The financial market like capital market (Dow or Nasdaq) & money market (treasury bills, bonds) r highly affected by financial institutions like banks who currently get big problems from the subprime market.The credit crunch in subprime market has also slashed home prices by $ 2.5 trillion from household wealth, or about $25,000 per homeowner. It is because the house supply become bigger than the house demand before the subprime happen.
The credit crunch also affect banks' liquidity because they get most of their revenue from the interest rate yielded by the credit market. Moreover, they have not just lost their income from the interest rate but they also lost most of its total credit value. In effect, banks do not have enough money to lend fund for companies which listed in Dow & Nasdaq. Ironically, most companies depends their funding from bank lending. So, they find it difficult to expand their business scope.
In order to boost this bad economy condition, The Fed reduce the Fed is interest rate, which is The Fed is revenue, to lower the credit cost for borrower & consumer. In effect, the rate of treasury bills & bonds, which is The Fed is cost, also become lower because The Fed is income has become lower. In other hand, banks have suffered huge money lost from the credit crunch so they become more selective to give credits for corporates & consumers.
This bad economy condition is worsen by the high commodity price around the world which is initiated by the high oil price & the harvest fail triggered by the global warming. They together forces The Fed not to reduce the interest rate even lower because the higher the commodity price the higher the inflation. This condition also reduce the buying power of consumers which make most of corporate is income even worse & eventually the Dow & Nasdaq index.
I hope my explanation could help u understand our current economy issues..