Stock market tanks when investors realize bailout plan won't provide immediate relief

The dark side of a global financial network showed itself today as stock markets around the world tanked amid a growing realization that the bailout plan signed on Friday won't immediately unlock complicated credit markets. From an LA Times story:

Wall Street suffered through another traumatic session today, with the Dow Jones industrials plunging as much as 800 points and setting a new record for a one-day point drop as investors despaired that the credit crisis would take a heavy toll around the world. The Dow also fell below 10,000 for the first time since 2004, and all the major indexes fell more than 7 percent.

The catalyst for the selling was the growing realization that the Bush administration's $700 billion rescue plan and steps taken by other governments 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 sent stocks spiraling downward in the U.S., Europe and Asia, and drove 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; and the benchmark index that gauges fear in the market jumped to the highest level in its 18-year history.

"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."...

Today'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...

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."