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Dow plunges 512 points, erasing gains for year amid recession fears

Trader John W. Panin of JNK Securites Corp.

Trader John W. Panin of JNK Securites Corp. works on the floor of the New York Stock Exchange Photo Credit: Trader John W. Panin of JNK Securites Corp. works on the floor of the New York Stock Exchange/Getty

The Dow Jones plunged a breathtaking 512 points Thursday as traders were gripped with the worst panic since the depths of the economic crisis three years ago.

The freefall was precisely the kind of white-knuckle experience many thought the debt deal was supposed to prevent, but the collapse, which erased 2011's gains, showed just how dire the new crisis has become.

Investors remained spooked over the economic turmoil rolling through Europe, and whether the U.S.’s own tenuous financial recovery is morphing into a dreaded double-dip recession.

Adding to the worries is the nation’s unemployment rate, with new numbers out Friday likely to add to the gloom.

Perhaps worst of all was the growing realization that an ideologically divided Congress and a hamstrung president could do little to reset the economy.

“People are throwing in the towel because they can’t find relief on any front,” said Milton Ezrati, market strategist at Lord Abbett Co.

So how screwed are we? The consensus seems to suggest the answer is “very.”

So are we racing toward another recession?

That seems likely, though it’s impossible to say yet. In the first half of 2011, the U.S. saw positive, but slight Gross domestic product (GDP), a sign that we haven’t technically been in a recession since the last one ended in June 2009. However, with manufacturing and housing still struggling, and consumer spending dropping in June, what lies ahead looks bleak.

“We’re in an economic slump. The future is still uncertain,” said Chad Stone, chief economist at the Center on Budget and Policy Priorities.

What can be done to create more jobs? Is it time for another stimulus?

Some economists say a fresh shot of federal stimulus is needed to get production humming again, and convince businesses to hire again. But Republicans are dead-set against any new spending, making the prospect of a new bailout unlikely.

“The Recovery Act did in fact make a positive contribution to employment,” Stone said, “although people said at the time it would have been better if there was more stimulus.”

Is raising taxes the answer to boosting the economy?

It’s not a silver bullet, said Roberton Williams, a senior fellow with the Tax Policy Center. Democrats largely support allowing Bush-era tax cuts on the wealthy to expire at the end of 2012, but Republicans say that would hurt the economy.

“You can’t get enough money out of the rich to balance the budget. They don’t have bottomless pockets,” Williams said.

The GOP is staunchly against raising taxes anyway, so unless there’s some sort of compromise, “huge tax increases are a nonstarter,” Williams added.

He suggests tax increases be coupled with spending cuts, particularly to costly entitlement programs such as Medicare.

How is an economic slowdown going to affect New Yorkers?

The Big Apple is hardly immune from any widespread fallout from the U.S. economy, said Todd Harrison, CEO of Minyanville Media and a former Wall Street trader.

The banking industry still holds toxic assets and unemployment in the city has been worse than New York state.

Harrison worries that the city’s crime rate could spike if people grow desperate.

“The chasm will grow wider between the haves and the have-nots,” he said.

(With Reuters)

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