Fear overtakes the markets

The fear is back.

The fear in capital markets is different from the near panic experienced in September and October, before governments around the world began organizing plans to deal with a global credit freeze. The cause is different this time, and many of the symptoms vary. But this fear may be more serious, and it's driving markets even further down a very dark hole.

That was painfully clear to anyone watching stock markets over the past two days, as the Dow Jones industrial average sunk by 872 wrenching points, or 10.3 percent. The Standard & Poor's 500 index, struggling through its worst year in an 80-year history, sunk to its lowest level in 11 years.

The Dow closed at 8,175.77 on its worst day in October, a month when many people like me believed the market was close to finding a bottom. The close yesterday: 7,552.29.

Besides the plunging prices, the stock volatility measure widely known as the fear index poked up to 80.86, a record.

But the single number that best captured investor sentiment yesterday may have been this one: 0.02.

That's the interest rate investors were willing to take in the purchase of three-month US Treasury bills yesterday. That's not 2 percent or two-10ths of 1 percent. That's two-100ths of 1 percent.

Subtract trading expenses, and that transaction was actually costing investors money yesterday. Think of it as the price of stashing money somewhere secure, like a government safe deposit box, for a few months. That's not investing, it's the market's version of a fetal position.

Strong demand for super-safe Treasury securities drove prices higher and interest yields so much lower (historically, three-month bills have offered interest in a range from 3 percent and 5 percent).

Popular longer-term Treasuries also traded in previously unseen territory yesterday. Interest levels on two-, five-, and 10-year Treasury notes and 30-year Treasury bonds all traded to their lowest levels since the government began the regular sale of those securities.

Frightened investors around the world had stampeded into Treasuries last month, when everyone panicked over the paralyzing credit freeze. Those three-month Treasury bills yielded the same 0.02 percent at their lowest point in that frenzied stretch.

The fear driving all kinds of capital markets down now is different. It isn't about a credit freeze, though access to money remains a real issue. Now it's about the sinking economy - how long and how bad the recession will be.

No dramatic news has reignited those fears in the last week. Everyone already knew a serious recession was underway. But a steady drip of bad news has dampened investor sentiment in the complete absence of any positive developments.

Some of that can't be avoided. Bad times generate a lot of bad news, some of it really dismal. But Washington hasn't helped lately. Congress and the administration seem ineffective in this important window of time.

For one thing, the government program to help the financial industry doesn't appear to be generating the intended results. Another: Talk of critical stimulus plans is getting sidetracked for now by the auto industry loan proposal, pitched with a kind economic fear mongering that makes people even more nervous. A stimulus plan that spends $100 billion or $300 billion or more - no one really has a clue - is what the country needs most as soon as possible.

"The Congress has spent so much time on this blessed $25 billion for Detroit that it's losing sight of the bigger stimulus package," says Nariman Behravesh, chief economist at Waltham-based Global Insight. "It seems like a completely backward sense of priorities. Nothing's happening and it's really worrisome. We just don't have the luxury of time."

Meanwhile, the government has spent a portion of the $700 billion dedicated to rescuing the financial industry by making investments in banks. But that hasn't prompted bank lending anyone can see. Those institutions are hoarding the cash.

Remember the original Treasury plan, to buy mortgage securities and help establish a bottom in frozen markets and get the system moving again? Not much going on there either.

Now investors worry about the health of giant Citigroup Inc., cutting its stock market value in half this week alone. The major index of US bank stocks has sunk well below levels recorded prior to the government's intervention plan. That's one good measure of short-term failure.

But an economic stimulus plan is the most important thing government can contribute to the economy and the market. The right plan can significantly alter the dimensions of a serious recession. It's also the one real positive element in the news that can help get investors off the ledge.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.