commitments or facing other difficulties can be placed in administration, which gives it court protection from anyone attempting to enforce debts or take legal action against it.
Administrators are answerable to the courts and have to devise a rescue plan that will benefit the company's creditors.
If this is not viable, the administrator has the option of winding up the business.
Taggart and Goodbody set up the joint ventures up in 2006 to buy up to €300 million worth of land around south Belfast and Dundonald on which they planned to build and sell houses.
They were funded with a mix of debt and around €30 million in equity from Goodbody clients.
Garth Calow and Rob Birchall, partners with PricewaterhouseCoopers (PWC) in Belfast, administrators of the Taggart group, have also taken charge of Taggart Homes and Taggart Estates.
Mr Calow said yesterday that he was hoping to sell the company's development land bank and pointed out that a number of parties had already been given details of what it holds.
"It is planned to conclude discussions with a limited number of parties within a short period, after which we anticipate moving forward with a preferred party to complete the sale," he said.
Goodbody's clients have 50 per cent of Taggart Homes Belfast Number One and, under the original deal's terms, have first refusal over the balance had the Taggarts decided to sell.
The stockbroking firm last night said it would enter talks with the administrators regarding all of its options.
PWC said yesterday that Taggart Estates owned five sites and has a share in a sixth, totalling 352,000 sq m (87 acres), most of which are within 11km of Belfast city centre.
All of it, barring 2,000 sq m, has full or outline planning permission for housing.
Stuart Pearson of Pearson Holdings recently confirmed to The Irish Times that he was interested in bidding for Taggart Holdings itself. His advisers last week contacted the administrator to open talks on the group's possible purchase.
John and Michael Taggart set up the company in 1989, and over the last half decade, it became one of the more high-profile beneficiaries of the property boom on both sides of the Border.
The Irish Examiner reports that ministers were last night trying to finalise a wide-ranging deal which would see private investors pump-in most of the cash needed to prop-up Irish banks.
Taoiseach Brian Cowen moved to play down talk of an imminent multi-billion euro injection of taxpayers’ money into the financial sector as opposition leaders accused him of “complacency”.
As shares in crisis-hit Irish banks continued a modest rally on the stock market, Mr Cowen insisted he was doing all he could to shore-up the sector and unblock lines of credit to struggling small firms.
“International market expectations in relation to capital levels in the banking sector have altered and meeting these expectations may be challenging.
“The Government is considering all options in relation to these matters,” he told the Dáil.”
The Taoiseach also warned that a bank recapitalisation scheme would not act as a “panacea to all ills”.
Finance Minister Brian Lenihan stressed he was more interested in getting private businesses to take the risk of putting money into the banking sector rather than see it fall on the taxpayer through outlets like the National Treasury Management Agency which invests public funds to boost pension schemes.
Fine Gael leader Enda Kenny called on the Taoiseach to ensure the funds must be used to open credit lines to help protect Irish jobs and small businesses.
“I’m sure the Taoiseach doesn’t want a situation where capital is extended to banks and it sits in vaults only or would be used for the purposes of supporting delinquent developers.”
Labour leader Eamon Gilmore attacked the Taoiseach’s “lack of urgency”.
“Businesses are going to the wall because they can’t get the money to pay their staff,” he said.
Mr Gilmore insisted the Taoiseach must get a grip on the situation and ensure injected money would not merely secure the credit rating of banks, but be circulated in the wider economy to save jobs.
Mr Cowen revealed a report commissioned by the Central Bank on the financial positions of Ireland’s six main financial institutions showed they all had required capital levels as of September 30, when the bank guarantee scheme was announced.
However, opposition leaders pointed out the market situation regarding the banks had altered radically since the PricewaterhouseCoopers’ report was ordered.
Mr Gilmore demanded to know why if the six banks were in such a good capital position, the Government had told the Dáil that the banking system was in “imminent danger of collapse” in September.
Mr Cowen replied “the stability of the banking system was at risk” if the guarantee scheme had not been imposed.
The Financial Times reports that Alistair Darling, chancellor, will next week throw Britain’s struggling small and medium-sized companies a credit lifeline, in an admission that the £37bn bank bail-out has so far failed to boost lending to business.
