Whoosh! Dow sheds 531 points

By Jerome R. Corsi

stocks-stock-market-wall-street-hand-on-nose-600
NEW YORK – A global stock market selloff appears to have triggered a much-anticipated selloff in the U.S. stock market, as the Dow Jones Industrial Average closed down 530.94 points Friday, off 3.1 percent.

The dramatic drop puts the Dow into corrections territory, defined as a 10 percent decline from the most recent high.

The Dow closed Friday at 16,459.75 after losing 1,000 points this week in the type of precipitous market drop not seen since the selloff in 2008, which was caused by an over-extended real estate market. At that time, substandard loans packaged into mortgage-backed securities collapsed, precipitating the economic downturn that tarnished the end of President George W. Bush’s second term and ushered a political change of course in which Barack Obama won the presidency.

The current global stock selloff was precipitated by a surprise decision announced by China two weeks ago to devalue its currency. The aim was to boost exports and jump-start sluggish growth in the world’s second-largest economy. Aug. 11 marked the biggest one-day loss recorded by the Chinese stock market in the past two decades.

The ‘weekend effect’

Experienced market watchers worried as the Dow closed Friday in a pattern similar to the “Black Monday” stock market crash Oct. 19, 1987.

The 1987 crash remains the largest one-day percentage decline ever, with a 22.61 percent loss of 508 points, closing at 1,738.74.

Get Dave Ramsey’s practical financial plan for your family, “Total Money Makeover: A Proven Plan for Financial Fitness,” at the WND Superstore!

A 22 percent selloff Monday would shed 3,600 points, representing trillions of dollars.

The “weekend effect” has been a focus of study by the federal reserve.

This weekend, nervous investors may well begin calculating ways to “get out first” to reduce the inevitability of substantial losses should Friday’s 531-point drop signal the beginning of a prolonged global stock market decline.

The Greek debt crisis nearly precipitated a “Grexit” in which the southern European country would have been forced to abandon the euro and become the first EU nation thrown out of the eurozone. The development took place amid growing concerns about government debt levels in Western economies, including the United States, that have slowed growth.

Fed puts an end to ‘quantitative easing’

WND has reported for nearly two years that the Federal Reserve, unable to sustain a policy of “quantitative easing” under which it purchased trillions of dollars of Treasury-issued debt, is running out of options to help stimulate economic growth or to reverse a sharp market selloff in the short term.

Under the leadership of Federal Reserve Chair Janet Yellen, the Fed has engaged in a “pivot,” shifting concern from stimulating job growth to worrying about inflation. The fear is that without a tightening in Fed monetary policy, the U.S. economy could experience inflation as high as 5 percent in the next two years, a level not experienced since 2005.

In October 2014, the Fed under Yellen’s direction ended the policy of Quantitative Easing in which for 37 consecutive months it had bought Treasury debt in an effort to stimulate the economy by keeping interest rates at or near zero.

Under the QE bond-buying spree, the Fed’s balance sheet ballooned to a record $4.48 trillion accumulated since announcing the first round of QE purchases in November 2008.

Yellen assumed the Fed chair on Jan. 6, 2014, determined to “taper” QE borrowing down to zero by the end of 2014, a goal she achieved in October.

The Greenspan debacle revisited

After 9/11, Greenspan and the Fed began cutting interest rates aggressively in an effort to jump-start a stagnant U.S. economy.

“For a full year and a half after September 11, 2001, we were in limbo,” Greenspan wrote in his 2007 book “The Age of Turbulence: Adventures in a New World.”

“The economy managed to expand, but its growth was uncertain and weak. Businesses and investors felt besieged,” Greenspan wrote.

Greenspan was open about monetary policy during this time.

“The Fed’s response to all this uncertainty was to maintain our program of aggressively lowering short-term interest rates,” he wrote.

Under Greenspan’s direction, the Federal Open Market Committee extended a series of seven cuts made in early 2001 to lower the Fed funds rates to around 1.25 percent by the end of 2002, a figure he admits “most of us would have considered unfathomably low a decade before.”

Greenspan admitted that the Fed was aware that maintaining low interest rates “might foster a bubble, an inflationary boom of some sort, which we would subsequently have to address.” But he claimed the Fed was worried the economic slowdown after 9/11 might cause deflation, a concern shared by professional economists around the world after experiencing the deflation that plagued the Great Depression of the 1930s.

As 2007 came to a close, Greenspan was a hero on Wall Street.

Investors who had made billions of dollars hailed his low-interest policy as the key to engineering an unprecedented surge of wealth on Wall Street.

At the close of 2007, analysts who warned that the economy had peaked and the real estate bubble had already burst were being rejected as prophets of doom.

As 2008 began, pundits were predicting the Dow would climb past 15,000 without much difficulty.

Unfortunately, such optimism was unfounded, as Greenspan and the Fed managed the federal funds rate up from a low of 1 percent in May 2004 to a plateau of 5 percent. The 5 percent rate was maintained for a year, from the last quarter of 2006 until approximately the last quarter of 2007, when Greenspan and the Fed began lowering rates in fear the upward adjustment violated the Goldilocks rule, being “too much” instead of “just right.”

In December 2007, few realized that month would later be identified as the official start of the most severe economic downturn in the U.S. since the Great Depression.

Jerome R. Corsi

Jerome R. Corsi, a Harvard Ph.D., is a WND senior staff writer. He has authored many books, including No. 1 N.Y. Times best-sellers "The Obama Nation" and "Unfit for Command." Corsi's latest book is "Partners in Crime." Read more of Jerome R. Corsi's articles here.


Leave a Comment