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Dow Falls Below 8,000, S&P At 5-Year Low
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NEW YORK (CBS) -- Wall Street hit levels not seen since 2003, with the Dow Jones industrial average falling below the 8,000 mark, as the fate of Detroit's Big Three automakers and the economy disheartened investors.
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Stocks finished at their lows of the session after the automakers pleaded for relief during a second day of hearings in Washington. The heads of General Motors Ford and Chrysler are asking for a massive infusion of cash to prevent millions of layoffs and stave off bankruptcy.
Investors were discouraged by the Fed's sharply lowered projection for economic activity this year and next. Economic worries caused across-the-board selling, with financial stocks particularly hard hit.
The Dow finished down nearly 430 points at the 7,990 level.
Meanwhile, American consumers hit by a seemingly endless stream of bad news, from vanishing jobs to shrinking retirement accounts, got a small dose of relief: lower prices at stores.
The Consumer Price Index, the country's most closely watched inflation gauge, dropped 1 percent in October, the biggest monthly decline on records dating back to 1947, the government reported Wednesday.
The big drop reflected not only a huge fall in gasoline and other energy costs, but widespread declines in other areas. Core consumer prices, which exclude food and energy, fell by 0.1 percent last month, the first drop in core prices in more than a quarter-century.
The big retreat in consumer prices reflects a remarkable turnaround from just a few months ago when a relentless surge in energy prices raised concerns that inflation could get out of control.
While some are worried that the price retreat could raise the prospect of a deflation, a prolonged bout of falling prices, most economists believe that current conditions are not likely to set the stage for such a development, which last occurred in the U.S. during the Great Depression.
Over the past 12 months, consumer prices have risen by 3.7 percent, substantially below the 17-year high of a 12-month price increase of 5.6 percent set this summer. Core prices are up 2.2 percent over the past 12 months.
This price moderation is giving the Federal Reserve the room it needs to cut interest rates to battle the economic slump. The central bank is expected to cut the federal funds rate, the interest that banks charge each other, down to 0.5 percent at its December meeting, even lower than the 1 percent where the funds rate stands currently. The 1 percent funds rate ties the record low for the past half century.
Even with the monthly price reprieve, consumers are in no mood to go on a shopping spree. They have been cutting back sharply on spending because of the strains from job losses, shrinking nest eggs and falling home prices.
The retrenchment jolted the national economy into reverse in the third quarter. Many predict economic activity will continue to shrink through the rest of this year and during the first three months of next year, more than satisfying one definition of a recession. That is, two straight quarters where the economy contracts.
Another report out Wednesday showed that the housing market, one of the economy's weakest spots, continues to be in a deep funk. Builders slashed home construction 4.5 percent last month driving it down to the lowest level on records going back to 1959.
Meanwhile, chiefs from the nation's struggling auto companies were set to return to Capitol Hill to make a fresh plea for financial aid.
Detroit's Big Three automakers begged Congress Tuesday for a $25 billion lifeline to save their teetering companies. They warned of economic upheaval and millions of layoffs if one of the companies were to collapse.
"Our industry ... needs a bridge to span the financial chasm that has opened up before us," General Motors Chief Executive Rick Wagoner told the Senate Banking Committee Tuesday. He blamed the industry's predicament not on failures by management but on the deepening global financial crisis.
The new auto rescue plan, however, appeared stalled on Capitol Hill, opposed by Republicans and the Bush administration not willing to dip into the Treasury Department's $700 billion financial bailout program to come up with the $25 billion in loans.
"I don't think they have immediate plans to change their model, which is a model of failure," Sen. Richard Shelby, ranking Republican on the Senate Banking Committee told CBS' The Early Show. "I wish they would. I know they're in dire circumstances but somebody's has to stick up for the taxpayers."
Faced with exasperated lawmakers upset by shifts in the bailout strategy, Treasury Secretary Henry Paulson launched a spirited defense of his handling of the $700 billion program in a separate hearing on Tuesday.
Members of the House Financial Services Committee criticized Paulson for not doing enough to help distressed homeowners and for failing to force banks that get some of the bailout money to specifically use it to bolster lending to customers, one of the prime reasons behind the rescue package.
"It is essential" that some of the bailout money be used to ease foreclosures, said the panel's chairman, Rep. Barney Frank, a Massachusetts Democrat and a key player in shaping the package that Congress passed and President George W. Bush signed into law Oct. 3.
In a break with the administration, Federal Deposit Insurance Corp. Chairman Sheila Bair, made a fresh pitch for using $24 billion of the bailout pool to help Americans at risk of losing their homes. House Speaker Nancy Pelosi is urging Paulson to support the FDIC plan.
Although Federal Reserve Chairman Ben Bernanke told lawmakers that in cases of some home loans, the FDIC plan could saddle heavy costs on the government, he said it is still a "very promising approach."
While Paulson was resistant to using some of the bailout money to provide mortgage guarantees, he said the administration will look for ways to provide foreclosure relief.
The Treasury chief found himself on the hot seat just one week after he officially abandoned the original rescue strategy of buying rotten mortgages and other bad assets from financial institutions. That had been the main thrust of the plan Paulson and Bernanke originally pitched to lawmakers.
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