Mr Darling is to underwrite new loans to small firms as part of a package of measures to help the sector, amid Tory claims that the credit crisis is “strangling” companies.
The government is also likely to announce measures to help businesses that have lost insurance cover, as the credit crunch has hit supply chains.
Gordon Brown, prime minister, on Wednesday told the Commons: “We will take all measures necessary to help small businesses get the loan capital they need.”
A key part of the plan is an extension of taxpayer guarantees to bank lending to SMEs, which amounted to £5.7bn in the year to June.
Mr Darling is expected to announce a sharp increase in funding for an existing government scheme, where small companies can apply for bank loans that carry a 75 per cent taxpayer guarantee, under certain conditions.
The chancellor is attracted to the idea of widening access to the £360m small firms loan guarantee scheme, since banks retain 25 per cent of the risk of the loan and would, therefore, still be expected to take commercial decisions.
Mr Darling is considering whether to amend the 75:25 per cent risk ratio to increase the taxpayer guarantee even further to ensure lending takes place. The plan would place a big new contingent liability on the government books.
The Conservatives called for the taxpayer to guarantee all business lending, but Mr Darling argues that would lead to the taxpayer supporting some loans that would have been made in any case.
He wants to focus efforts on small companies and start-ups – especially those without collateral – which can be given “soft” loans under European Union state aid rules worth up to €1.5m (£1.25m) over three years.
Mr Darling has rejected the idea – mooted by the Liberal Democrats – for the government to lend directly to companies. “The priority is to get existing institutions working better,” a government spokesman said.
The chancellor is also coming under increasing pressure to force the three part-nationalised banks – Royal Bank of Scotland, Lloyds TSB and HBOS – to honour commitments to maintain the availability of business lending at 2007 levels.
“What has been done so far has not yet worked properly,” said David Cameron, Tory leader. Nick Clegg, Liberal Democrat leader, said: “The bankers can’t believe their luck. They have got billions of pounds of taxpayers’ money, they can keep their bonuses and they don’t have to lend to companies.”
Meanwhile, Lord Mandelson, business secretary, is looking at a range of options – including some form of government guarantee – to help companies hit by the withdrawal of insurance protection against the non-payment of bills for goods.
The withdrawal has hit thousands of businesses and is seen as a problem “across the supply chain”, according to insiders.
The government also intends to increase the support it offers for export credit insurance.
Meanwhile falling oil prices will cost the government about £6bn in lost revenues next year, putting further pressure on the already-strained public finances.
Yvette Cooper, Treasury chief secretary, hopes that efficiency savings worth £4-5bn by 2010-11 could help to repair some of the damage to public finances.
The FT also reports that manufacturers are expecting the sharpest contraction in 30 years, according to a CBI survey published on Wednesday which said that the last time the sector’s mood was so black was back in 1980 as the country went into recession.
The CBI Industrial Trends Survey for October came as the Engineering Employers Federation, whose members are largely manufacturers, reported that one in four companies that had negotiated a pay deal in the three months to the end of September had either deferred a decision or opted to freeze pay.
Separately, the Bank of England’s monthly agents’ survey, which takes the temperature of companies around the UK, also found the slumping economy and tighter credit is taking its toll on business investment.
Companies had pared their investment plans back to cover only essential expenditure, while reports of small-scale redundancies and plant closures became more widespread in October, with more employers entering redundancy consultations.
Together the three surveys point to a rapid deterioration in Britain’s manufacturing sector as the country heads into recession.
Jonathan Loynes, economist at Capital Economics, said they showed that hopes that a weaker pound would keep exports of manufactured goods buoyant were unlikely to materialise. “It’s now pretty clear that industry is going to suffer as much or more than the rest of the economy,” he said.
The CBI’s survey reported that manufacturing order book levels were judged to be well below normal for October, although they remained above weak periods seen in 1998 and 2003 and were “much less negative” than levels seen in previous recessions in 1980 and 1991.
