Market Drop Fueled by a Crisis, Anxiety and an Error
By: Floyd Norris
Combine one part nervous traders, one part Greek crisis and one part trader error. Stir in one part central bank complacency. Bring to boil. Panic.
That combination produced one of the wildest days ever in financial markets, with the Dow Jones industrial average, at one point, down almost 1,000 points while the euro sank to its lowest level in more than a year. There were substantial declines in emerging markets, whose economies had seemed to be booming, and in developed markets fearful of renewed recessions.
Even though a substantial part of the worst plunge appeared to be linked to a trader error — one $40 stock fell for a time to one penny — prices had fallen around the world even before such mistakes began to happen.
It appears that investors are again growing more hesitant to own assets like stocks and bonds, particularly since many now cost far more than they did only a few months ago.
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Another sharp retrenchment by investors, consumers and businesses could threaten the current global recovery by choking off financing and new orders for companies.
For much of the last 14 months, the prices of risky assets around the world have been rising rapidly. That recovery, from lows reached in March 2009 amid talk of a new Great Depression, both reflected and encouraged a revival in economic activity. Manufacturers in most countries this week reported rapidly growing order books.
The most recent recession was made in the United States, and to a large extent it was unmade here as well. If it was the subprime mortgage market and other credit excesses that sent markets reeling, it was also a willingness of the American government, including the Federal Reserve Board, to plow in money when fears were at their highest that helped to bring those markets and economic activity back.
For the last several months, worries have been alternately rising and receding that the next crisis would be made in Europe, where Greece has faced the possibility of default. Europe and the International Monetary Fund have announced plans for a bailout, but there have also been riots in Greece amid anger over the steep budget cuts being forced on the country.