Pat Dollard | Young Americans

Tuesday December 2 2008

Guardian UK

A board on the floor of the New York Stock Exchange shows the closing number of for the Dow Jones industrial average on Monday. Photograph: Richard Drew/AP

Confirmation that the US is in recession shook Wall Street tonight and set the Dow Jones industrial average on course to end a five-day winning streak.

The Dow fell 679 points to 8,149, a drop of 7%. Shareholders balked at an announcement by the National Bureau of Economic Research that the US economy entered recession in December last year.

Ben Bernanke, chairman of the Federal Reserve, said today that further interest rate cuts were “feasible” but the scope to bring the key Fed funds rate below its current 1% was “obviously limited”.

Answering audience questions after a speech to business leaders in Austin, Texas, Bernanke said more constraints on risk-taking by large financial institutions were needed to ease the problem of banks being “too big to fail”.

Limiting the risk-taking of institutions to “feasible” levels would mean “we don’t privatise the profits and socialise the losses,” Bernanke said. “We need a better system for resolving failing institutions,” he added. This may include similar mechanisms to deal with problems at companies outside the banking sector.

The NBER’s business cycle-dating committee gave Bernanke and his colleagues more bad news to digest when rates are discussed on December 15 by announcing that the US was in recession. The committee, which defines recession as “a significant decline in activity spread across the economy” and is considered an official arbiter of the economic cycle, said the downturn began last December as firms started to shed jobs in large numbers.

“The committee determined the decline in economic activity in 2008 met the standard for a recession,” said the privately owned group. President Bush expressed contrition over the downturn yesterday. In an interview with the ABC television network, he said: “I’m sorry it’s happening, of course. Obviously I don’t like the idea of people losing jobs.” He added authorities would intervene if the financial system suffered further difficulties, after the Fed and US treasury bailed out Citigroup and nationalised mortgage lenders Fannie Mae and Freddie Mac.

“The American people have got to know that we will safeguard the system,” the president said.

The Dow fell before the NBER statement, following factory output data for November that showed the weakest activity since 1982.

Initial optimism about a strong start to the shopping season also appeared to evaporate as retail stocks were hammered on concerns that heavily discounted sales would hit profits. The S&P 500 and Nasdaq indices were off by more than 8%.

Market-watchers said the Dow would have struggled to retain recent gains because hedge funds are still dumping assets to pay investors who are withdrawing funds, and to settle bank loans.

“I don’t know of a single investment strategist who thinks that we are at the beginning of a bull market. It looks like it will be a long recession,” said Brian Gendreau, of ING Investment Management in New York.