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By Theo Francis and Jane Sasseen

The winner on Tuesday, Nov. 4, won't get much of a chance to rest on his laurels—or rest at all, for that matter. The calendar may show 11 weeks until Inauguration Day, but the President-elect will be expected to stage what may amount to the fastest transition in history.

"He'll have about a day to rest. His Presidency will start on Nov. 6," says one top staffer for a key Democratic senator.

That may be a slight exaggeration, but events won't wait for the new Administration. Congressional Democrats are laying the groundwork for a fiscal stimulus package they hope to pass in late November. Under pressure from European leaders—and perhaps with an eye on his own legacy—President Bush is hosting a summit of world leaders on Nov. 15. House Financial Services Committee Chairman Barney Frank (D-Mass.) has scheduled a hearing on the bailout for Nov. 18. And the President-elect may hold his own economic summit as well, as Bill Clinton did in 1992.

Meanwhile, Detroit is clamoring for $25 billion more in loan guarantees (BusinessWeek.com, 10/31/08), and all sides say something has to be done—soon—to help homeowners and stem the housing market collapse.

A History of Wrong Guesses

Whoever wins, naming a Treasury Secretary is sure to be high on the list, followed by other key economic posts. Among other things, an early Treasury nominee will give the new Administration more influence over how the rest of the $700 billion bank bailout is rolled out.

Beltway pundits are working overtime to predict who will snag this key job, but "the guesses about the Clinton Cabinet were hilariously wrong in almost every respect," says Matt Bennett, spokesman for progressive Washington think tank Third Way, who worked in Clinton's 1992 campaign and in the White House during his second term. "Even Lloyd Bentsen [Clinton's first Treasury Secretary] wasn't on the top of people's lists."

Says Paul Stevens, CEO of Investment Company Institute, a mutual fund trade group: "I've heard about six different names, but in Washington that means it's none of the six."

The Bush Administration has already set aside a conference room for the winner's Treasury transition team and is preparing reams of briefings on everything from terrorism financing to travel policies. Nor is cooperation likely to be confined to administrative matters.

"There's no question we'll be consulting on big decisions with the President-elect's team," a Treasury Dept. official says. "It's in the best interests of the financial markets."

Hold Off Till January?

But the President-elect might consider mimicking Franklin Roosevelt, who famously declined to help out with policy before Inauguration Day during the Great Depression, on the grounds that the country has one President at a time. That's especially true with the planned Nov. 15 summit, which is likely to chart broad policy with little concrete action.

"There is a principle behind it, but it's also politically smart," says one lobbyist on financial issues. Both candidates have worked overtime to distance themselves from the deeply unpopular Bush Administration, and working too closely with it just weeks before taking office could undermine public support for the President-elect's policies.

But even if they don't get visibly involved in policy decisions just yet, economic advisers to whoever wins will undoubtedly start working overtime to better understand the nitty-gritty of how the Treasury is managing the financial rescue plan and making decisions about who does and does not get money.

Then there's Capitol Hill. With an Obama victory and a significant increase in the Democrats' margins in Congress, a bare-bones, lame-duck session is likely this fall. That session would focus on a fiscal stimulus package that includes extended unemployment benefits and perhaps aid to state and local governments; more sweeping fiscal measures would wait for the new Administration.

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By Ellen Gibson

Are you better off?" It's a question the candidate of the challenging party asks during each Presidential campaign. The economy, of course, is the No. 1 issue this election, and that question has been raised in cities, suburbs, and small towns across the country. With the recent stock market meltdown and the collateral damage to 401(k) plans, many voters are indeed poorer. But in terms of real wages and the cost of consumer goods, are we truly worse off? For most Americans, the answer is, sadly, yes.

On Jan. 22, 2001, when President George W. Bush took over the White House, the Nasdaq was in the midst of a post-dot-com freefall. Bush had the bad luck of taking office just before the economy went into a recession that March. But after a mini downturn, the American economy experienced a period of recovery and expansion, with the gross domestic product growing at a steady clip and productivity surging 22%. That measure of prosperity, however, hasn't translated into gains for most families.

In 2000 the median U.S. household income was $50,557 (adjusted for inflation), according to the U.S. Census Bureau. Seven years later, the median income fell to $50,233. "That might not sound too bad," says Edward Wolff, professor of economics at New York University, "but normally, median income increases. That's not good news for the middle class." Consider that the median household income would be almost $64,000 had paychecks kept pace with the GDP.

Overblown Claims?

