'This Sucker Could Go Down': Bailout Stalls, Market on Edge

"If money isn't loosened up, this sucker could go down," President Bush reportedly declared Thursday evening as talks over the $700 billion bailout package stalled.

Friday morning, Bush reassured frazzled financial markets by declaring "a substantial package" will be passed. "We will rise to the occasion," the President said.

In recent trading, the Dow was down 0.6%, the S&P by 1.3% and the Nasdaq by 1.3%, about half the level of declines prior to the President's brief address.

President Bush spoke five minutes into the U.S. trading day, which began with sharp -- but not outsized -- losses for stock indexes amid concerns the bailout may be delayed, if not derailed. International markets suffered big declines overnight on similar fears.

As painful as it's been for investors, the stock market has held up relatively well compared to the credit markets, which have seized up again. Credit spreads are approaching the extreme levels seen last week in the wake of Lehman Brothers' bankruptcy and the crisis in big institutional money market funds.

Policymakers are rightfully focused on the credit markets. If banks are unwilling to lend to each other -- as surging LIBOR rates suggest -- they sure aren't going to lend to consumers or businesses, which has profound implications for the economy (which grew slower in the second quarter than originally reported, by the way.)

• In the short term, companies like Goodyear Tire can't access their cash because of stress in the money market and overnight lending operations. Most businesses need this capital to fund day-to-day operations.
• In the longer- to intermediate-term, a slowing economy means more earnings disappointments such as delivered in recent days by GE and Research In Motion.

Thus far, the stock market has held up remarkably well given those threats. Barring some resolution on the bailout in Washington, stocks won't be able to ignore strains in the credit markets much longer.

"It is unclear at this time whether this intense stress in credit markets is the result of Washington not moving fast enough, or moving ahead with the wrong approach, or simply the result of a cascade of forced balance sheet liquidation," writes Michael Darda, chief economist of MKM Partners. "In any event, these stresses suggest equities could come under considerable pressure in the near term."