Economy Takes a Beating

The Dow Jones Industrial Average closed at 10,609.66 toady, marking a tumble of over 800 points this week, following the bankruptcy of Lehman Brothers (an investment banker) and the Federal Reserve's $85 billion bailout of gigantic mortgage lender AIG. Another investment banker, Merill Lynch, agreed earlier this week to sell itself to Bank of America. The Fed's bailout of AIG comes as a surprise, since it follows on the heels of the Fed's refusal earlier this week to bail out Lehman Brothers. It also seems to have frightened the market rather than reassuring it - the Dow Jones, S&P 500, and NASDAQ, all considered reliable market indicators, have dropped over 4%, according to the Associated Press.

Update:
According to the New York Times, the Dow closed up more than 400 points, relieving a little of the pressure on the market. The market, however, is still volatile.

As the market fluctuations continue, we can expect to see increasing interest rates on loans, which are a precaution against defaulting. Mortagages, too, may increase, and home values will continue to sink. According to some economic philosophies, the unrest at the "top tier" of the economy (large companies, banks, and investors) will eventually find its way down to the consumer level as increased prices, a precaution against bankruptcy. The current market crisis stems from the recent housing bubble in the U.S.; home values have been sinking, and a prior increase in subprime (relatively high-risk and consequently high-interest) mortgages caused a jump in defaults on loans and then foreclosures. This has hurt banks and mortgage lenders. Thus, the housing market needs to bottom out before the foreclosure crisis comes to a close, taking the pressure off banks and lenders. The market may continue to fluctuate for a while until it settles down. However, this may take some time - the International Monetary Fund recently said that the current U.S. market crisis is "the largest financial shock since the Great Depression".