Failures and near-failures of some major financial institutions greatly undermined confidence in financial institutions and severely disrupted financial markets, leading to a further sharp tightening of credit conditions. Risk spreads, which were already elevated, escalated further and equity prices fell. In addition, the financial turmoil contributed to a sharp decline in consumer and business confidence.
The result was a major pullback in spending as consumers responded to decreases in wealth and the deterioration in their future employment prospects and as businesses, worried about the demand for their products, cut back on capital spending and sharply reduced production to avoid an accumulation of unsold stocks.