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Wednesday, Feb 2, 2005 8:30 PM UTC

Making the case for Social Insecurity

The struggle over Social Security will be the defining political battle of Bush's second term. His game plan: The same one he used to successfully sell the Iraq war.

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Making the case for Social Insecurity

When discussing possible fixes to the Social Security system, most politicians get nervous. The problems are complex, and lawmakers tend to shy away from going on the record as to how to solve them. But not George W. Bush. When he talks about Social Security, just as when he talks about tax cuts or peace in the Middle East or the war on terrorism, the president is given to simple, declarative statements.

Here he is, for example, at a White House-sponsored conference on Social Security in early January: “By the time today’s workers who are in their mid-20s begin to retire, the system will be bankrupt. So if you’re 20 years old, in your mid-20s, and you’re beginning to work, I want you to think about a Social Security system that will be flat bust, bankrupt, unless the United States Congress has got the willingness to act now.”

Many economists would consider that statement very nearly an outright lie. If we do nothing at all, Social Security’s accumulated trust fund will be depleted by about the middle of this century, at which point it will need to reduce, not discontinue, benefit payouts. Still, Bush has repeated the “bankrupt” line often. He said much the same thing at his press conference last week, and he will likely make a similar argument at his State of the Union address, during which he’ll officially launch his campaign to remake the Social Security system as we know it. The centerpiece of Bush’s program is a plan to allow workers to divert their payroll taxes into private accounts invested in the stock market. Instituting such accounts promises to be both politically and fiscally difficult. Democrats have already dug in against the idea, and they’ll argue that its $2 trillion-plus price tag will break the national bank.

So how will Republicans press the issue with the public? The key to their argument, as outlined in a 104-page playbook that congressional Republicans were handed at their Allegheny Mountain retreat over the weekend, will be Bush’s trademark simplicity. “Talk in simple language — your audience doesn’t understand financial jargon,” advises the playbook, which was compiled by White House aides, pollsters and outside marketing consultants and was first reported on by the Washington Post (it later found its way online). Some other key bits of advice given to Republicans:

  • “Keep the numbers small: Your audience doesn’t know how trillions and billions differ. They know these numbers are large, but not how large nor how many billions make a trillion. Boil numbers down to ‘your family’s share.’”

  • “Say it the way they can hear it: Your audience will reject some turns of phrase because of the connotations and associations. The responses are not universal, but they are much less personal than you might imagine. For example, to most Americans ‘building wealth’ sounds unattainable — especially in the context of Social Security. But on the other hand, ‘putting aside a nest egg’ sounds like common sense. Another example: Calling the trust fund ‘meaningless’ will raise hackles. Taxpayers believe it is the source of the monthly checks paid out by Social Security. But, everyone agrees that it is an ‘empty promise.’”

    To many Americans, it’s difficult to conceive of a denser, more mind-numbingly abstruse public policy debate than the one we’re soon about to have on Social Security. Not only is this fight fundamentally about a set of insanely huge numbers, it’s about huge numbers in the future — numbers that most of us are only making a guess at, budget and accounting and actuarial figures that various parties are only hoping, or fearing, are real. The numbers matter greatly to economists, and in an ideal world they’d matter to the rest of us, too, easily holding sway in the debate over our future. If we were going by just the numbers, the president’s plan would already be DOA, since we’ve seen, over the past few months, several elegant demonstrations of its insufficiency.

    But in the campaign that the White House is about to launch, the numbers won’t count for much. What will count, as Republicans suggest in their playbook, are language and media, and public relations spinners will matter far more than economists. Key supporters of the White House plan — corporate interests, mainly — are gearing up to launch expensive ad campaigns pushing the new scheme, and after his speech, Bush himself will barnstorm the nation, invading key congressional districts to pressure Democrats and even some free-thinking Republicans to commit to private accounts. So far, Democrats have done well in pushing against the effort, but the public is still very much open to the privatization plan, experts say, and Bush’s simple hard sell could work.

    “As on many other issues, the opinion on this is fairly unformed,” says John Rother, director of policy and strategy for the AARP, which opposes privatization. “In polling you see a wide range of answers to essentially the same questions. That tells you the public hasn’t worked its way through this yet.”

    Bush has every incentive to fight hard to win the public. Players on each side agree that the debate over Social Security will constitute the defining political battle of the age. If Bush prevails, you’ll hear calls for carving his mug into Mount Rushmore. If he loses, the Democrats will have proved they’re still in the game. Stephen Moore, the president of the Free Enterprise Fund and a key proponent of the plan, estimates that supporters of the White House will spend between $50 million and $100 million to get it passed. “This is the big enchilada,” he says by way of explaining such huge sums. “This is the biggest fight we’ve had in years and years about our future.”