While workers' paychecks have stagnated, corporate profits jumped an average of 10.8% per year, according to data from the Bureau of Economic Analysis. "The fact that middle-income households ended up below where they were in 2000 despite strong productivity growth—that's the heart of the problem," says Jared Bernstein, an economist at the Economic Policy Institute, a liberal think tank. "It's one thing if you're looking at a period like now, when the macroeconomy is dysfunctional, but for most of this decade the economy has been pumping along." However, economists at the conservative American Enterprise Institute counter that claims of income stagnation are overblown, pointing out, for example, that household income data does not take into account total compensation, including companies' burgeoning contributions to employee health insurance.

Even though inflation has not been severe for most of the decade, the cost of living has outpaced wages. The consumer price index has risen by 25% since January 2001, while core inflation jumped 18%. But the core consumer price index can be deceptive because it excludes food and energy. Once, after reporting that core inflation had been relatively tame that quarter, Conference Board economist Ken Goldstein came back to the office to find an irate e-mail: "Hey, dummy, what the hell do you think we spend our money on?" The point was taken: When energy and food skyrocket, families feel it.

And skyrocket they have. In early 2001 you could fill your car with regular gas for $1.47 a gallon. But on Oct. 24, three months after regular unleaded peaked at $4.11 a gallon, the average cost was leveling off around $2.78, according to the AAA online Daily Fuel Gauge Report. Grocery store sticker shock has been almost as acute. Take, for example, the price of a dozen eggs, which has risen 97% since 2001, from a nationwide average of $1.01 to $1.99. "You could look at inflation and think it hasn't been that much of a problem, but in fact, if you look at the components of the middle-income consumption basket—tuition, housing, childcare, gas, food—all of those have been rising a lot more quickly," says Bernstein.

Retirees Are Really Feeling It

There are consumer goods that have come down in price. And some economists don't buy the argument that families are being hit where it hurts most. "People are more attuned to price increases than declines, so their perceptions are biased," says Wolff. He points out that the price of goods such as toys and clothing have remained fairly stable because we have benefited from inexpensive imports. Electronics have come down, too, especially when adjusted for advances in technology. In 2001 the base model of Apple's iBook, with its paltry 500MHz chip and 10GB hard drive, sold for $1,499. Today, the basic white 13-inch MacBook laptop will run you $999 for a 2.1 GHz chip and 120GB drive. That's $500 less for nearly four times the speed and 12 times the storage capacity.

For consumers, there's no argument over the impact of the current economic crisis. They're feeling it, especially retirees. Take Patricia Wehrs, a Washington State resident who retired from her federal government job in 2000. She and her husband were all set for a comfortable, though modest, retirement. Then their retirement fund started losing money every month, while the cost of living crept up. "Our basic bills—electric, telephone, water, and cable—went up, in some cases 90%, over the past two years. I've kept the food bills under control with a budget and a diet," jokes Wehrs. "However, fuel costs have drained any extra money, so no more theater, no dinners out, and smaller gifts to the grandchildren for special occasions."

FINANCIAL MARKET SUMMARY
Symbol Lookup: Companies & Funds

	DJIA 8,979.26  +401.35    NASDAQ 1,717.71  +89.38    SPX 946.43  +38.59    S  3.33 0.00    LMT  92.61 +5.14    FNM  0.99 -0.01    DJIA 8,979.26  +401.35    NASDAQ 1,717.71  +89.38    SPX 946.43  +38.59    S  3.33 0.00    LMT  92.61 +5.14    FNM  0.99 -0.01

Personalize Ticker | Updated 4:00 PM, 10/16/2008	Disclaimer | © MarketWatch Inc. Source: Interactive Data Corp

The Dow Jones industrial average was down as much as 376 points at one point, but closed up 4.7 percent, or 401 points, at 8,979. The Standard & Poor's 500-stock index gained 4.3 percent, or 39 points, to end the day at 946.

The tech-heavy Nasdaq rose 5.5 percent, or 89 points, to 1,718. It was helped by a 10.5 percent surge in Yahoo's share price. The Internet firm received a boost from reports that Microsoft's chief executive, Steve Ballmer, said a deal between the companies might still make economic sense. Yahoo rejected a previous offer from Microsoft, which closed up 6.8 percent. Both firms were among the most actively traded companies in the Nasdaq today.

There is a battle between investors who are confident stocks have reached their bottom and others who see more downside to come amid gloomy economic data and corporate earnings. "This is a sucker's rally," said Joseph Brusuelas, chief U.S. economist at California-based Merk Investments. "There's a very difficult period ahead."

Today's gains follow the markets' huge dive yesterday, when the Dow fell more than 700 points.

