Wall Street's Fear Factor

A news ticker display the latest stock market news in Time Square, New York, Thursday Oct. 9, 2008. Stocks plunged in the final minutes of trading Thursday, sending the Dow Jones industrials down more than 675 points, or more than 7 percent, to their lowest level in five years after a major credit ratings agency said it was considering cutting its rating on General Motors Corp. (AP Photos/Bebeto Matthews)
AP Photo/Bebeto Matthews
Just a year ago, investors were swaggering as the stock market surged to an all-time high. Now, almost everyone on Wall Street and Main Street seems to be shuddering amid a frightening reversal of fortune that has erased $8.3 trillion in shareholder wealth in the past 366 days.

"We aren't dealing with a fundamental economic issue any longer," said James Paulsen, chief investment strategist for Wells Capital Management. "We are dealing with fear. And that doesn't respond to economic medicine."

The Dow dropped a staggering 679 points yesterday, closing below 9000 for the first time in five years. Over the past seven sessions, the Dow has plummeted more than 20%, nearly 40% of its all-time high of above 14,000, exactly one year ago.

The slide on Wall Street has also brought down some of the biggest blue chips. GE, Boeing, and American Express have all seen their stock values cut by more than half. General Motors' stock fell below $5 a share, a level not seen since the 1950s.

Forbes Magazine managing editor Andy Serwer told CBS' The Early Show that fear is at the core of the current crisis.

"What you have to understand is, all of the subprime, all of those derivatives, all of those terrible investments we made, all of the borrowing we made as Americans (both as individuals and as a nation), are now coming back to haunt us," Serwer said. "It's a perfect storm of problems and here it is roosting, and really the fear is carrying us forward."

And Serwer says there is nothing to end it at this point.

In a series of moves aimed at avoiding the mistakes that culminated in the Great Depression nearly 80 years ago, the government already has committed to spend more than $1 trillion to prop up ailing banks and other lenders during the past month of turmoil.

But none of it seems to be working, which only seems to be scaring people even more, especially after the nation's leaders spent nearly two weeks painting a gloomy picture of the economic outlook to persuade Congress to approve a $700 billion bailout of the banks.

The words, meant to convey the gravity of the situation, certainly spoke to the emotion of fear: "Major sectors of America's financial system are at risk of shutting down," said President Bush.

"If we don't do this [bailout package], we may not have an economy on Monday," said Federal Reserve Chairman Ben Bernanke.

"I think right now there are just some very powerful negative images that are alive in many people's minds - images of the Depression, images of people selling apples," said George Loewenstein, a behavioral economist at Carnegie Mellon University. "The images of the downside are just so salient in people's minds, and nobody has presented an upside image yet."

Some investors, like software engineer Sandeep Bhanote, are trying their best not to be spooked.

"Fear is the most dangerous emotion. It can really do the market a lot of harm when maybe it is not necessary to be afraid," Bhanote said Thursday at a coffee shop near the New York Stock Exchange.

The quarterly 401(k) statements that are starting to arrive in the mail will only serve as another grim reminder of the financial carnage. And it has gotten worse since the quarter ended in September, with the Dow Jones industrial average tumbling every day so far this month.

The tailspin on Wall Street has hit many retirees hard, like Diane and Frank Mayer of Detroit, Mich., who rely on their 401(k) retirement savings. They've seen its value lose $24,000.

"Don't have any pension check," Frank Mayer said. "All we have is our 401(k)s and our savings. And it keeps shrinking down like this and the cost of everything keeps going up."

Social Security is their only backup.

Stemming The Flow Of Red

The Federal Reserve and Treasury Department have promised to pump more than a trillion dollars into the financial system but that hasn't put to risk the fears that the credit markets will remain frozen.

Despite congressional approval of the $700 billion bailout, intended to bring confidence back to the credit market, Serwer says banks are still not lending to one other, while the interest rate that banks use to lend to one another is still, relatively speaking, astronomical.

"How does that get cut loose?" The Early Show's co-anchor Harry Smith asked.

Serwer says it's basic psychology coming down to trust. "If I'm the Andy Bank and you're the Harry Bank, 'I'm still looking at you and saying I don't know if he will pay my back next week, I'm not sure, because I don't know about his business. I don't trust him the way I used to.' It's human interaction and trust - and it's hard to get that going [again.]"

A global meeting this weekend in Washington is aimed at getting nations to work together to confront the crisis.

"We've had interest rate cuts and jaw-boning by the Feds, and everything has not helped at this point," Serwer said. "Maybe a coordinated global effort is what we need. It certainly is a try, we'll tell you that."

In London, CBS News correspondent Sheila MacVicar says the question for many traders there Friday morning is, "How many ways can you say 'tanked'?"

In the U.K. and across Europe, markets opened sharply down. In London the FTSE Index (the leading 100 largest stocks) opened nearly 10% down and below 4000 points for the first time since 2003. Even with some steadying in recent hours of trading, what traders and analysts are saying this morning is that the situation is very close to "panic" (their choice of words).

The banks are still not lending to one another and as long as that's not happening, the system remains stuck and in peril, says MacVicar.

In Tokyo CBS News correspondent Barry Peterson says the Japanese economy has been in pretty good shape - the banks are solid - but the Nikkei index is being hit more by emotion than economics. Investors were spooked when a small Japanese life insurance company and a real estate investment company went belly-up. In the last two weeks the Tokyo market has lost almost a third of its value.

Japan's biggest fear right now is that Americans will stop buying. The country depends on exports to live and if Americans close their wallets, factories and companies here will be howling in agony.