    If you’re looking for good, objective information indicating that the president’s plan is unnecessary and useless, there’s been much of it in the past few months. You can start by reading Roger Lowenstein’s fine New York Times magazine piece of mid-January, which concluded that “the actuarial view is that the system is probably in need of a small adjustment of the sort that Congress has approved in the past,” but that “there is a strong argument, which the [Social Security Administration] acknowledges as a possibility, that the system is solvent as is.” A few months before that, Michael Kinsley, the Slate founder and current editor of the Los Angeles Times editorial page, presented a mathematical proof that privatization won’t return Social Security to solvency. That view that was echoed, strangely enough, by Peter Wehner, a Bush political aide, who declared, in a leaked internal White House memo, “We simply cannot solve the Social Security problem with Personal Retirement Accounts alone. If the goal is permanent solvency and sustainability — as we believe it should be — then Personal Retirements Accounts, for all their virtues, are insufficient to that task.”

    There you have it, then: Even some people in White House think that privatization won’t work. Whatever long-term problems Social Security faces, the system won’t be made solvent by private accounts. The prevailing view among economists is that most of Social Security’s difficulties can be solved by a mix of modest tax increases, benefit cuts, or some other painful but not exceedingly difficult adjustment in the program (for instance, raising the retirement age, or lifting the cap on which payroll taxes are collected.) Bush has already ruled out one of these steps — he has repeatedly declined to consider raising payroll taxes. But the White House has looked favorably on cutting benefits; earlier this month, it signaled the it would consider changing the formula by which Social Security calculates its benefits to rise according to prices rather than wages. The change could cut promised benefits by about a third.

    That move, says Stephen Moore, was a public relations disaster. Despite being a supporter of its goals, Moore is critical of much of what the White House has done to promote its Social Security plan in the past few months, especially the idea, suggested by Wehner in the White House memo, that private accounts won’t solve the Social Security problem. Moore is of the school of conservatives who believe that private accounts will work. Specifically, he says, if the White House pushes to create a plan with large private accounts — that is, a plan in which a great deal of a worker’s payroll tax is diverted from Social Security into the stock market — investors will realize so much money from the stock market that they’ll offset Social Security’s funding problems.

    If he calls for large private accounts, Bush won’t need to push for benefit cuts, Moore believes. And from a public-relations point of view, Republicans need to stay away from any suggestion that they want to cut Social Security benefits, he says. “It makes me nervous. I’ve seen Republicans lose seats over this. Americans don’t have a big appetite for cuts in Social Security. It gives the other side an opening: ‘There go the Republicans again.’ This is American politics by sound bite, and its hard to respond to that sound bite.”

    But instituting the kind of large private accounts that Moore calls for creates its own political difficulties. The more money that workers divert into private accounts, the more money the government will need to borrow to pay for the benefits of current retirees. In other words, the larger the private accounts that Bush’s plan outlines, the larger the transition price on the plan. But Moore believes that Bush will have an easier time explaining a high price tag than he will explaining future benefit cuts; with a high price tag, all he’d have to say is that paying for Social Security solvency now is a prudent thing to do. In fact, Republicans have already started making that argument by using words like “prepay” rather than “transition costs.” By “prepaying,” you’re being a wise steward of your money. As Moore puts it, “We’ll argue that essentially we want to go from an unfunded system to a funded system, and you’re going to have to find a way to finance the transition.”

    At the moment, it’s unclear whether the White House will push for small private accounts that carry a smaller price tag but include future benefit cuts, or whether it will ask for large private accounts with a high price tag and no benefit cuts. Grover Norquist, the influential head of Americans for Tax Reform, says that there’s a debate in the White House over this very issue. The President is not expected to outline the size of the accounts in his speech Wednesday evening, but Norquist says that his group is pushing for the largest possible private accounts, and he plans to pressure members of Congress in a similar way.

    Such pressure in Congress will be crucial to Bush’s effort. Supporters of the White House plan acknowledge that in the past two months, Bush has lost ground in his Social Security effort. Democrats strengthened their opposition to the scheme, while some Republicans expressed either wavering support or opposition to the plan. On Jan. 19, Bill Thomas, the California Republican who heads the House Ways and Means Committee, called Bush’s plan a “dead horse” and advocated a broader look at the tax system to fix some of the problems with Social Security. “But in politics you can regain momentum,” says Moore. “It’s not fatal. Bush could easily turn this thing around.”