The survey by the Bank of England’s agents, conducted between late September and late October, sought to identify business trends that the Bank’s monetary policy committee will incorporate into its next deliberations on interest rates. The latest survey found many contacts reporting a tightening in their credit conditions. The cost of finance, including management and arrangement fees, had risen and debt was increasingly being priced to Libor rather than the bank rate, which has come down sharply.
“There was also a wide-ranging perception that banks have become more active in responding to breaches in covenants,” the survey noted. While only a small number of contacts businesses reported that their day-to-day business was immediately threatened, the survey noted concerns that credit might be reduced was weighing on companies. As a result, some employers had trimmed internally funded investment plans and projects had been shelved.
Meanwhile, inflationary pressures appeared to be abating, with no employers expecting price rises over the next three months. Four months ago pricing intentions were the highest for 18 years.
The New York Times reports that after gyrating wildly for weeks, the stock market lurched lower on Wednesday, falling to its lowest point in nearly six years, as concern spread that the economy might be facing a chronic and debilitating decline in prices.
The Dow Jones industrial average closed below 8,000 for the first time since early 2003 after new reports painted a grim picture of the economy and raised the specter of deflation, which would put more strain on hard-pressed businesses and workers.
The Labor Department reported that prices of consumer goods and services fell by a record amount in October, while another report showed that a measure of home building fell for the fourth straight month, to its lowest level in the 49 years that the government has kept that data.
While most consumers might welcome the idea that things are getting cheaper, deflation is an economists’ nightmare. It was a hallmark of the Depression and Japan’s so-called lost decade in the 1990s. A big worry is that deflation would blunt the impact of interest rate cuts by the Federal Reserve, forcing policy makers to use other tools to try to revive the economy.
The Consumer Price Index, a measure of how much Americans pay for groceries, entertainment and other goods and services, fell by 1 percent in October, to an annualized rate of 3.7 percent, according to the Labor Department. It was the biggest one-month drop in the 61-year history of the index and the lowest annualized gain since October of last year.
Much of the decline could be traced to a 14 percent drop in the price of gasoline, but the cost of other goods — including clothes, milk and vegetables — also fell sharply.
The vice chairman of the Fed, Donald L. Kohn, said that the risk of deflation, defined as a “general decline in prices,” remained slight but had increased. “Whatever I thought that risk was, four or five months ago, I think it is bigger now even if it is still small,” Mr. Kohn said in response to a question after a speech. The Fed, he added, would be aggressive, if necessary, to prevent a broad drop in prices.
Stocks started falling shortly after 10 a.m. and ground their way down for much of the day before tumbling sharply in the last hour of trading. The broad Standard & Poor’s 500-stock index closed down 6.1 percent, to 806.58, falling below a low it set on Oct. 27. The index is now only 37 points above its October 2002 low. The Dow dropped 427.47, or 5.1 percent, to 7,997.28.
Financial shares led the market down, with Citigroup falling by more than 23 percent and Bank of America closing down 14 percent. General Motors and the Ford Motor Company also tumbled as prospects for a federal aid packaged looked grim. “That spooked investors quite a bit,” said Sam Stovall, chief equity strategist at Standard & Poor’s Equity Research. “G.M. and Citigroup, two venerable companies, are right now on the ropes.”
In the credit market, the price of corporate debt and bonds backed by commercial mortgages plummeted, while government bonds rallied as investors sought safe havens. The yield on the 10-year Treasury, which moves in the opposite direction from its price, fell to 3.32 percent, from 3.53 on Tuesday.
Analysts say a sustained decline in consumer prices would be terrible for the economy. Businesses that cut prices to attract buyers are likely to have to lay off workers as well. They may also have little left over to pay lenders or shareholders.
Prices are falling outside the United States too. Consumer prices declined in Britain, France, Germany and elsewhere in Europe in October, and prices were flat in September in Japan, which has fought deflation on and off for nearly two decades.
The decline in consumer prices is all the more remarkable because this summer many economists were concerned about inflation and the prospect for stagflation, in which inflation and unemployment rise simultaneously, contrary to their usual relationship. “It’s funny that just a few months ago everyone was wringing their hands over inflation,” said Nariman Behravesh, chief economist at Global Insight. “It’s gone. It’s over.”
