Last week the Dow Jones industrial average fell 4.2%, the steepest drop since March 2003. Financial shares took a beating on growing evidence that problems in the sub-prime mortgage market are spreading, making financing the corporate buy-outs that drove the market’s rally more difficult.

Many financial market participants are of the view that there is a definite deterioration in credit conditions, which means less liquidity for private equity, stock buy-backs, and business expansion. Fed officials, however, have downplayed this claim.

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