    Moore, who recently stepped down as president of the Club for Growth, is a veteran of the kind of take-it-to-the-streets fight that Bush now looks to be mounting against individual members of Congress. Despite even the objections of Karl Rove, Moore has frequently engaged with moderate Republicans who’ve opposed Bush’s economic policies. In 2003, in the debate over Bush’s tax cut bill, the Club for Growth targeted two Republican senators — George Voinovich, of Ohio, and Maine’s Olympia Snowe — and Moore takes credit for winning Voinovich’s vote on that bill. The coming battle over Social Security, he says, will be conducted the same way. Democrats are united in opposition to the Bush plan, “and that’s all the more reason we have to bully these Republicans by increasing the pain factor,” he says. “You run ads explaining why it’s a good plan, that Olympia Snowe is opposed to this good plan. Tell Olympia Snowe to support the president’s plan.”

    Other Republican groups are, it should be said, planning less confrontational approaches. Derrick Max, who heads the Alliance for Worker Retirement Security, a lobbying group funded by a few dozen large corporations and Wall Street groups, says that he’s spoken to half a dozen Democratic senators and members of the House who’ve expressed support for private accounts and would be open to voting for a plan put forward by the president. “It’s going to take a few brave leaders to lead this,” he says, and that will come with negotiations and cajoling. Then, more centrist Democrats will follow.

    It’s hard to know what to make of Max’s prediction. A handful of Democrats have certainly expressed support for some form of private accounts (Josh Marshall is the most diligent keeper of the list), but the numbers are too small for this to be called bipartisan, and Democratic-friendly groups such as the AFL-CIO and AARP are mounting huge efforts to make sure the landscape remains that way. To date, AARP members have delivered over 200,000 phone calls or e-mail messages to their representatives, Rother says. A spokeswoman for the AFL-CIO says that the group considers the fight among its highest priorities, and it is considering countering Bush’s efforts in local areas with demonstrations of their own. And Hillary Shelton, of the NAACP, says that despite Republican attempts to spin privatization as a positive move for African-Americans, blacks are unlikely to be swayed by the Bush plan. Social Security is the only source of income for one in three African-Americans over the age of 65, he points out. “We’re concerned that investments in the private stock market could end up looking just as bad or worse than my 401K, which just came back all negatives.”

    Still, despite the lefty efforts, don’t be surprised if Bush pulls this off. What he has going for him is the simple sell, an alluringly uncomplicated view of how things are in the world. Not so long ago, he launched a war on the strength of just this sort of rhetoric. Now he plans to do it again. As Wehner, the White House aide, wrote in that memo: “Democrats and liberals are in a precarious position; they are attempting to block reform to a system that almost every serious-minded person concedes needs it. They are in a position of arguing against modernizing a system created almost four generations ago. Increasingly the Democrat Party is the party of obstruction and opposition. It is the Party of the Past. For the first time in six decades, the Social Security battle is one we can win — and in doing so, we can help transform the political and philosophical landscape of the country. We have it within our grasp to move away from dependency on government and toward giving greater power and responsibility to individuals.”

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    Farhad Manjoo is a Salon staff writer and the author of True Enough: Learning to Live in a Post-Fact Society. More Farhad Manjoo.

    Tuesday, Apr 10, 2012 7:59 PM UTC

    Gambling with economic security

    The "universal investor society" is a bad idea whose time has passed

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    Gambling with economic securityA trader on the floor of the New York Stock Exchange. (Credit: Reuters/Brendan McDermid)

    Is the problem with capitalism that there are too few capitalists? Is the solution to encourage every American to get into the stock market? Before the tech bubble burst at the beginning of this century, I thought this was an interesting notion that deserved careful consideration. Mea culpa. Today, after two disastrous stock market crashes in less than a decade, I think that the idea of “the investor society” or “the ownership society” or “universal capitalism” (defined narrowly as encouraging wider individual ownership of stocks and bonds, as opposed to broadly, to include proposals for sharing profits from public resources or sovereign wealth funds) is a profoundly misguided idea. The proponents of universal shareholding in the 1990s were right that more Americans should share in the gains from economic growth, which have gone disproportionately to the owners of capital and overpaid CEOs. But the method of spreading the gains by encouraging individual working Americans to risk their money in the stock market was ill-conceived.