But that concern has been quickly dashed, in large part because of a steep drop in commodity prices. Crude oil prices, for instance, have fallen more than 63 percent from their July peak of $145.29 a barrel, to $53.62 on Wednesday. The national average price for unleaded gasoline is now $2.05 a gallon, down from $2.92 a month earlier, according to AAA, the auto club.
In fact, it now seems clear that the nation is entering a more frugal era after several years of conspicuous consumption.
For instance, room rates at luxury hotels fell 5.4 percent in the 28 days ending on Nov. 15 — in contrast to a 1.3 percent increase in rates at midscale hotels that do not serve food, estimated Smith Travel Research, a firm that studies the industry. Over all, hotel prices fell 1.6 percent in October, according to the Labor Department.
High-end retailers are resorting to drastic discounting to lure customers into stores. Executives at Nordstrom, the department store chain, said on a recent conference call with analysts that the company had lowered prices on more than 800 clothing styles by an average of 22 percent.
Airfares, which were rising along with energy prices this summer, are now sliding as airlines struggle to fill seats on many popular routes. The average price of a one-way ticket is down about 20 percent from July, to $107 in mid-November, according to Harrell Associates, a firm that tracks the airline industry.
Still, the so-called core price index — which excludes energy and food — was down a more modest 0.1 percent. The prices of goods and services like meat, alcohol, medical care and education increased in October.
“It would take significant and persistent contraction in the economy to push core inflation into negative territory,” said Dean Maki, an economist at Barclays Capital in New York. “We do not think that is likely, especially given the aggressive policy response on the part of the Fed and Treasury.”
The Fed has already cut its benchmark interest rate to 1 percent from 5.25 percent last year, and it has been lending hundreds of billions of dollars to banks and corporations in recent months to revive credit markets. The Treasury has also pumped nearly $300 billion into banks and other financial firms.
The Fed is anticipating significant further slowing in the economy. A report released on Wednesday shows that the Fed now expects 2009 growth to be 1.8 percent to minus 1 percent, down from a previous forecast of growth of 1.9 percent to 3 percent.
Even though the Fed’s target interest rate is close to zero, economists say there is much more the central bank and the government can do to revive the economy. In a speech in 2002, before he was the chairman of the Fed, Ben S. Bernanke said central banks could combat deflation by buying longer-term Treasury and mortgage-backed securities to drive down interest rates.
“The Fed is going to ram liquidity into the financial system whether it is asking for it or not, just going out and buying assets and printing money in order to do it,” said Alan D. Levenson, chief economist at T. Rowe Price. “If you jam money into everyone’s pocket, they will spend it.”
Furthermore, lawmakers in Washington are also expected to pass a significant fiscal stimulus package in January after the new administration and Congress take power. Policy makers could head off deflation by spending hundreds of billions of dollars on tax breaks, infrastructure projects and other initiatives.
The NYT also reports that as the stock market tumbled to its lowest level in nearly six years on Wednesday, Wall Street traders and many ordinary Americans were asking the same question: Where, oh where is the bottom?
After a yearlong slide in stocks and a giant bank rescue from Washington, even some pessimists had hoped that the worst might be over. But now, after the Dow Jones industrial average fell below 8,000 on Wednesday, the financial crisis and the bear market it spawned seem to be taking a new, painful turn.
Once again, investors’ confidence in the nation’s financial industry is draining away. And once again, people are rushing for ultra-safe investments like Treasuries. Many analysts agree that the short-term outlook seems grim now that the Dow has fallen below 8,000, a level that had lured buyers again and again in recent weeks.
“When you break through these kinds of levels, it strongly suggests there’s more to go,” said Ed Yardeni, president of Yardeni Research.
But how much more to go? Dow 7,000? Dow 6,000? Many analysts are reluctant to say, having been proved wrong so many times before. The Dow has lost nearly 40 percent this year, and many of its blue chips, from Alcoa to General Electric, are down even more than that.
Much will depend on the course of the economy, but there is little good news on that front. On Wednesday, a new report raised concern that the economy might be beset by a debilitating decline in prices, or deflation.
