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Market Meltdown: What Happens From Here


Everyone OK?

Yesterday will undoubtedly go down as one of the most flabbergasting days in our market's history. The Dow Jones' 777-point decline marked the largest one-day drop ever (in points, not percentage), after the House of Representatives voted down the proposed financial-system bailout.

First, a few notes:

  • The Nasdaq fell nearly 10% -- its third-largest one-day percentage decline ever.
  • The Volatility Index -- known as the VIX, or "panic" index -- jumped 34.5% to close at its highest level ever.
  • Citigroup (NYSE: C  ) bought Wachovia (NYSE: WB  ) for around $1 per share ... incredible news that was largely ignored amid the market mayhem.
  • The Dow closed just 100 points above where it stood exactly nine years ago. Compound growth ... whoo-hoo!

And the granddaddy of all the eye-catching figures of the day:

  • Yesterday's stock market swoon zapped $1.2 trillion from equity markets.
  • The bailout plan proposed extending $700 billion in credit, the majority of which would likely be recovered.

If there's a statistic that better conveys that this is more of a Main Street problem than a Wall Street problem, I don't know what it is. But, heck, there's no point belaboring that topic much longer. Fingers can be pointed and mud can be flung for years to come. What people want to know is, where do we go from here?

Hang in there, Hank
A few notable points: One, the Treasury isn't necessarily out of options. It can still handle financial bailouts on a case-by-case basis, as it's done for AIG (NYSE: AIG  ) , Freddie Mac (NYSE: FRE  ) , and Fannie Mae (NYSE: FNM  ) in the past several weeks. While that'll hardly solve the problem long term, Hank Paulson and Co. still have some ammunition left should remaining heavyweights like Goldman Sachs (NYSE: GS  ) or Morgan Stanley (NYSE: MS  ) teeter on the brink of collapse, as they had before the mother of all bailouts was announced a week and a half ago.

Besides, just because a wide-reaching bill stalled yesterday doesn't mean it's killed for good. As the days and weeks unfold, our pals in Washington will (hopefully) assess how markets react to the thought of having to make it through this mess cold turkey.

Keep in mind that markets price in the odds that certain events will happen, and yesterday's incredible crash, believe it or not, is still undoubtedly pricing in the expectation that some sort of bailout plan will eventually take shape. If it becomes clear that there truly won't be a wide-reaching bailout, yesterday is all but sure to be just the beginning of a flock of very angry chickens coming home to roost. And, again, we're not just talking about a stock market correction or a Wall Street bailout -- we're talking about a collapse of the financial system that every inch of the economy relies on in one way or another.

The long, uncertain road ahead
Still, what keeps me up at night aren't bank failures, market plunges, or stalled votes on Capitol Hill. It's the value of the dollar, particularly the fate of the dollar in light of the fact that foreign investors who hold trillions of dollars worth of U.S. securities are watching our financial meltdown as it happens.

Keep in mind that the value of the dollar isn't backed by gold, silver, beads, or sea shells. It's backed by the assumption that the U.S. is the world's alpha economy. Sure, it still is, and will be for some time to come, but having foreign investors own 25% of our Treasury bonds while watching our financial system slowly wither away should make you squirm. Remember Bear Stearns? Lehman Brothers? WaMu? They were all "financially strong" until investors saw the writing on the wall and gave up on them, staging a run on the banks in one way or another. 

Could the American economy as a whole be setting itself up for a similar situation? If the financial system is allowed to completely crater, the answer should be a resounding yes, which is part of the reason why so many have expressed such a sense of urgency over this situation.

The suspense is just killing me.

Related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 30, 2008, at 3:51 PM, websmith1 wrote:

    Just hang onto your stock. It will go back up to its true value as soon as Americans get their country in order.

    Americans are tired of bailing out private industries that move our jobs off shore only to have things continue to get worse. We have lost 8.3 million jobs and public servants like Menendez, Feinstein and Pelosi want to move 550,000 more F-1B cheap labor visa holders into this country while tent cities were popping up all over America long before this financial crisis. Every time these public servants pass legislation or a regulation, things get worse. Every time we bail out one of these poorly run, government interfered with, private companies the value of our dollar goes down and we suffer more. These public servants got us involved in an illegal war that is not only draining our economy, it is killing our children. These public servants are now having an adverse effect on one bright spot in our economy by bickering about extending tax credits for the renewable energy industry.

    We know that this crisis was instigated by legislation. We know that this bailout will end up propping up the banks while we end up continuing to suffer. We are already suffering and it doesn't scare us to tell us that we are going to suffer more. The message is that if you vote for this bank bailout, you won't be re-elected.

    If you want to fix this, put the country back into the hands of the people who love it. Give the money to the people. They will deposit it, catch up and renegotiate their mortgages, and buy American made products. This is trickle up economics and it is the only way that a free market works. We know that this is only a temporary fix and we expect the new batch of public servants, that will include a lot of new faces, to begin working on a way to smoothly migrate our economy back to one that is Constitutionally based and prosperous for the people, not just the elite.

  • Report this Comment On September 30, 2008, at 3:54 PM, DaveYostCom wrote:

    "the largest one-day drop (in points not percentage) ever"

    I'm disappointed that even you guys are doing this egregious scaremongering. Percentage is the only rational measure of numbers going up and down. Quoting point changes is a tool used by sensationalists. This makes you sensationalists, not serious commentators, I guess.

  • Report this Comment On September 30, 2008, at 4:18 PM, HackerWolf wrote:

    Maybe if you media types weren't pumping the fear that we were destined for the worst depression ever if the bill didn't pass on Monday, we would have never seen the 777pt drop.

    I heard that crap for 4 days, it's why I bought ETFs that shorted all of the indicies. I'd be willing to bet that almost all of the CNBC commentators did as well after all of their doom and gloom reporting.

  • Report this Comment On September 30, 2008, at 4:47 PM, tokpela wrote:

    FEAR!!!! What a load of crap (sorry had to say it).

    The problem is Main Street's because Wall Street is socking it to us!!

    The powers that be just want you (the taxpayer) to foot the bill.

    The irony here is that the Fed rate is still 2% but banks are creating a crisis by not lending setting the bank to bank rate extremely high causing a credit crunch.

    So, they are the ones creating the problem so that you will take all of the crap off of their balance sheets by buying the stuff nobody wants.

    Think of this - yesterday the Fed pumped $650 billion into the market to shore up the system. How come they can just do that without Congress but they seem to want to have this "rescue". What's the difference? Why couldn't $650 billion pumped into the economy fix the problem yesterday - because they want there to be a problem!!

    Think about it - the media keeps telling you about the drop of 777 but what about the gain of 450 today? Why - did the bailout happen? No, just more bullsh*t. The credit markets are rigged by the very people who want this bailout.


    If they do this bailout - we will be signing on to a whole load of inflation. Also, even if this bailout passes - it will just be the first in a long line of handouts. The problems will not end with the bailout. Several days later (after the vote) - things will be back to fear mongering. Later this year - we need more money!!

  • Report this Comment On September 30, 2008, at 9:01 PM, robertf36009 wrote:

    Tokpela: Greetings and amen. If the big banks are distrustful of one another because they are all hiding toxic waste in their vaults why should we trust them? I don't want to spend my grandchildren's money on crooks and speculators. This plan will create a giant inflated dollar that will float over main street for years. I think that just maybe the large U.S. banks which were going to fail have done so. Now Eurozone banks are failing because they were greedy to. If foreign investors want their money from U.S. banks give them the paper that our government says will be so good for us taxpayers!

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