    During periods of rapid asset inflation, whether the assets be stocks and bonds or houses, it is tempting to conclude that the middle class and poor, as well as the rich, should be able to enjoy the benefits of asset appreciation. In such an era, like the 1990s, the warnings of realists are drowned out by the claims of optimists that the rise in stock market or house values is a permanent trend, not an unsustainable bubble. The failure to recognize the stock market bubble for what it was encouraged schemes to increase the ownership of stocks and bonds by America’s high-school educated, working-class majority. The utopian dream was that, in addition to earning income by means of wages, every American could be a capitalist, supplementing wage income with income from capital gains. The fact that, during the bubble, stock market returns outpaced the virtual returns from “investment” in Social Security created converts for the libertarian scheme of partly or wholly replacing Social Security with tax-favored individual retirement accounts invested in the stock market.

    That this was madness was argued by a lonely few at the time.  By now its lunacy should be apparent to everyone but die-hard libertarians and stock market touts in the financial press. Appealing as it seems, “universal capitalism” — the idea that middle- and low-income Americans can or should rely for a substantial part of their incomes on investments in the stock market — is bad for ordinary Americans and the American and world economies as a whole.

    Proponents of universal individual stock ownership often view it as a supplement or replacement for public income maintenance programs, of which the most important are Social Security and unemployment insurance. Likely Republican presidential nominee Mitt Romney recently praised the libertarian idea of private unemployment insurance accounts. Diverting Social Security payroll taxes into the stock market is another right-wing idea which, like Count Dracula, repeatedly rises from the dead.

    But public income maintenance programs are far less volatile than stocks and bonds, particularly at the federal level. The federal government has a diverse, continental tax base. And it can borrow more easily than the states to meet its obligations during downturns like the Great Recession. Average Americans can count on Social Security and the federal contribution to unemployment insurance far more than they can expect the stock market to be up at the exact moment when they are fired or have to retire.

    This is not liberal propaganda. It is common sense. Any rational person would prefer the security of government-funded retirement and unemployment insurance to the insecurity of private retirement accounts and unemployment accounts. The truth is that Social Security and government unemployment insurance are far better deals than the universal capitalist alternatives.

    In addition to being a bad deal for ordinary people, the push to increase stock market participation by the majority of Americans has had bad effects on the economy as a whole. At the root of the volatility of the global economy in the decades leading up to the crash of 2008 was an excess of global savings and too little wage-enabled consumption by ordinary people in developed and developing nations alike. This problem had many causes, including the strategy of Asian mercantilist countries of suppressing the incomes of their workers and the diversion of the gains from economic growth in the U.S. into rewards for shareholders and CEOs rather than higher wages for workers.

    One factor in macroeconomic instability was federal tax policies that encouraged employer-based pension funds, in the 1940s and 1950s, and then Roth IRAs and 401K’s, beginning in the 1970s. These tax incentives channeled enormous amounts of money from working Americans into mutual funds. This money—at least what was left, after the brokers had extracted their hidden fees — added to the oceans of money sloshing around in search of unrealistically high returns, producing a pattern of ever more severe booms and busts.

    Among other harmful effects, Wall Street management of the retirement money of millions of Americans, whether in the form of employer or union or public pension funds or IRAs and 401K’s, contributed to the culture of short-termism in the American business community. Answerable to flighty investors demanding high short-term returns, CEOs neglected the long-term health of one American company after another, in order to goose quarterly earnings reports by dismantling and offshoring industrial capacity, slashing wages and benefits, or engaging in financial machinations (some of them criminal, as in the case of Enron).

    Last but not least, the fantasy of the investor society has had a corrosive effect on the ethics of Americans. The unspoken premise is that it is not enough to work hard in order to get ahead. Average Americans as well as the rich few must gamble in the stock market as well. To their detriment, millions of Americans whose wages failed to keep up with economic growth bought into this Wall Street-peddled fantasy of a nation of day traders and house flippers. They and the rest of us are still paying the price for the corruption of American morals by the get-rich-quick mentality.

    It is time to wake up from the daydream of the investor society and face reality. The bubbles were just bubbles. No serious economic expert expects the next few decades to be a golden age of rapid growth capable of enriching janitors with stock market accounts as well as tycoons.

    The United States is not a nation of capitalists. It is a nation of wage earners with a minority of capitalists. The only genuine capitalists — individuals who can live entirely from their investments — are a minuscule minority in the U.S. and all other so-called capitalist countries. Having a modest amount of retirement money in a mutual fund does not make anyone a capitalist except in the Wall Street Journal’s Op-Ed pages. For the foreseeable future, few Americans will derive any significant income from capital gains during their working lives, just as few will derive more than a small portion of their retirement income from sources other than Social Security including 401K’s. Right-wing propaganda about an emerging “capitalist majority” to the contrary, America is and will remain a nation of wage earners dependent on pay-checks and public social insurance like Social Security and unemployment insurance.