But another big worry is that the credit markets, where this crisis began, are coming under even more stress than they were before. Junk bonds, for instance, fell to their lowest levels on record on Wednesday, driving the average yield on these high-risk corporate bonds to more than 20 percent. Yields on Treasury bills, meantime, fell to nearly zero. Investors were willing to accept almost no return just to know their money was safe.
The Treasury’s benchmark 10-year bill rose 1 25/32, to 103 20/32, and the yield, which moves in the opposite direction from the price, was at 3.32 percent, down from 3.53 percent late Tuesday.
Another source of concern is a possible new round of forced sales by hedge funds, seeking to raise the cash quickly to meet margin calls and redemptions of assets by investors.
Few stocks escaped unscathed. Shares of small and midsize companies fell, as well as those of Wal-Mart, the retailer. Energy companies plunged, as did airlines, fast-food chains and pharmaceutical companies.
But it was financial stocks that bore the brunt of the selling, and, for many analysts, seem the most worrisome. Financial shares are plunging far below the levels plumbed in October, when panic gripped the markets. On Wednesday, Citigroup, the hobbled financial giant, plunged 23.4 percent to a mere $6.40 in an avalanche of sell orders. Once the most valuable financial company in America, Citigroup is now worth less than U.S. Bancorp.
Big banks like Bank of America, JPMorgan Chase and Wells Fargo — all of which, like Citigroup, have received billions of dollars from the government — fell more than 10 percent.
Goldman Sachs, the former employer of Henry M. Paulson Jr., the Treasury secretary, sank to its lowest level since it went public in 1999. Analysts predicted that Goldman, the most profitable bank in Wall Street history, would suffer its first loss as a public company.
Even Warren E. Buffett’s Berkshire Hathaway, which owns the Geico Corporation and recently invested in Goldman Sachs, fell 12 percent, its steepest decline in more than two decades. The Dow Jones industrial average closed down 427.47 points or 5.07 percent, at 7,997.28. The broader Standard & Poor’s 500-stock index closed down 6.12 percent or 52.54 points at 806.58 while the technology-heavy Nasdaq ended down 6.53 percent at 1,386.42.
But even as markets tumbled, analysts saw few signs of capitulation, that final burst of panicked selling that typically marks a market bottom. If anything, Wednesday’s new lows are a sign that Wall Street has farther to fall.
“The market is still anticipating that we have not seen the worst,” said Ryan Larson, head equity trader at Voyageur Asset Management.
After precipitous declines this autumn, Wall Street had spent the past weeks testing its yearly lows by dipping sharply, only to rebound late in the day. The testing and retesting prompted some optimists to hope that the markets had finally found a foothold.
But Wednesday’s drop proved them wrong.
A gathering mass of bleak economic conditions seemed to approach the critical point, as fears of deflation and the auto industry’s waning prospects of a federal bailout drove financial markets into an afternoon selling frenzy.
Auto shares fell as the leaders of the three American automakers reprised their appearance on Capitol Hill to discuss an emergency bailout and the threat of bankruptcy. General Motors was down 10 percent, to $2.79 a share, and the Ford Motor Company was down 25 percent, to $1.26.
Crude oil settled at a 22-month low at $53.62 a barrel, and energy stocks followed them lower.
Wednesday’s losses followed news that consumer prices dropped 1 percent in October, a record one-month decline, according to the Labor Department. Energy prices, which tumbled 8.6 percent over the month, led the declines.
Meanwhile, housing starts in October fell 4.5 percent to a seasonally adjusted 791,000 from the prior month, the government reported on Wednesday. For the year, housing starts were down 38 percent and building permits were 40 percent lower, reflecting how the housing industry has slammed to a halt amid tumbling home values, slumping sales and tighter credit markets.
Asian stock markets opened sharply lower on Thursday. Trade data from Japan, Asia’s largest economy, showed big drops in exports compared with a year ago. The Nikkei 225 index in Japan dropped 4.3 percent soon after the opening. Similar falls were seen in South Korea, where the Kospi fell 3.9 percent.
