For the second consecutive day, the Federal Reserve took action in hopes of staving off a global financial collapse. And again, U.S. financial markets failed to calm, extending losses for a sixth straight day while shrugging off a Fed-led, globally coordinated half-point cut in interest rates.
Under normal circumstances, rate cuts are a cause for cheer because they lower the cost of borrowing for consumers and business, spurring economic activity. But these are far from normal times, and the fear on Wall Street is proving difficult to contain.
Before U.S. markets opened Wednesday, and after steep stock losses in Asia and Europe, the Fed announced a coordinated half-point interest-rate cut with the central banks in England, China, Canada, Sweden and Switzerland and the European Central Bank. It lowered the benchmark U.S. federal funds rate to 1.5 percent, bringing down the prime rate that commercial banks charge their best customers to 4.5 percent.
Yet traders in New York, ignoring the very rate cut they'd been clamoring for, began selling stocks at the opening bell, and the Dow Jones industrial average plunged more than 200 points within a minute of opening. It bounced back and forth between loss and gain for much of the day before closing down 189.01 points to 9258.10. The S&P 500 finished off 11.29 points to 984.94, and the Nasdaq was down 14.55 points to 1740.33.
“Markets are manic depressive, and they're really in a depressed state right now,” said Alan Blinder, a former Fed vice chairman, now a Princeton University economics professor. “I thought for at least one day, wrongly, that this (rate cut) would help the market psychology. It's disappointing.”
For millions of Americans, the Fed's cut means borrowing money becomes cheaper. Home equity loans, credit cards and other floating-rate loans all fluctuate depending on what the Fed does.
Bank of America, Wells Fargo and other banks cut their prime rate by half a point to 4.5 percent, also the lowest in more than four years, after the Fed announced its decision.
“We're just in a world where new debt is scarce, if not nonexistent. And this week's rate cut and the (congressional) rescue package last week are steps to try to manage the process, but they are not going to reverse it,” said Ken Goldstein, a veteran economist with the Conference Board in New York. “The problem is too much debt in the financial system … and until those conditions change we're just staring at a world that is losing output and losing jobs.”
Few economists doubt the U.S. economy is in a recession, or soon will be. The psychology of a downturn is that bad economic news creates pessimism that leads consumers to reduce their purchases and businesses to postpone investment.
There was clear evidence of that Wednesday, when the RBC Cash Index, a survey of consumer sentiment conducted by pollster Ipsos Public Affairs, showed that consumers are in a dour mood. Almost two-thirds of the public said they feared they or someone they know would lose their jobs in the next six months.
“If there's the possibility of losing their jobs, they're probably not going to be spending a lot of money,” said Clifford Young, a senior vice president at Ipsos.
Facing a clearly weakening economic outlook, much of what the Fed and Treasury Department are doing now is akin to plugging holes to keep the financial system afloat.
For example, on Tuesday the Fed announced it would bypass the banking system to provide emergency short-term loans to major U.S. corporations since banks won't. That ensures that corporate America can issue short-term debt to make payrolls and keep more Americans in their jobs.
The Fed has so far made available almost $800 billion in emergency short-term loans to keep the banking sector functioning.
In a speech Wednesday, Treasury Secretary Henry Paulson warned that volatile times are ahead and tried to comfort ordinary Americans, who've seen more than $2 trillion in retirement savings erased in the past year and a half.
“We are a strong and wealthy nation with the resources to address the needs we face,” Paulson said, adding that by coordinating with other national governments, the global financial problems eventually will ease.
He spoke after Asian and European markets wrapped up a bleak day, with investors fleeing stocks and worrying that neither the Fed nor other central banks could move fast enough to stop the turmoil.
European indexes ended lower, too. Britain's FTSE-100 finished down about 5.2 percent, Germany's DAX about 5.9 percent and France's CAC-40 6.3 percent.
The Bank of England announced that it would inject directly into several top banks upward of $350 billion to ensure that they have cash to lend. This differs in approach from the $700 billion made available to the Treasury by Congress to purchase bad assets and get them off of bank balance sheets.
In Asia, where trading ended for the day before the rate cuts were announced, the Japanese Nikkei 225 closed down more than 9 percent, Hong Kong's Hang Seng more than 8 percent. In Russia, the government shut down the country's stock markets again on Wednesday.
And in Iceland, the country's third-largest bank went into receivership and the government abandoned attempts to put a floor under its free-falling currency. As increasingly worried Icelanders attended a protest concert in the capital's main square and reported problems withdrawing and transferring money from banks, their government was scrambling to get a hold on the spiraling situation.
Prime Minister Geir Haarde acknowledged that it will take the tiny Nordic nation of just 320,000 people several years to recover from the crisis, which has been wrought by the exposure of the country's top-heavy banking sector to the global credit squeeze.
As Europe's financial problems worsened, finger pointing followed. France's finance minister, Christine Lagarde, suggested to a French radio station that the problems were caused by a U.S. decision to let investment bank Lehman Brothers collapse in September.
“What was horrendous is the decision of Henry Paulson to let Lehman Brothers go,” she said, adding that “for the equilibrium of the world financial system, it was a veritable mistake.”