    In the name of dealing with the federal budget, there is a well-funded push in Washington for cutting Social Security and forcing Americans to rely more for retirement on 401K’s and other tax-favored accounts. This conventional wisdom manages to be stupid and crazy at the same time. Given the dangerous volatility of the stock market, the truly prudent course would be to expand risk-free Social Security payments to most Americans, while reducing or phasing out tax breaks for volatile, risky stock market accounts funded by employer pensions or private savings accounts.

    Businesslike prudence counsels an effort to shrink the failed, volatile private retirement savings programs and expand the more secure public retirement system. The  expansion of the low-risk Social Security program, proposed by Steven Hill among others, can be paid for with higher payroll taxes or a mix of payroll taxes and general revenues, including increases in income tax revenues that follow the capping or eliminating of IRAs, 401K’s and similar poorly performing, tax-favored private retirement programs.

    Just as private investments are a poor substitute for Social Security, so the promise of capital gains is a poor substitute for wage increases.  Low- and middle-income Americans need higher wages or greater, secure public benefits, or both, not the promise that they can supplement their low wages or inadequate benefits with day trading — a promise that in hindsight looks like a sick joke.

    Libertarian ideologues will continue to lobby in favor of replacing public social insurance with private accounts in the stock market; that is what they are paid to do, by the Koch brothers and their other donors. And self-styled “budget hawks” — most of whom are ideological conservatives posing as pragmatic centrists — will continue to claim falsely that the U.S. cannot afford Social Security in its present form, much less in an expanded form that would increase American retirement security while reducing macroeconomic volatility.  Finally, fund managers on Wall Street will continue to salivate at the prospect of replacing part or all of Social Security payroll taxes with voluntary or compulsory “individual mandates” pressuring Americans to buy the risky products they peddle and to pay the Wall Street middlemen their fees.

    Do not be fooled by this well-funded propaganda.  Americans need higher wages and more generous, secure public benefits, not schemes to encourage them to compensate for lousy pay and inadequate benefits by gambling in the risky stock market.  Some ideas really do fail the test of history. After two catastrophic stock market crashes in less than 10 years, the once-fashionable idea of the investor society gets a failing grade.

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    Michael Lind’s new book, "Land of Promise: An Economic History of the United States", will be published in April and can be pre-ordered at Amazon.com. More Michael Lind.

    Thursday, Nov 17, 2011 12:00 PM UTC

    Occupy Wall Street takes on the stock market

    Evicted from park, the movement vowed to shut down the financial trading center. Salon reports from scene VIDEO

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    Occupy Wall Street takes on the stock market Pine and Broadway

    Justin Elliott

    Justin Elliott is a reporter for ProPublica. You can follow him on Twitter @ElliottJustin More Justin Elliott.

    Wednesday, Sep 14, 2011 12:01 PM UTC

    Why is Wall Street so afraid of Europe?

    Because what happens in Germany and Greece is a bigger threat to the U.S. economy than anything Congress could do

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    Why is Wall Street so afraid of Europe?One of the worlds heaviest waves breaks in Tahiti

    The sense of panic and confusion in Europe seems to grow by the hour. Let’s review the last day or so of events.

    • Germany’s economics minister warned that, to save the euro, Greece might have to go through some sort of “insolvency procedure.” Bloomberg News promptly reported that there is now a “98 percent” probability that Greece will default.
    • An Italian bond sale went badly, forcing Italy’s borrowing costs sharply higher. Investors were heartened, however, by the news that Italy’s foreign minister was begging China to bail out the country with a significant investment. This was the same foreign minister who had previously warned against China’s “reverse colonialism.”
    • The price of insuring against the default of bonds issued by Portugal, Italy and France jumped.
    • Bank stocks in France tanked. French banks own about $57 billion in Greek debt — and much, much more in Spanish and Italian debt.
    • German Chancellor Angela Merkel smacked down her own economics minister, and declared that she wouldn’t allow Greece to go into “uncontrolled insolvency.”
    • “I think we will do Greece the biggest favor by not speculating much, but instead encouraging Greece to implement the commitments it has made,” Ms. Merkel told RBB Inforadio, a public broadcaster in the Berlin region. “What we don’t need is unrest in the financial markets — the uncertainties are already big enough,” she said.
    • Merkel’s promise calmed the waters — for the moment. French bank stocks — and the U.S. stock market — suddenly rebounded.

