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Dow takes another dive: what is making investors worried

Obama, Bernanke, and Geithner meet as investors worry that political leaders – in the United States and Europe – and central banks can't do much more to support a weak economy.

By Staff writer / August 10, 2011

Specialist James Ahrens works at his post on the floor of the New York Stock Exchange Wednesday. Wall Street focused Wednesday on the bleak landscape ahead for the economy and sold off, wiping out the big gains from a day earlier and then some.

Richard Drew/AP

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Global stock markets fell sharply on Wednesday as investors fretted about twin uncertainties: the economy and whether policymakers can do much to help it.

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Key stock indexes in the United States, Germany, and France all fell by roughly 5 percent. The Dow Jones Industrial Average lost 520 points, closing at 10,719.94, more than offsetting a rebound on Tuesday as the Federal Reserve sought to show its commitment to supporting the economy.

Investment analysts point to multiple factors that may explain the downward trend of recent days, including simple fear and the influence of computer-driven "high frequency" trades by some investment firms.

But many say investors are focused especially on two big questions: First, how much has the outlook for economic growth deteriorated lately? And second, if a recession may be near, are central banks or governments able to give meaningful assistance to the economy?


On the first issue, many forecasters say the risk of another recession has risen, but that continued growth remains the likeliest scenario. Jobs and incomes have been rising in the US, for example, albeit slowly.

On the second issue, a widespread view among investment strategists is that governments may not have many tools left to aid the economy. Precious resources have already been spent fighting the last recession, and political obstacles in the US and Europe make it hard to achieve consensus on new measures.

In Europe, the challenge is how disparate nations can come together on a plan to hold their currency union together, even as Italy joins Greece and Spain on the list of problem debtors.

In America, the recent debt-ceiling negotiations made clear that bipartisan compromises will be hard to come by heading into the 2012 election, and that Republican lawmakers have no appetite for another round of deficit spending aimed at stimulating the economy

Perhaps most of all, though, the debt-limit brinkmanship left President Obama looking weaker – unable to push his goal of a "grand bargain" on fiscal policy to the finish line. Some critics say he also appears out of touch, pushing tax hikes on the rich, which they say undermines the important goal of job creation.

"Businesses, investors and ordinary Americans simply lack confidence in the ability of the Obama administration to get the country growing and create jobs," economist Peter Morici at the University of Maryland wrote in an analysis Wednesday.

That doesn't mean stocks deserve to keep falling. Some analysts say the sell-off is already overblown, and that the economic and political conditions are not that dire.

But a widespread view among business managers is that the Obama administration and Congress could be doing more to instill optimism.

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