Investors panic and can't stop selling as the financial crisis grows deeper.

Investors panic and can't stop selling as the financial crisis grows deeper.

Investors panic and can't stop selling as the financial crisis grows deeper.

A summary of what's in the major U.S. newspapers.
Sept. 18 2008 6:33 AM

Fear Factor

Widely reported hopes that the bailout of American International Group was going to lead to a market rally went out the window yesterday morning with the opening bell as stocks plunged, credit markets seized up, and investors around the world scrambled to put their money into safe government bonds and gold. In short, it seems investors decided that it's officially Time To Panic. Knowing full well that casual readers might chalk up this latest development as simply another in a string of bad days on Wall Street, the papers make sure to emphasize that if you were worried yesterday, you should be terrified today. Right off the bat, the New York Times warns that the "financial crisis entered a potentially dangerous new phase," and the Washington Postsays Wednesday was "one of the most tumultuous days ever for financial markets." The Dow Jones industrial average dropped almost 450 points, or 4 percent.

Investors were so panicked as they rushed to sink their money into U.S. government debt, which is considered the safest investment, that at one point yesterday they "were willing to pay more for one-month Treasurys than they could expect to get back," reports the Wall Street Journal. "That's never happened before." Investors were also so eager to snap up gold, which has always been considered a safe haven during turbulent times, that its price increased by more than $70, which the Los Angeles Timescalls "its biggest one-day gain ever in dollar terms." Meanwhile, the average American might not understand the ins and outs of the crisis, but they still "know that something's wrong," says USA Today, which reports on a new poll that shows 23 percent of adults think the economy is in a depression. That's nearly double the number of people who thought so in February.

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Early-morning wire reports suggest that it's not going to be a pretty morning on Wall Street, as Asian markets plunged today.

Many contend that investors right now are simply acting out of blind fear, which, of course, just makes things worse. "While investors' decision to protect themselves may be perfectly rational," notes the NYT, "the crowd behavior could cause a downward spiral with broader ramifications." Right now, investors "are worried there is a lot more out there," an economist tells the WP. "What other firms are going to collapse?"

The LAT says Morgan Stanley and Washington Mutual might be the next financial powerhouses to be acquired. Morgan Stanley is one of two remaining independent investment banks along with Goldman Sachs, and their stocks suffered the steepest decline in their history. In this climate where such little money is flowing and banks don't even want to lend to one another, everyone notes that Morgan Stanley and Goldman Sachs are particularly vulnerable. The NYT and WSJ report that Morgan Stanley is in preliminary merger talks with Wachovia. The plunge in "the last two titans left standing on Wall Street" (NYT) was somewhat of a surprise considering that they both reported respectable numbers on Tuesday, but everyone sees it as a sign of just how far the fear is spreading.

As credit markets essentially froze, one of the most worrisome—and "surprising," according to the Post—aspects of yesterday's fast-moving events had to do with money-market funds, which have long been billed as an ultra-safe investment. One fund reported that its net assets fell below $1 a share, which is so rare "that many investors consider them as safe as cash or a checking account," notes the NYT. The development raised even more fears that spooked investors would rush to get their money out of other funds.

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As the crisis that many are calling the worst since the Great Depression spreads, any hopes that it would end quickly "are fading fast," notes the WSJ. In an extended comparison, the WSJ says that the American financial system "resembles a patient in intensive care" who is trying to fight a disease that is spreading. The doctors at the Treasury and the Fed are "resorting to ever-more invasive treatment, and are now experimenting with remedies that have never before been applied."* The disease, if you will, has been identified as deleveraging (sure to be in the running for word of the year), or the unwinding of debt. Just like the people who took on mortgages they couldn't afford, financial institutions took on way more debt than they could handle. And just like most people dealing with the credit crunch, these institutions now must learn to live without so much borrowed money, "a painful and drawn-out process that can choke off credit and economic growth."