Analysts said investors no longer question whether there will be a recession, but instead are worried about how long it will last and how deep it will be.

The government's responses to the financial crisis, from lowering interest rates to taking stakes in major banks, are good steps toward stability, economists and analysts have said. But they do not address the more immediate economic problems and have yet to drastically impact the credit squeeze as lenders remain reluctant to lend to each other.

Market volatility has become the new norm, said Doug Roberts, chief investment strategist for New Jersey-based Channel Capital Research. "Right now people are worried things are going to fall off a cliff. Every bit of news moves the market," he said.

Economic data released by the Labor Department today was mixed. New claims for jobless benefits dropped by 16,000 last week to a seasonally adjusted 461,000. That was a bigger drop than expected, but unemployment claims remain high by historical standards. And consumer prices were flat in September, according to the Consumer Price Index, a closely watched barometer of inflation.

Two Federal Reserve-related reports today painted a more bleak economic picture. Factory activity in the mid-Atlantic region is experiencing its largest one-month decline this month, according to the Federal Reserve Bank of Philadelphia, and the region's manufacturing executives expect no growth during the next six months. Also, the Federal Reserve reported today that industrial production fell 2.8 percent in September, the biggest plunge since December 1974.

"While the collapse in the U.S. housing sector and simultaneous drop in consumer confidence has prompted U.S. manufacturers to cut back sharply this summer, it has been the recent banking crisis and credit freeze that has turned the manufacturing recession into a outright collapse," said Michael Woolfolk, senior currency strategist for Bank of New York Mellon, in a research note this morning.

The collapse in industrial production parallels the sizable drop in retail sales released yesterday, punctuating the onset of a recession, analysts said. Retail sales in September took their steepest monthly decline in three years, according to a report released yesterday. Those concerns were amplified by Nation Retail Federation survey today showing that consumers planned to increase holiday-related shopping by 1.9 percent this year, a paltry sum that is the smallest increase since the survey began in 2002.

Investors have also been spooked by the impact of the financial crisis on many firm's balance sheets and their outlook through the rest of the year. Merrill Lynch, which is being acquired by Bank of America, reported a $5 billion loss during its third quarter this morning, while Citigroup reported a loss of $2.8 billion. Both firms have been battered by the credit crisis.

Merrill Lynch was basically flat, registering a 0.6 percent gain, and Citigroup was down 2 percent.

The financial crisis also continues to help drive down crude oil prices as the economic turmoil saps demand. The price of oil fell 6 percent, or $4.55, to $70 a barrel today. Before yesterday, oil had not traded below $75 a barrel in more than a year. But with demand dwindling, many analysts now expect prices to fall to as little as $50 a barrel.

The financial crisis also continues to churn overseas. Swiss authorities moved to stabilize financial giant UBS today, agreeing to move $60 billion in troubled assets from the company's books into a special government-backed fund.

Foreign markets were down. London's FTSE 100 and the CAC 40 in Paris were down more than 5 percent, and Germany's DAX fell 6.7 percent today. But the losses were larger in Asia as the Nikkei stock average in Japan closed down more than 11 percent.

NEW YORK  (CNNMoney.com) -- The Dow ended its worst week ever Friday and capped a staggering eight-session selloff that has seen the blue-chip index fall 2,400 points.

Investors could be in for another rough ride as Citigroup (C, Fortune 500) and Merrill Lynch (MER, Fortune 500) are on tap to report results this week, giving another glimpse into just how deep their losses continue to be. And a slew of economic reports are also due out, including readings on consumer spending and housing.

Much of the Dow's loss occurred over the most recent sessions as the global credit market crisis intensfied. In fact, last week the Dow fell just over 1,874 points, or 18%. The index has lost nearly 22% over the last eight sessions, as panicked investors ditched stocks across the board.

That panic also gripped the global markets, which have seen some brutal selloffs of their own.

"The magnitude of what's going on is unprecedented and people are frightened," said Robert Philips, senior portfolio strategist at BLB&B Advisors.

Finance ministers from the Group of Seven nations said Friday that exceptional steps were needed to ease the global financial crisis and get money flowing again.

And early Saturday, the G-7 vowed to work together to stem the criris. Later in the day, the International Monetary Fund soundly endorsed the G-7 commiment, with IMF managing director Dominique Strauss-Kahn saying the crisis "had pushed the global financial system to the brink of systemic meltdown."

Wall Street lost roughly $2.4 trillion in market value during the week, according to losses in the Dow Jones Wilshire 5000, the broadest measure of the market.