    So what does this all mean? First guess: Anyone looking to Congress, the White House or the supercommittee for answers to U.S. economic problems — or for even a hint as to the future direction of the U.S. economy, is almost certainly looking in the wrong place. The biggest downside threat to the U.S. economy, right now, is Europe. Whether or not Merkel can steer a path toward resolution of the Greek crisis will likely exert far more influence on American livelihoods than whether or not the payroll tax cut gets extended, or even whether Republicans succeed in forcing more austerity down U.S. throats.

    Just how exposed U.S. banks are to Europe is a hotly debated question — some banking analysts claims direct exposure is relatively minimal, while others note that we just have no idea how much credit default swap insurance U.S. banks have sold to European banks.

    Who ends up holding the bag if Europe implodes? Astonishing as this is to contemplate, just three years after credit swaps played a major role in precipitating the financial crisis of 2008, we just don’t know. But even in the midst of our ignorance, formulating a disaster scenario is child’s play.

    If Greece slips into default (controlled or uncontrolled) and Italy follows down the insolvency garden path, French banks are certainly in big trouble. If the French banking sector collapses, at the very least, Europe will be headed for recession, and at worst, the interconnectedness of the global banking system will transmit chaos straight across the Atlantic to New York in less time than you can say “systemic event.”

    Another recession in Europe would be bad enough — add yet another grim headwind to the troubles limiting U.S. growth. But another global credit crunch? Is it any wonder that every new headline from Europe seems to spark an immediate zig or zag in the U.S. stock market?

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    Andrew Leonard

    Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21. More Andrew Leonard.

    Thursday, Aug 18, 2011 9:55 PM UTC

    Here we go again: Another big down day for Dow

    Despite hopes that the worst was behind the stock market, index closes down more than 400 points

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    Here we go again: Another big down day for DowA trader strides across the floor of the New York Stock Exchange at the closing bell, Tuesday, Aug. 9, 2011. The Dow Jones industrial average closed up 429.92 points. (AP Photo/Richard Drew)(Credit: AP)

    Just when Wall Street seemed to have settled down, a barrage of bad economic reports collided with fresh worries about European banks Thursday and triggered a global sell-off in stocks.

    The Dow Jones industrial average fell 419 points — a return to the wild swings that gripped the stock market last week.

    Stocks were only part of a dramatic day across the financial markets. The price of oil fell $5, gold set another record, the 10-year Treasury hit its lowest yield, and the average mortgage rate fell to its lowest in at least 40 years.

    The selling began in Asia, where Japanese exports fell for a fifth straight month, and continued in Europe, where bank stocks were hammered because of worries about debt problems there, which have proved hard to contain.

    On Wall Street, the losses wiped out much of the roughly 700 points that the Dow had gained over five days. Some investors who bought in the middle of last week decided to sell after they were confronted with a raft of bad news about the economy:

    – More people joined the unemployment line last week than at any time in the past month. The number of people filing claims for unemployment benefits for the first time rose to 408,000, or 9,000 more than the week before.

    – Inflation at the consumer level in July was the highest since March. More expensive gas, food, clothes and other necessities are squeezing household budgets at a time when most people aren’t getting raises.

    – Sales of previously occupied homes fell in July for the third time in four months — more trouble for a housing market that can’t seem to turn itself around. This year is on pace to be the worst since the late 1990s for home sales.

    – Manufacturing has sharply weakened in the mid-Atlantic states, according to a report from the Federal Reserve. Manufacturing had been one of the economy’s strongest industries since the recession ended in 2009, but its growth has slowed this year.

    The manufacturing news was especially bleak on an already bad day, said Dan Greenhaus, chief global strategist at brokerage BTIG. He called the Fed report “an atrocious set of numbers.”

    “That really set the market on its head,” he said.

    Wall Street and other financial markets have wrestled for several weeks with fears that a new recession might be in the offing. Morgan Stanley economists said in a report Thursday that the U.S. and Europe are “dangerously close to recession.”

    “It won’t take much in the form of additional shocks to tip the balance,” they wrote.

    Worries about European debt also hang over the market. A default by any country would hurt the European banks that hold those European government bonds, plus American banks that have lent to their European counterparts.

    Renewing the fears, The Wall Street Journal reported Thursday that U.S. regulators are looking at the U.S. arms of big European banks to make sure they have enough money for day-to-day operations.

