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Sorting Out and Making Sense of the Recent Financial Turmoil

We could go on ad infinitum about the recent events taking place in financial markets today--the causes of the credit crisis, why the stock market continues to fall, the long-term impact this crisis will have on the economy and how (and when) it will be resolved. In fact, the story...

By Staff Writer | Updated on November 04, 2008

We could go on ad infinitum about the recent events taking place in financial markets today–the causes of the credit crisis, why the stock market continues to fall, the long-term impact this crisis will have on the economy and how (and when) it will be resolved. In fact, the story has been told and retold in every newspaper, online blog and TV program over the past few weeks. October comprised a string of historical events, the most pronounced being the worst weekly loss in the history of the Dow Jones industrial average (down 18%).

In an attempt to simplify what has transpired, the violent activity we have experienced in the stock market can be seen as a reaction to the severe tightening in the credit markets. It is as if the stock market has become a lens for the public eye on what is happening in the credit markets–the public sees and understands the Dow Jones activity but doesn’t see the lending activity that goes on among banks and financial institutions around the world. As banks worldwide continue to refuse to lend to other banks, companies cannot get the funding needed to sustain day-to-day business. Investors translate this into potential earning losses down the road and thus, sell shares.

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