Two things happened yesterday morning. First, the European banking system started to show signs of falling into the same banking crunch. In fact, three European banks fell victim to the credit crunch, needing government rescue. Secondly, Congress threw a big curveball at the markets by failing to approve the bailout plan we have been waiting awaiting.
Put yesterday in perspective. How significant of a day was this?
778 points is the biggest single decline in the history of the stock market, surpassing the first trading day after 9/11 so it was definitely a big day. In fact, the S&P500 lost 100 points, nearly 9%, the 7th biggest percentage loss in history and the largest since the '87 crash.
Let's walk through why the market is so concerned. What will happen if Congress does not pass a bailout plan?
The main problem is that banks have weak mortgages clogging their ability to make good loans. The plan will allow the government to purchase these mortgages from banks, freeing them up to make the good loans that are so critical to keeping the economy going. Without them, we experience high mortgage rates and drastically higher unemployment.
And your thought is that the lack of confidence is acting as another obstacle for banks
Absolutely. Fear is a huge, unfortunate problem now. Redemptions from 401(k) plans has been in the billions over the last couple of weeks. Even large investors are worried about the safety of banks, and are liquidating assets. If there is one thing we should all do, its to be patient.
So everyone is wondering, is the bailout going to happen?
We're going to get a bailout plan. Congress is close. There was enough agreement yesterday but we didn't get there because of political obstacles. I have a strong feeling that when Congress reconvenes Thursday, we will get a plan in place.