    “I don’t want to pretend that the market knows what it’s thinking about too much,” said David Kelly, chief market strategist at JPMorgan Funds. “We live in an environment of sell now and ask questions later. The European market was off very heavily this morning before the markets opened. But honestly there wasn’t any news of any substance. We always collect whatever crumbs we can find and point to them.”

    Asian markets started Thursday’s drop. Japan’s Nikkei 225 index fell 1.3 percent. The main stock indexes in South Korea and India each dropped a little more, then Europe more than that — 4.5 percent in Britain and 5.8 percent in Germany.

    In the United the United States, the Dow fell 419.63 points, or 3.7 percent, to 10,990.58. The Standard & Poor’s 500 index fell 53.24, or 4.5 percent, to 1,140.65. The Nasdaq composite fell 131.05, or 5.2 percent, to 2,380.43.

    The Dow is down 13.6 percent since stocks began falling July 21 — four weeks that have rattled Americans watching their retirement savings and other investment accounts shrivel.

    Lee Applegate, a retired sales executive from Cincinnati, watched the latest market plunge uneasily but said he was planning to stay the course with his investments. He and his wife have several retirement accounts.

    He remembers the mistake he made in pulling his money out of stocks in early 2009, just before the market started its two-year surge. Since March 9 of that year, the S&P 500 is up 68.6 percent.

    “I think things are going to get worse before they get better,” Applegate said. “But I’m still going to ride it out.”

    Last week was one of the wildest in Wall Street history. The Dow moved more than 400 points on four straight days for the first time. But stocks had been relatively stable this week because investors were calmed by strong earnings reports.

    The Dow had fallen 76 points Tuesday and risen four points Wednesday — the first time in nearly three weeks that the average rose or fell by less than 100 points on two straight days.

    That ended Thursday. And with stocks down big, money flooded into U.S. Treasurys and gold, both considered safer investments.

    The yield on the 10-year Treasury note briefly fell below 2 percent for the first time, hitting 1.98 percent, before rising to 2.07 percent. Low yields show that investors are willing to accept a lower return on their money in exchange for safety.

    The price of gold reached yet another high — almost $1,830 per ounce. Gold keeps setting records, with some investors looking for stability and others simply looking to cash in.

    The price of oil fell $5.20 to $82.38 per barrel after the economic reports raised concern among traders that demand for gasoline would fall. One survey this week found Americans have already cut back on gas 21 weeks in a row.

    And the average rate on a 30-year fixed mortgage fell to its lowest on record. The rate on the 30-year fixed, the most popular mortgage, hit 4.15 percent — the lowest in at least 40 years and barely beating the record from last November. The last time long-term rates were lower was in the 1950s, when 30-year loans weren’t even widely available.

    Nicole Sherrod, a managing director at broker T.D. Ameritrade, said the market volatility has led more clients to put automatic protections in place to sell a stock or an investment fund once it falls below a certain value.

    “Our clients are saying that this is not a buy and hold market,” she said. “This is a buy and protect market.”

    In addition, computer systems that are programmed to analyze charts, capitalize on tiny changes in price and execute trades with no human intervention are making the market rougher.

    High-frequency trading programs make up about half of the trading volume in a normal market day but 70 percent or more on a volatile one.

    AP Business Writers Dave Carpenter in Chicago and Matthew Craft and David K. Randall in New York contributed to this report.

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    Thursday, Aug 18, 2011 7:13 PM UTC

    European bank stocks battered by liquidity fears

    The Dow index is down 4 percent an hour before market close

    By and , Associated Press
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    European bank stocks battered by liquidity fearsSpecialist Michael O'Mara, center, works with traders at the closing bell, on the floor of the New York Stock Exchange Friday, Aug. 12, 2011. A wild week ended relatively calmly on Wall Street Friday as the Dow today gained 126 points to 11,269 and the S&P was up 6 points, while the Nasdaq composite added 15 points. The key averages were down 1 percent or more for the week. (AP Photo/Richard Drew)(Credit: AP)

    European bank stocks tanked Thursday as fears over the anemic pace of the global economic recovery and the institutions’ ability to get access to funding intensified.

    Most bank stocks across Europe were underperforming in already fragile markets, with British bank Barclays and French bank Societe Generale leading the way down, ending the day with losses of 11.5 and 12 percent, respectively. Germany’s Commerzbank fell 10 percent.

    Analysts said the plunge seemed to be, at least in part, a reaction to increasing signs that banks are struggling with liquidity — or access to the cash they need to run their day-to-day operations. Banks typically fund their activities with very short-term loans, and the seizing up of the credit markets where they get those loans was one of the hallmarks of the 2008 crisis. First banks refused to lend to one another, and eventually companies and consumers weren’t able to get loans.