The WP's Steven Pearlstein characterizes it as a "Category 4 financial crisis" that may be resulting in "the greatest destruction of financial wealth that the world has ever seen." And while there may be a lot of psychology of fear going on and no one's gone broke overestimating the importance of confidence in the markets, what is really happening "at the most fundamental level" is that foreign creditors are forcing the United States "to begin living within its means." As USAT succinctly puts it, "the party's over." The problem is that if everyone cuts back, that would almost certainly lead to a recession, and while that's bad in and of itself, it could also translate into big problems for regional and local banks that have issued lots of loans to businesses that will inevitably suffer. "Think of that ... as the inevitable second round of this financial crisis that, alas, still lies ahead," Pearlstein writes.

To prevent more banks from failing—11 have already failed this year—the NYT reports that to little fanfare regulators proposed "a significant change in accounting rules to bolster banks and encourage widespread industry consolidation by making them more attractive to prospective purchasers." Also, in a move that everyone reports, the Securities and Exchange Commission imposed new limits on short-selling.

So, what does all this mean for the average American? USAT does a good job of clearly laying out how different types of people might be affected. In short, this new period of tight credit "could mean jobs lost, retirement plans pruned, college deferred and lifestyles diminished," USAT summarizes. As usual, experts say retirement investors shouldn't panic and shouldn't rush to get all their money out of stocks.

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All of the quick decisions that the Fed and Treasury Department have had to make this week mean that lawmakers have been relegated to the spectator seats, a development that they're not happy about, reports the Post. There was lots of grumbling on Capitol Hill yesterday along with vows to hold hearings. In the meantime, the idea to create a new federal entity that would buy mortgages and debt that no one wants is gaining ground, even if nobody expects quick action on the matter. One thing that has come quickly is finger-pointing, notes the NYT. This blame game is also playing out on the campaign trail, where Barack Obama has been quick to link the current problems with the Republican administration.

In another look at the quick-changing John McCain, the LAT fronts a look at how the Republican nominee is having a hard time figuring out how to respond to the financial crisis. There's probably no better example than what happened yesterday. On Tuesday, McCain was adamant that "we cannot have the taxpayers bail out AIG or anybody else," a view he had apparently forgotten about by Wednesday when he issued a statement supporting the decision. This is only one stark example of how McCain has been trying to find a balance between talking about the need for small government while also pledging "stringent oversight" of Wall Street.

Although it's probably too soon to tell, all this talk about McCain's inconsistencies may be hurting his image with voters. The NYT fronts a new poll that seems to suggest the surge of support McCain got after the convention—particularly among white women—may have been nothing more than a temporary blip in the radar. The latest poll has Obama ahead among registered voters though still within the margin of error. Horse-race numbers aside, voters also see Obama as more likely to change Washington and view McCain as a "typical Republican." In addition, voters continue to say the economy is their top concern and affirm that they trust Obama more than McCain on the issue. But it's not all bad news for McCain, whose selection of Gov. Sarah Palin as his running mate has clearly energized the conservative base.

The LAT catches late-breaking news that seven U.S. troops died in Iraq when their helicopter crashed outside of Basra. The military said the helicopter didn't come under fire and the crash appears to have been an accident. In other Iraq news, local police say 99 people have died in a variety of bombings across the country over the last week.

The WP is alone in fronting yesterday's well-coordinated attack on the U.S. Embassy in Yemen that killed 10 guards and civilians as well as six of the assailants. The attackers weren't able to breach the compound's gates, and no Americans were killed. U.S. and local officials were quick to say the tactics were similar to those employed by al-Qaida in the past, and the Post notes that the use of two vehicle bombs is a strategy used by the Sunni insurgent group al-Qaida in Iraq.

On the NYT's op-ed page, Paul Wilmott, a quantitative-finance expert whom Portfoliohas described as the editor of "the most influential magazine you've never heard of," compares the current financial crisis to Hamlet. "We've had the deaths of Polonius, Claudius and Laertes— that is, the falling house prices, the rising commodity prices and the collapse of banks. As of now there is no sign of Hamlet himself, a catastrophic fall in the markets," Wilmott writes. "Yet it's difficult to believe that markets are not going to undergo a climactic implosion some time soon. If the current situation doesn't fill investors with fear, then what are they smoking?"

* Correction, Sept. 23, 2008: This piece originally left out the word "with" in the quote from the Wall Street Journal. (Return to the corrected sentence.)

Daniel Politi has been contributing to Slate since 2004 and wrote the Today’s Papers column from 2006 to 2009. Follow him on Twitter.