The biggest event in a very momentous week was not the roller-coaster ride in stock prices or another big drop in employment. At one point on Monday afternoon, stocks fell in the New York market by 400 points, in just six minutes. This is one of the major underlying problems with mark-to-market values. The value of U.S. business did not change by about 3 percent in just a few minutes. Mistakes in valuation and risk assessment lie at the heart of the continued turmoil in financial markets.

This is a major factor in the freeze up in credit markets, the most immediate danger to economic prospects. It's not just that stock prices dropped so much, so fast. It's that credit markets ground to a halt. Moreover, while stock prices recovered a bit over the following days, the very wide spreads in the credit market actually widened still further. The lack of access to credit, and its high cost, presents the biggest obstacles to keeping the ship of state afloat. The evidence was crystal clear in the big drop from already slow vehicle sales.

Friday, October 10

8:30am U.S. International Trade in Goods and Services, August 2008 (Bureau of the Census)

Trade has been the one bright spot in the economy. But now the dollar has rebounded and economic growth abroad has slowed (as reflected in the Leading Economic Indexes for all of the measured economies around the globe. Imports are unlikely to decline and could even begin to turn around. But export growth clearly is not remaining in the double digits. The bottom line is that while consumption and investment growth remain weak, there is now less help from trade. Therefore, GDP growth, perhaps after a dip in the third quarter, may show no more than a very modest rise in the fourth quarter.

BY THE END OF THE WEEK

The biggest development outside the United States this week has been the intervention of central banks to pump liquidity into the financial system. Moreover, some banks and other financial institutions are being forced into mergers, the same as in the U.S.

The Leading Economic Indexes show slower growth ahead in Europe and East Asia. Other economic data suggest that growth could be slowing in the emerging markets like China, India, even Chile, and Argentina. A frozen credit market, if sustained, could spread the pain wider, and cause it to last longer.

Finally, the lack of credit availability is slowing economic growth. Already, it is reducing tax revenues. Obviously, the loss of tax receipts related to financial turmoil is resulting in at least a one-fifth shortfall in the New York State budget. Massachusetts and California are looking for a federal rescue loan. Other states may fall. And just as forced financial mergers in Europe followed some mergers here, so could public budget shortfalls. Will the same happen in East Asia? While that probability is uncomfortably high, the likelihood of slower economic growth is even higher. The global economy slowed from a 5 percent pace last year to a little less than 4 percent at present. Could it slow to 3.5 percent? That is not out of the question. Even more worrisome is how long the global economy will remain weak. It could remain slow right through the first half of 2009. This is a very dramatic change in economic conditions over a very short time span.