 NEW YORK (AP) - Financial markets took a bleak view of the future Monday, seeing contagion in a credit crisis that threatens to cascade through economies globally despite government efforts to provide relief. The Dow Jones industrials skidded more than 500 points and fell below 10,000 for the first time in four years, while the credit markets remained under strain.
Investors around the world have come to the sobering realization that the Bush administration's $700 billion rescue plan won't work quickly to unfreeze the credit markets. Global banks, hobbled by wrong-way bets on mortgage securities, remain starved for cash as credit has dried up.
That has sent stocks spiraling downward in the U.S., Europe and Asia, and driven investors to sink money into the relative safety of U.S. government debt. Fears about a global recession also caused oil to drop below $90 a barrel.
"The fact is people are scared and the only thing they're doing is selling," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research. "Investors are cleaning out portfolios and getting rid of everything because nothing seems to be working."
The selling was so extreme that only 98 stocks rose on the NYSE — and 3,114 dropped. That's a telling sign considering the stock market is considered a leading economic indicator, with investors tending to buy and sell based on where they believe the economy will be in six to nine months.
Monday's steep decline on Wall Street indicates that investors are becoming more convinced that the country is leading a prolonged economic crisis that is spreading to other nations. Over the weekend, governments across Europe rushed to prop up failing banks, while the governments of Germany, Ireland and Greece also said they would guarantee bank deposits.
As the U.S. tries to repair its battered banking system, the German government and financial industry agreed on a $68 billion bailout for commercial-property lender Hypo Real Estate Holding AG. And France's BNP Paribas agreed to acquire a 75 percent stake in Fortis's Belgium bank after a government rescue failed.
The Fed also took fresh steps to help ease credit markets. The central bank said Monday it will begin paying interest on commercial banks' reserves and will expand its loan program to squeezed banks.
Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co., said government intervention certainly might help. However, he believes investors are sensing that what's happening in the economy is a shift in the extent to which consumers and businesses take on debt, a change that will take years to play out.
"This is a global deleveraging of many economies," he said. "It might appear that you're going into the abyss where the economy grinds to a halt and the financial system goes into complete disarray. But, what the market is really reading here is that this is a global phenomenon, and when you delever like this, it is a process that takes a very long period of time measured in years, not quarters."
That, he said, is being reflected in major stock indexes being repriced significantly lower. In early afternoon trading, the Dow Jones industrial average fell 446.49, or 5.39 percent, to 9,768.89, dropping below 10,000 for the first time since Oct. 29, 2004. At one point, the Dow was down nearly 600.
Broader indexes also tumbled. The Standard & Poor's 500 index shed 65.13, or 5.93 percent, to 1,034.10; and the Nasdaq composite index fell 128.88, or 6.62 percent, to 1,818.51. The Russell 2000 index of smaller companies dropped 36.45, or 5.88 percent, to 582.95.
In Asia, the Nikkei 225 closed 4.25 percent lower. Europe's stock markets also declined, with the FTSE-100 down 5.20 percent, Germany's DAX down 7.07 percent, and France's CAC-40 down 9.04 percent.
The anxiety was again obvious in the credit markets. The yield on the three-month Treasury bill slipped to 0.42 percent from 0.50 percent late Friday. Demand for bills remains high because of their safety; investors are willing to take extremely low returns just to have their money in a secure place.
Investors also moved into longer-term Treasury bonds. The yield on the 10-year note fell to 3.49 percent from 3.60 percent late Friday.
Anthony Sabino, a professor of law and business at St. John's University, said the "market is displaying one of its worst traits with a herd mentality, and investors have an appetite for feeding on fear." He cautions that, while there are deep economic and financial problems being faced, it is still not a nightmare scenario.
"Most certainly, this is not the Great Depression of the 1930s, but (is like) the savings and loan crisis of the 1980s — and we bailed them out," he said. "Once people catch their breath, they'll see this is the proper analogy and this will breathe life back into banking institutions."
Banks' hesitation to lend to one another and to many businesses and individuals is the result of the bad mortgage debt that the financial rescue is supposed to sweep up. But it's still unclear how quickly financial institutions will be able to hand that debt to the U.S. government and convince the markets they are healthy again.
There has been some hope that perhaps the Fed, in concert with other central banks, might cut interest rates to help stimulate the economy. With oil prices well off their midsummer highs and indicators pointing to a slower economy, the Fed's worries about inflation are less than they had been, making it easier to justify a rate cut.
Investors might get some indication about a potential rate cut with several policymakers slated to speak this week. Dallas Fed President Richard Fisher and Chicago Fed President Charles Evans will speak on the U.S. economy on Monday. Federal Reserve Chairman Ben Bernanke is due to speak on Tuesday.
Frederick Dickson, chief market strategist at D.A. Davidson & Co., believes investors are eager for any signs about the well-being of the economy. He doesn't believe that will happen until Wall Street overhauls its expectations for growth of corporate earnings and the overall economy.
"Wall Street at this point is shifting its attention from whether Congress was going to act on the emergency stabilization bill to the realization that the economy is slowing significantly faster than most analysts had expected," he said. "The downturn has shifted from first gear to about third gear in about two weeks."
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