And investor fear surged to record levels, with the CBOE Volatility (VIX) index, or the VIX, hitting a record just shy of 77 Friday, before closing a bit off those levels.

The Dow Jones industrial average (INDU) ended Friday's session down just 128 points, after falling as much as 697 points in the morning. The Standard & Poor's 500 (SPX) index also declined Friday and for eight sessions in a row. The Nasdaq composite (COMP) ended barely higher, following seven down sessions.

Paralyzing fear. Banks have clamped down on capital, with credit markets remaining frozen and several measures of bank nervousness hitting all-time highs. Treasury prices slumped, boosting the corresponding yields as investors no longer bet that government debt was necessarily so much safer than stocks. The dollar recovered versus other major currencies. And oil, gold and other commodities plunged on bets that slowing global demand will hurt oil usage.

"Investors are the most fearful they've ever been," said Phil Orlando, chief equity market strategist at Federated Investors.

The heightened volatility that has left investors seasick was evident in Friday's market. In the first five minutes of trade Friday the Dow plunged 697 points, falling below 7,900 to the lowest point since March 17, 2003. The Nasdaq and S&P also hit more than five-year lows. But stocks recovered abruptly, with the Dow erasing losses. The afternoon saw the Dow make violent swings back and forth, toppling as much as 600 points and rising as much as 322 points.

Stocks have plunged despite a series of efforts on the part of the government to unfreeze the credit markets and get money flowing through the system again.

"Fear is feeding upon itself and nothing the officials have done to this point seems to stem the tide," said Ryan Atkinson, market analyst at Balestra Capital.

Last week, the Fed announced an emergency rate cut, coordinated with banks around the world. The central bank has also pumped billions into the system. But the moves have hardly made a dent in investor sentiment.

"Central banks of the world have been flooding the markets with liquidity, but banks are hoarding cash," Atkinson said. "This is the lynchpin of the entire financial system and as long as this is still going on, the markets will be driven by fear."

On Friday, President Bush said that the government will continue to work to resolve the economic crisis to return stability to the markets. Meanwhile, House Democrats are meeting Monday to discuss a potential second economic stimulus package, although House Republicans are reportedly skeptical of a second package, CNN reports.

Looking for a bottom: Stocks have been in a bear market for most of the year, but the selling began accelerating in September following a series of bank failures and mergers.

Since hitting all-time highs a year ago, the Dow has lost just over 40% and the S&P 500 has lost 43%. The Nasdaq has not come close to reclaiming its tech-bubble record, but it did hit multi-year highs last October. Since then, the Nasdaq has fallen just over 42%.

And investors across the board are pulling money out of equities, with $43.3 billion pulled out of stock mutual funds during the week ended Oct. 8, according to TrimTabs Research.

"To some extent, we are seeing a retail investor capitulation," said Kelli Hill, portfolio manager at Ashfield Capital Partners. "And when everyone is getting out, that suggests we're getting closer to finding a bottom," she said.

Wall Street was last in a bear market between 2000 and 2002 amid the end of the tech bubble, a recession and the terrorist attacks on 9/11. But stocks bottomed in October 2002 and then again in March 2003, leading to a more than four-year bull market.

On Friday, the three major stock gauges fell to within shouting distance of that March 2003 bottom. Some market pros are wondering if that 2003 level could turn out to be the bottom for the 2008 bear market also. (Full story)

However, bottoms are often "retested," meaning stocks fall to a low, bounce for a few days or even months, then fall back to right around that low, before making a bigger, more sustained advance off the low.

That's what happened in the last bear market. Stocks bottomed in early October 2002, bounced a little bit in the lead up to the start of the Iraq war and then retested those lows in March of 2003 before moving higher.

Either way, the analysts spoken with agree that when the market does finally put a bottom in place, it will lead to an extensive rally.

One comfort for investors is the knowledge that there are limits to how low the Dow can go, thanks to rules put in place in the aftermath of the crash of Oct. 19, 1987, when the Dow plunged 22.6%. The NYSE has rules to halt trading if the Dow loses 10%, 20% or 30% in a single day. Trading is halted for 30 minutes, an hour or two hours, depending on the time of day. Trading is over for the day if the Dow loses 30%.

The Dow's 22% decline roughly compares with the two-day slide in the crash of 1929. On Oct. 28, 1929, the Dow fell 12.8% and it It fell an additional 11.7% the next day, according to Stock Trader's Almanac.

Bear vs. Bull: Looking for a bottom

Credit markets frozen: Amid the ongoing crisis, lending has dried up, making it difficult for businesses to function on a daily basis and for consumers to get loans.

