With financial markets in near-meltdown, governments around the world scrambled to find new ways to infuse vast amounts of cash into banks and even directly to companies to help resuscitate the global financial system. The Federal Reserve on Monday night was weighing a plan that would in effect make it a major funder of a wide range of U.S. businesses facing imminent cash shortages. The Fed also said Monday that it would push $900 billion into the U.S. banking system, a six-fold increase in its program of lending money to banks.
Major market indexes remained volatile in early trading Tuesday.
The measures followed similar efforts by other central banks and governments around the world over the weekend and Monday to get financial institutions to stop hoarding money and start lending to one another and to their customers.
It wasn’t enough. Stock markets began a steep tumble in Asia, where most national markets were down considerably, and then declines accelerated in Europe on fears of new bank failures. The French stock index tumbled 9 percent, the German index dropped 7 percent and the British benchmark index fell nearly 8 percent. Russia was off about 18 percent.
In the United States, the Dow Jones industrial average fell 3.6 percent, closing below the 10,000 level for the first time since 2004.
It had been down nearly twice that at one point before staging a late rally.
With the financial crisis engulfing most of the developed world, a meeting scheduled for this week in Washington of the International Monetary Fund and World Bank will probably turn into a summit that could provide a forum for coordinated action.
But there was little sign of coordination among European leaders, who could not agree over the weekend on a common approach to the crisis and who on Monday bickered over what sorts of protections they would offer investors and institutions.
Fed plan for special fund
While Europe struggled to stop new bank failures, in the United States, alarm has increasingly focused on the commercial paper market, where all sorts of businesses and local and state governments turn for money for day- to-day operations. For the past week, that market has been nearly paralyzed, and Monday, the cost of such borrowing soared.
Monday night, the Fed was drawing up plans to set up a special fund that would buy short-term commercial paper. The purchases would benefit banks as well as non-financial companies.
The fund would be financed by a loan from the Fed, and any losses would probably be covered by the Treasury using its $700 billion bailout package. Fed and Treasury lawyers were hammering out details Monday night.
Purchasing commercial paper through the new special entity would increase risks for the Treasury, and ultimately taxpayers, while potentially relieving companies of the downside risk of bad behavior, financial experts said. One senior U.S. bank executive said it was “like taking the fire sensors out of the building.”
One benefit of such an action is that it would free up money for lending and lower the interest rates banks pay to borrow money to conduct business. Monday, the rate at which banks lend to one another — the London interbank offered rate, or Libor — was 4.3 percent for a three-month loan. In normal times, it would be not much higher than the 2 percent bank-lending rate set by the Fed. The premium is a measurement of the mistrust among banks and translates into higher rates for businesses and consumers, if they can get loans at all.
Possible cut in interest rates
Another step the Fed could take to try to jolt the financial system out of its torpor would be to cut its target for short-term interest rates. The federal funds rate is 2 percent, and many financiers on Wall Street argue that an emergency rate cut, as early as today, would help the situation.
Australia’s central bank cut its official interest rate by a bigger-than-expected 1 percentage point to 6 percent. Japan’s central bank kept its key interest rate unchanged at 0.5 percent.
As recently as last week, there was no consensus at the Fed on whether additional rate cuts would make sense. Some leaders of the central bank worried that they would not serve their intended purpose of stimulating the economy as long as the credit markets were clogged.
They feared that a rate cut could cause the dollar to drop and commodity prices to rise.
But in recent days, as the financial crisis has become more severe, an emergency rate cut, perhaps coordinated with other large countries, has become more plausible. Fed Chairman Ben Bernanke is set to deliver a speech today that will indicate his current thinking on rates.
The deteriorating credit and economic picture has provoked an increasing amount of criticism of U.S. and European central bankers and has spread anxiety in financial markets that even the lenders of last resort might be stretched to their limits.
Q and A
With the blue-chip indicator sinking below 10,000 for the first time in four years, many are wondering how much lower it could go and how vulnerable are their holdings in stocks, CDs and other investments as the credit crisis continues.
The Associated Press addresses some of the concerns, based on interviews with experts.
Q: Where’s the best place to keep money I may need in the short term?
A: Much like your overall portfolio, you might want to consider diversifying even your cash reserves. Right now, for example, rates on tax-free money-market funds are better than certificates of deposit, or CDs. To mitigate any difference, consider splitting your money between the two.
To find the best rates for CDs and money-market accounts, check , which includes listings from online banks.
Q: What’s the difference between a money-market mutual fund and a money-market deposit account?
A: Both are generally safe ways to keep money readily available while drawing a modest amount of interest to offset inflation.
While a money-market fund generally offers a greater yield than a money-market account, it also carries modestly higher risk.
Unlike other mutual funds that invest in stocks and bonds, money funds are limited to safer short-term debt. The safest typically invest in government debt such as Treasury bills, while funds offering slightly higher returns invest in the short-term corporate debt of firms with high credit ratings.
Q: What should investors who are within five years of retirement do when they see their portfolio’s value declining sharply?
A: If you’re near retirement, you may want to fight your instincts to retreat. “If you can afford it, consider increasing retirement contributions in the final years of your working life,” said Christine Fahlund of T. Rowe Price. “You’ll be taking advantage of the market conditions and buying into the market when it’s low.”
Q: How should investors whose college funds have taken a hit respond to the market?
A: The date for when the child is going to school plays a key role. Investors should reduce a college fund’s exposure to the stock market as the enrollment date approaches. However, if the child isn’t heading off to school soon, “this is a better time to buy stocks than to sell,” said Alan Gayle of Atlanta-based RidgeWorth Capital Management.
The AP personal-finance team compiled this report.
