Financial Market Update: Consumers Decide to Stay Home

After yesterday’s upward bump, the Dow Jones index slipped into another downward course today losing some 338 points, or 3.82 percent. The S&P 500 slipped more, 4.17 percent, and the Nasdaq even more than that, an even 5.0 percent.It’s official–and the office is the U.S. Department of Commerce, which released the numbers this morning–retail sales dropped in October by a record 2.8 percent. On the other hand, records only began in 1992: surely consumer spending also dropped precipitously in, say, 1991, 1974 and 1930. Excluding cars, sales still dropped 2.2 percent. Auto sales as a single category contracted by 5.5 percent in October, on top of a decline of 4.8 percent in September. Target Corp., Macy’s Inc., J.C. Penney, Abercrombie & Fitch and Gap Inc. were among the major chains to report declines in same-store sales for October, and the International Council of Shopping Centers has forecast the slowest holiday sales season since 2002. It could be that consumers are behaving like that rational economic animal from classic economic theory by cutting back in the face of alarmingly bad financial news, or perhaps it’s the fact that the spigot of credit that sustains consumer spending isn’t flowing very robustly these days. Or maybe it’s both. In any case, Treasury Sec. Henry Paulson has now turned his attention to unclogging that consumer credit spigot, while Fed Chairman Ben Bernanke has said that central banks “stand ready to take additional steps,” i.e., cut interest rates. Zero, here we come? Freddie Mac is back, and with more bad news. The mortgage finance giant reported a $25 billion quarterly loss and is now tapping some of that $100 billion bailout money set aside by the federal government back in September when the Treasury Department and the Federal Home Finance Authority took control of the company. Most of the loss was in write-downs of tax credits that Freddie Mac isn’t going to use. The FDIC has proposed a plan to prevent home mortgage foreclosures, maybe as many as 1.5 million of them, by agreeing to share losses with private mortgage companies stemming from refinancing untenable mortgages. FDIC Chairman Sheila Bair wants the money to pay for the plan, nearly $25 billion, to come from that ever-expanding TARP. “It is imperative to provide incentives to achieve a sufficient scale in loan modifications to stem the reductions in housing prices and rising foreclosures,” the FDIC said in a statement. The Treasury Department seems to be unenthusiastic about the proposal. “We continue to aggressively examine strategies to mitigate foreclosures and maximize loan modifications, which are a key part of working through the necessary housing correction,” Treasury Interim Assistant Secretary Neel Kashkari, who is point man on the bailout, said in prepared testimony today to House of Representatives. In other words, thanks but no thanks, Sheila. The G-20, representing countries involved in about 90 percent of the economic activity in the world, are coming to town today. To Washington, D.C., that is, to chat about the economic crisis. Few are expecting such a large committee to MacGyver the world economy out of its current perilous condition.