The TED spread, the difference between what banks pay to borrow from each other for three months and what the Treasury pays, spiked to an all-time high of 4.65% Friday before pulling back slightly.

The wider the spread, the more reluctant banks are to lend to each other, rather than from the federal government. When markets are fairly calm, banks charge each other premiums that are not much higher than the U.S. government.

Three-month Libor, or what banks charge each other to borrow for three months, rose to a 2008 high of 4.82% Friday.

The yield on the 3-month Treasury bill, seen by many as the safest place to put money in the short term, fell to 0.24% from 0.5% Thursday, with panicked investors willing to take a piddling return on their money rather than risk stocks. Last month, the yield on the 3-month bill skidded to a 68-year low around 0%.

But in a sign that banks were willing to take a chance on near-term lending, Libor, the overnight bank lending rate, eased to 2.47% Friday from 5.09% Thursday, according to Bloomberg.com. Libor was at 2.15% a month ago.

Treasury prices slipped at the end of the week, raising the yields. The benchmark 10-year note ended Friday's shortened session at 3.88%. Treasury bond markets closed early Friday and are closed Monday for Columbus Day.

Other markets: Oil prices plunged $8.89 a barrel Friday, the second biggest decline ever, to settle at $77.70 a barrel on the New York Mercantile Exchange, a 13-month low.

Oil prices have tumbled on bets of slowing demand since the price of crude hit an all-time high of $147.27 a barrel on July 11.

 

To get a business loan, Amber Sutton was required by her bank to use her house and personal stock investments as collateral, as well as get life insurance. (By Jahi Chikwendiu -- The Washington Post)

The financial crisis that has roiled Wall Street and toppled some of its leading institutions has had an uneven impact on Main Street, leading to sharply divided opinions within the business community over whether Congress should approve the Bush administration's $700 billion rescue package.

A wide range of companies that depend on loans and services from financial institutions such as Wachovia are worried about their dwindling access to credit and are putting pressure on lawmakers to act. Among them are cash-strapped small businesses, the ailing auto-dealership industry and franchise owners of chain restaurants such as McDonald's and Sonic, who are suddenly struggling to get loans as their traditional lenders, such as GE Capital and Bank of America, face problems of their own.

But other businesses, such as local chain the Healthy Back Store, report few problems borrowing money because they either had good credit histories or do not have a lot of debt on their books. They say they are far more concerned about whether consumers will keep their wallets shut in the coming holiday season than whether credit will continue to flow freely from Wall Street.

"The way the bailout has been sold to the general population, including small businesses, is that you are going to perish if you don't get this through and your credit is going to dry up overnight," said George Cloutier, who is founder and chairman of American Management Services, which consults for small businesses. "We talk to . . . small business owners on the phone every day. And I think the most important thing that we are hearing is they hate the concept of the bailout. They feel that Wall Street is being given a free ride."

But both sides appear keenly aware that Wall Street's problems, if unsolved, would eventually lead to a severe recession that would hurt businesses across the economy.

"Our concern is with what would happen without the rescue plan, if capital does tighten up and continues to be hard to come by," said John McEleney, who runs two dealerships in Iowa and is the incoming chairman of the National Automobile Dealers Association. The association reports 600 dealerships nationwide have closed this year. "The auto financing model could struggle, whether it's customers financing the vehicle or dealers financing their inventory."

Because of the tighter credit markets, Amber Sutton, for one, was required by her bank to use her own house and personal stock investments as collateral, as well as get life insurance to obtain a $400,000 loan. She needed the money to launch her business two months ago, a pet day-care business in Woodbridge, which is part of a franchise called Dogtopia.

"It was very difficult," Sutton said of the loan process. "Nobody turned me down . . . but banks were a little more cautious."

Businesses that had a relationship with Wachovia have also been hit hard since the banking giant's troubles surfaced. On Monday, to prevent its collapse, the government engineered a sale of Wachovia to Citigroup.

Because of that deal, Wachovia said it would stop managing the Commonfund, a nonprofit that runs $41 billion worth of endowments and short-term funds for 1,900 universities, hospitals and other institutions across the country, including as many as 100 in the Washington region, according to John S. Griswold, a spokesman for the Commonfund. The move froze the short-term fund, leaving many of the organizations without access to needed capital.

Griswold said that the situation was unusual and that the group was actively looking for a trustee to replace Wachovia. Still, "it's clearly hurting a lot of people."

He added that "higher education institutions remain very concerned that this rescue bill pass."