BLACK MONDAY

Sep 30, 2008 (New Haven Register - McClatchy-Tribune Information Services via COMTEX) -- DJ | Quote | Chart | News | PowerRating -- On the heels of a failed vote on a government-sponsored bailout plan and the steepest ever, one-day tumble in the Dow Jones industrials, the business cycle closes another month and the year's third quarter today.

In the troubled financial sector, hedge fund investors today hit a liquidation deadline.

"There are three cross-currents here," said Paul Schatz, founder and wealth manager at Heritage Capital LLC in Woodbridge. "It's not a great recipe. To me, the clear takeaway in all of this is the lack of a clear understanding that Wall Street's mess will become Main Street's mess. No one wants to bail out Wall Street, but this problem is also about the small business owner that's not going to be able to make payroll."

The U.S. House of Representatives on Monday shot down legislation authorizing a $700 billion rescue plan for the nation's financial system, ignoring urgent warnings from President Bush and congressional leaders of both parties that the economy could nosedive into recession without it.

The legislation the administration promoted would have allowed the government to buy bad mortgages and other rotten assets held by troubled banks and financial institutions. Getting those debts off their books should bolster those companies' balance sheets, making them more inclined to lend and easing one of the biggest choke points in the credit crisis. If the plan worked, the thinking went, it would help lift a major weight off the national economy that is already sputtering.

The stock market responded with a 777 point fall in the Dow, a 106 point plunge in the Standard & Poor's 500 index and the Nasdaq plummeted 199 points. Still, in percentage terms, the decline remained well below the more than 20 percent drops seen on Black Monday of October 1987 and the Great Depression.

Credit markets froze up further amid the growing belief that the country is headed into a spreading credit and economic crisis.

"If they don't pass a bill, we're at serious risk of a modern-day Depression. This isn't just about rich people getting bailed out. This is about America getting bailed out," Schatz said.

The plan's defeat leaves questions about what comes next and whether taxpayers would be paying too much for toxic mortgagebacked securities that could fail to yield a return.

"There is no evidence the real estate market is anywhere near a bottom," said Donald Klepper-Smith, chief economist at Data-Core Partners LLC in New Haven and economic adviser to Gov. M. Jodi Rell. "It took a long time to get into this problem. It's going to take some time to get out. I don't think this turns on a dime."

Its proponents warn that the nation's fragile economy could nosedive into a depression.

U.S. Reps. Christopher Murphy, D-2, Rosa L. DeLauro, D-3, John Larson, D-1, and Christopher Shays, R-4, backed the plan. Murphy called it the hardest vote he has cast since going to Washington nearly two years ago.

"But I simply cannot allow my constituents' retirement and jobs to be put at risk by Congress refusing to act," he said. "This legislation, though far from perfect, is a completely different bill than the three-page proposal initiated by the president."

Freshman U.S. Rep. Joseph Courtney, D-2, opposed it.

"I cannot in good conscience vote to borrow $700 billion in taxpayer money for a plan that does not stem the downward spiral in the real estate market, nor invest in economic stimulus that will help struggling middle class families," he said. "Lastly, the final round of negotiations undermined congressional efforts to limit CEO compensation and to pay for this measure responsibly."

Klepper-Smith said the terms of the bailout failed to get to the core of a recovery: confidence on the part of consumers, businesses and investors.

Confidence will return only with responsible leadership over time and the development of trust, he said, adding that the bill could create unintended problems down the road, such as weakening the dollar, rising budget deficits and pushing energy prices higher.

"The socialization of private sector debt sets a bad precedence," Klepper-Smith said. "Let the market forces determine who the winners are and who the losers are."

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