Worldwide worry

Markets tumble amid doubts on US stability

Electronic display boards in London (above) and New York told the tale as panic selling battered stock markets around the world yesterday. (AP Photo)

Waves of panic selling swamped stock markets around the world yesterday as a spreading crisis in confidence battered investors from Tokyo to Brazil and intensified concerns over a potential global recession.

In another wild day on Wall Street, the Dow Jones industrial average finished below 10,000 for the first time since 2004, plunging 800 points before rebounding in the last hour to close down nearly 370. The Dow has lost more than 1,000 points in just over a week.

Earlier, some European stock markets suffered their worst one-day drops ever, following a dive in Asian markets, which fell to near five-year lows. The fall was even steeper in emerging markets such as Russia and Brazil, where markets plunged as much as 20 percent.

The stock market collapse is battering the nest eggs of millions of retirees and workers who increasingly rely on stock investments, made through mutual funds, to finance their 401(k) and other retirement accounts. The Dow is down nearly 30 percent from a year ago.

The global selloff came just three days after the passage in Congress of a $700 billion bailout plan aimed at stabilizing and restoring confidence in the US financial system. Ultimately, analysts said, investors viewed the plan as insufficient to do either. Credit markets in the United States and around the world remain all but frozen as frightened financial institutions continue to refrain from lending to each other.

Adding to the fear: an acceler ating economic slide in the United States that threatens to pull the global economy into recession. Crude oil yesterday fell below $88 a barrel for the first time since February on fears of slumping demand.

"It is still true when the US sneezes, the rest of the world catches cold," said Michael Goldstein, a Babson College finance professor. "And we're doing more than sneezing."

In Washington, Treasury Secretary Henry M. Paulson Jr. spoke with Federal Reserve chairman Ben Bernanke about the global market turmoil as Treasury moved to put the bailout plan into place, seeking to hire professional asset managers to help design and run the program, which will buy troubled mortgage-related assets from financial firms.

Meanwhile the Fed, which already has pumped hundreds of billions of dollars into the global financial system, said it would make $900 billion in loans available to financial institutions by year-end as it tries to keep credit flowing. The central bank is also considering acting as the intermediary between banks reluctant to lend and companies desperate to borrow. Now, the market for such short-term loans, which routinely fund day-to-day activities for companies, is freezing.

If the Fed were to step in, it would come closer than ever to lending directly to businesses, risking more taxpayer dollars.

In appearances in San Antonio and Cincinnati, President Bush sought to reassure investors and citizens. "I believe that in the long run this economy is going to be just fine," Bush said in Cincinnati, where he gave a speech on judicial nominees.

The plunge in world markets provided another example of how quickly fear can spread through an interconnected financial system in which technology allows vast sums of money to move across international borders in an instant, analysts said. The root cause can be traced to the US economy, where the collapse of housing and credit bubbles of a few years ago has brought down some of the biggest and oldest financial firms, including Lehman Brothers Holdings Inc. and Bear Stearns Cos., insurance giant American International Group Inc., and mortgage giants Fannie Mae and Freddie Mac.

Those companies made large investments in securities and other assets backed by mortgages. Their epic crashes have made financial firms reluctant to lend to one another, fearing their peers might have similar holdings of mortgage-related securities, and eventually fail. As firms hoard their cash, it stops the flow of credit that consumers need to buy homes, autos, and other items, and businesses need to expand and hire. The result: a shrinking US economy.

Even state and local governments can't find credit. In Massachusetts, a spokeswoman for state Treasurer Timothy P. Cahill said the state plans to proceed with a $750 million borrowing in the bond market today, but investment managers said raising the money could be difficult.

"I've been doing this for 25 years and I've never come close to seeing what I am right now," said Bob MacIntosh, codirector of municipal investments for Eaton Vance. "Nobody wants to take on any risk, even if the risk is absolutely miniscule."

Financial firms in other countries also invested in US mortgage-backed securities and related assets, and that exposure is undermining confidence in overseas credit and financial markets. Homegrown problems in other countries also are adding to the global financial turmoil.

In Europe, for example, England, Spain, and Ireland are reeling from their own collapsing housing bubbles. Several major banks have failed or been nationalized. Meanwhile, European nations have been unable to agree on a coordinated strategy to address the crisis. "European central banks and governments have refused to see that there was any systemic problem," said Simon Johnson, a professor at MIT's Sloan School of Management. "If the Europeans keep mishandling this, a big nasty global recession is coming."

That prospect underlies the global meltdown in stock markets, analysts said. After focusing on the US bailout package, investors have turned their attention to worsening conditions in many of the world's major economies, said Carl Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y.

In the United States, he said, the root problem remains consumer overspending and high debt fueled by easy credit.

"We're going through a massive readjustment of consumer spending, and it can only end when people pull in their belts and spend less," said Weinberg. "And that's a recession."

Casey Ross of the Globe staff contributed to this report. Material from the Globe wires services is included in this report. Robert Gavin can be reached at rgavin@globe.com.