    A number of European banks are already dependent on last-resort credit from the European Central Bank because of a reluctance among financial institutions to lend to one another since many are heavily exposed to bad debt like that of Greece, Portugal, Italy and other foundering countries.

    The European Central Bank said Thursday that one bank had borrowed $500 million a day earlier for seven days through the bank’s dollar lending program at 1.1 percent. The bank was not identified.

    A request for dollars from the ECB suggests that at least one big bank is having trouble obtaining funds. Analysts said fears about one bank’s troubles are enough to spark concerns about the entire industry because traders are already worried about banks’ sovereign debt holdings.

    “These are worrying signs,” said Neil MacKinnon, an economist at VTB Capital in London. “You could think of it as a mini-Lehman moment: There is the risk that a major eurozone bank might be a casualty.”

    In 2008, the investment bank Lehman Bros. filed for bankruptcy, causing the global credit markets to freeze up almost overnight. Banks refused to lend to each other because they feared more failures and greater losses. Companies and consumers were unable to get loans.

    Last week the European Central Bank opened its credit window and let banks borrow as much as they wanted for six months, an unusually long time that gives them more certainty about their funding. The ECB allotted 114 banks euro49.75 billion, more than expected.

    In a move that could compound liquidity fears, U.S. regulators said they were stepping up scrutiny of European banks’ U.S.-based subsidiaries, according to two people familiar with the situation. Banks are meeting more frequently than usual with supervisors from the Federal Reserve Bank of New York and the New York State Banking Department, said the people, who spoke on condition of anonymity to discuss confidential matters of bank supervision.

    Analysts said that regulators are pressing the foreign-based banks to park more of their dollars in the U.S., in case their European parents falter and start draining them. Federal Reserve data show that foreign-based banks are storing more cash here — $127 billion near the beginning of August, up from $86.1 billion in June.

    A similar spike occurred before the 2008 crisis, analysts with Keefe, Bruyette & Woods said in a research note Thursday.

    Protecting foreign bank subsidiaries has been a priority for regulators since that crisis. Lehman’s bankruptcy filing fed the global panic in part because the legal and financial status of its European operations were not clear to other banks and investors.

    Poor economic news in the U.S. also seemed to be driving the flight from banks, which was also seen on Wall Street. Shares of big U.S. banks plunged faster than the broader market indexes. Bank of America Corp. and Morgan Stanley dropped about 7 percent, while Citigroup Inc. skidded nearly 9 percent. The Dow Jones industrial average was down more than 4 percent.

    “People are putting the pieces together,” said Will Hedden, a sales trader with IG Index.

    Some of those pieces are an increase in claims for unemployment benefits in the U.S. and Morgan Stanley’s decision to cut its global growth forecasts for 2011 and 2012. Many European banks hold substantial amounts of Greek debt, and have begun to take writedowns on those holdings.

    Banks have also been undermined by Tuesday’s revelation from German Chancellor Angela Merkel and French President Nicolas Sarkozy that the two countries’ finance ministers would come up with a proposal to slap a tax on all trading transactions.

    A transaction tax — a small percentage taken from foreign exchange and share transactions, for instance — has been proposed as a source of money to pay for bank bailouts but could hurt trading volumes — a key source of revenue for many of Europe’s banks.

    If banks and investors had been holding their breath hoping for a panacea from Sarkozy and Merkel, they were disappointed, and Thursday’s dive could reflect the realization that there’s no easy way out of Europe’s problems.

    “All we got was more taxes and more bureaucracy and more austerity,” said MacKinnon.

    A Finnish deal to get collateral from Greece to secure its rescue loans to the debt-ridden country has also raised renewed concerns over Europe’s handling of its debt crisis.

    Many of Europe’s banks, including Societe Generale and Commerzbank, have already taken big writedowns over their holdings of Greek debt and anything that makes Greece’s second financial bailout less likely has been viewed with dismay. Commerzbank, Germany’s largest commercial holder of Greek debt, wrote off euro760 billion ($1.1 billion) in Greek bonds, all but wiping out its second-quarter earnings.

    Last month’s decision by eurozone countries to grant Greece a second financial bailout, worth a total of euro109 billion ($157 billion), called for banks, pension funds and other private institutions that hold Greek debt to take their share of the pain.

    Daniel Wagner reported from Washington. Pan Pylas in London and David McHugh in Frankfurt contributed to this story.

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