Credit Crunch Crux of Crisis

Article excerpt

Byline: Patrice Hill, THE WASHINGTON TIMES

Wall Street's monumental sell-off last week, with major stock indexes falling to levels not seen in a dozen years, reflects a rapid unraveling of the economy that was spawned by the collapse of the biggest credit bubble in history.

Credit is needed by every player in the economy from consumers to businesses to investors and the government, much like a body needs oxygen, economists say. When the oxygen is cut off, the patient goes into a coma, and survival is in question. That is what has happened to the economy since a severe credit crisis broke out in September, and the markets are reflecting the patient's waning vital signs.

The alarming free fall of the economy is wreaking havoc on American consumers, businesses and markets. Within months, it has sent the jobless rate soaring to its highest point in a quarter century and driven consumer confidence to record lows, while chopping half the value off a typical investor's stock portfolio. It has imperiled people's retirement, as well as their employment.

Credit markets are in disarray - with some having died altogether in recent months. The stock market is experiencing its worst bear market since the Great Depression. The Dow Jones Industrial Average ended last week a little above its lowest levels since April 1997, while the Standard & Poor's 500 index registered a 13-year low of 683 during the week.

The economy is suffocating, said Sung Won Sohn, professor at California State University at Channel Islands. The stabilization of the credit market is a prerequisite for stopping the hemorrhage in jobs as well as producing a recovery in the stock market, he said. The government must present a clear blueprint detailing how the financial market will be stabilized.

Wall Street analysts say the massive deleveraging of the U.S. and global economy in the wake of an unprecedented worldwide credit bubble is mostly responsible for huge stock losses. But a grim bear market psychology also has set in that is taking a toll, especially on struggling financial firms and other stocks hit hard by the credit crunch.

An army of short-sellers has focused on wounded companies such as Citigroup and General Motors Corp., for example, driving Citigroup's stock below $1 for the first time Thursday. So many former blue-chip stocks have fallen below $1 recently that the New York Stock Exchange has loosened its rules to avoid having to delist them as penny stocks.

GM shook markets Thursday with a report from its auditors stating that the company is insolvent and will not survive without more government loans. GM's stock, also a target of short-sellers trying to profit from the downturn, plummeted more than 15 percent to $1.86.

Another corporate giant victimized recently by the credit crisis is General Electric Co., an icon of industry that was once considered a model of how to succeed as a large multinational firm. A large share of GE's most profitable business in the past was financial, but GE's stock has plummeted from $30 to $6.66 as credit losses mounted at its finance arm, GE Capital. GE is one of a handful of corporations worldwide with a AAA credit rating, and the company's troubles securing credit recently has raised worries of a first-ever downgrade.

The troubles of such corporate titans have added to the market's grim psychology. Investors not only are grappling with monumental losses in what were once blue-chip stocks, but they cannot foresee which, if any, corporate giants will rise in their place to lead the market forward in the future. …