The global market suffered again Monday, days after President Bush signed the $700 billion bailout into law.
The reason for the fall cant be attributed to the bailout bill not working, said Dave Swenson, associate scientist with the Iowa State University department of economics-Agriculture and Life Sciences. He said Mondays losses were simply a continuation of a massive international stock sell-off.
Were still adjusting, Swenson said. Even after they passed the law the other day, the market dropped sharply ... it wasnt that the law didnt work, it was just the direction that the market was going broadly was down.
He said even after the bailout bill was passed, investors across the globe were still in a panic and waiting for a new bottom, before regaining confidence in the market.
There is still not very much world-wide confidence, so people are shedding what they think are their bad stocks, Swenson said. What you hope is that they get through this as rapidly as possible and folks start to feel more comfortably in the stock market.
What the global market is, essentially, going through a ripple effect. Swenson said because the American and European markets are down, consumers in those countries are buying fewer goods from China and India, driving their markets down as well. Since Chinas and Indias markets are losing ground, he said, they are buying less energy and fewer food imports from the United States, which drives our market down further.
Swenson said the crisis is incredibly complex, and to understand the current economic crisis one has to go back to the housing crisis and look at how it expanded into an international problem.
The housing market got in to trouble when the values of homes rose more rapidly than income levels were rising, and you ended up with an imbalance between incomes and housing levels, Swenson said.
When the cost of owning a home went up, people couldnt afford to pay their mortgages and had to default, leaving banks with bundles of mortgage-backed securities worth less than people thought they were, he said.
[For example,] I may have paid $100 million for a bundle of these things and find out theyre only worth $60 million, or maybe theyre worth $40 million, or maybe they are pretty good and are worth $90 million dollars, so I can hold on to them for a while and be OK, Swenson said. The problem is nobody knows where they really are.
Because investors are unsure of the value of their assets, they lose confidence and are forced to get rid of the assets and stocks they believe might not have a chance, Swenson said, which is what happened Monday.
Its complicated, isnt it, because there are so many actors, Swenson said. This is one of the most incredible things ever its worse than needing a scorecard. You need diagrams to figure out who all is involved and at what level and why something is working or not working at any given time.