Not since 9/11 has the world seen markets tumble as quickly—or as dramatically—as they did today: While American markets were closed for the federal holiday, the MSCI World Index fell by 3 percent, and Europe's Dow Jones Stoxx 600 Index plummeted by 5.7 percent.
This means a few things:
First of all, Bush and Bernanke's attempt to prevent a recession by calling for a stimulus package didn't quite do the trick. In fact, globally speaking, it probably made things worse:
The selloff followed falls on U.S. markets on Friday that ended the worst weekly performance on Wall Street for five years and a round of bloodletting in Asian markets yesterday, as investors were left underwhelmed by U.S. President George W. Bush's package of measures aimed at stimulating the world's largest economy.
Second, our little subprime mortgage crisis is not just our problem any more—it's starting to affect the rest of the world as well:
Behind it all: Investors worldwide grew fearful that problems from massive losses on loans made to U.S. home buyers will cascade through the world financial system. For example, the Bank of China is now forecast to record a multibillion-dollar loss on U.S. mortgage investments.
And companies that insure bonds are incurring such massive losses on exotic securities based on mortgages that one is in receivership and others have had their credit ratings cut. That could cause financial institutions worldwide to mark down the value of a wide range of assets guaranteed by these insurance companies.
The biggest surprise, though, was the scope of today's plunge. Back when "emerging markets"—like those in China, India, Russia, and Brazil—first entered the global scene, they were seen as a stabilizing force. Since Asia and Europe's markets made up a big chunk of the global economy, a downturn in the U.S., the reasoning went, wouldn't automatically spell trouble for everyone. Not so today: China's Shanghai Composite Index plunged by 5 percent. India's SENSEX was down almost 9 percent. Brazil's Bovespa index fell by 6.6 percent, and Russia's Micex Index dropped 7.5 percent.
There has been speculation that the Fed will cut interest rates by .75 points later this month. Even if it does, odds are it's not a permanent solution; at best, it will only postpone what is beginning to look like an inevitable recession in the United States—and perhaps around the world.