Boy, soon as it starts to look like the dust may be just about to settle a bit from the subprime mortgage market’s recent woes and resulting concerns surrounding the broader credit markets, something comes along like today’s 387-point drop of the Dow Jones Industrial Average to suggest it might be a while before this is completely resolved.
It was the Dow’s second worst day of the year, and Thursday’s dive came after the market gained more than 153 points Wednesday. At the heart of today’s drop? Subprime mortgage concerns, of course.
The market’s plunge today also provided additional evidence of the global nature of today’s economy. Analysts credited the drop to concerns over Paris-based bank BNP Paribas announcement that it was freezing three funds that have invested in U.S. subprime mortgages, with concerns heightened by the European Central Bank’s move to make $130 billion in overnight funds available to European money markets.
The U.S. Federal Reserve and the Bank of Canada also took steps to inject funds into the money markets.
The rating agencies have been keeping an eye on insurers’ exposure to subprime mortgage investments lately, and several insurers have come forward to discuss the extent of their exposure to ease any potential concerns. Most recently, American International Group Inc. did so today, addressing the issue in a conference call, with company CEO Martin J. Sullivan saying AIG was “comfortable” with the size and quality of its investment portfolios.
In her August Themes on the Economy, Diane C. Swonk, chief economist and senior managing director at Chicago-based Mesirow Financial, addressed the subprime mortgage market meltdown and its impact on the broader economy. While there will be an impact on the housing market, the economist suggests, with potential home buyers facing tighter credit conditions, there won’t be an overall credit crunch.
“Credit is still readily available to credit-worthy borrowers,” Ms. Swonk said, noting, among other factors, that banks are well capitalized, mortgage rates remain low and employment and income growth is solid.
Of course, not everyone is as calm about current credit market conditions. If you haven’t seen the video of former hedge fund manager and CNBC’s “Mad Money” host Jim Cramer’s take in an interview last week, it’s worth checking out.