NEW YORK — This wasn't the reaction to his $700-billion rescue plan that Treasury Secretary Henry M. Paulson was hoping for.
Stock prices and the dollar plunged Monday -- and oil and other commodities soared -- on fears that the proposed bailout of the financial system could require a massive increase in government borrowing, push up interest rates and unleash new inflationary pressures. The Dow Jones industrial average tumbled almost 375 points.
And -- worst of all -- what if it doesn't work?
"People worry that, if this doesn't do it, there is no Plan C if Plan B doesn't work," said Ed Yardeni, president of Yardeni Research in Great Neck, N.Y. "Once you've essentially nationalized the capital markets, what more can you do?"
The volatile market moves came as members of Congress and the Bush administration negotiated changes to the bailout plan that could increase its cost.
"It's certainly preferable to avoid a meltdown of the financial system," said Martin Fridson, head of money-management firm Fridson Investment Advisors in New York. "But after you breathe a sigh of relief, you look down the road a little bit and you see mounting deficits, rising federal debt and the possibility of inflation."
The Dow Jones industrial average dropped 372.75 points, or 3.3%, to 11,015.69, more than erasing its 368-point rally Friday. The Standard & Poor's 500 index skidded 47.99 points, or 3.8%, to close at 1,207.09. The Nasdaq composite index gave up 94.92 points, or 4.2%, to 2,178.98.
Some investors who pulled money out of stocks poured it into commodities.
Oil for October delivery shot up $16.37 a barrel, a record increase, to settle at $120.92 on the New York Mercantile Exchange. It spiked as high as $130 in the last hour of trading. The price of an ounce of gold soared $43.30 to $903.90. An index of 19 major commodities surged 3.9%.
"People are seeing the bailout today as the fleecing of America," said Fadel Gheit, senior energy analyst at Oppenheimer & Co. "They are expecting the dollar to sink even more, and there is no place for the investment money to go except back into commodities and oil."
Inflation fears helped send the euro surging to $1.480 from $1.447 late Friday. The dollar's 2.3% decline against the euro was the biggest on record. An index of the dollar's value against other major currencies slid 2%.
