Fed Moves to Thaw Credit Markets

Video

Bernanke: More Economic Pain Ahead

Federal Reserve Chairman Ben Bernanke warned Tuesday that the financial crisis has not only darkened the country's current economic performance but also could prolong the pain.

» LAUNCH VIDEO PLAYER

The Fed yesterday said it would push $900 billion into the U.S. banking system, a six-fold increase in its program of lending money to banks.

The measures followed similar efforts by other central banks and governments around the world over the weekend and yesterday 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 nearly 20 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 now engulfing most of the developed world, a meeting scheduled for later 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 yesterday bickered over what sorts of protections they would offer investors and institutions.

In the United States, the Fed is hoping that its move into the commercial paper market will unfreeze lending. Another step it could take to try to jolt the financial system out of its current torpor would be to cut its target for short-term interest rates. The federal funds rate is currently 2 percent, and many financiers on Wall Street argue that an emergency rate cut, as early as today, would help the situation.

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 S. Bernanke is set to deliver a speech today that will indicate his current thinking on rates.

Early today, Australia's central bank cut the country's benchmark lending rate by a full percentage point, to 6 percent, but the Bank of Japan left its key interest rate unchanged at 0.5 percent.

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.

"The Federal Reserve balance sheet is about $1.2 trillion," said David Shulman, senior economist at the UCLA Anderson Forecast. "But we have an $11 trillion mortgage market, a $54 trillion credit-default-swaps market. The central banks are nowhere near large enough to handle this problem right now."

Edwin Truman, a senior fellow at the Peterson Institute for International Economics and longtime senior Fed official for international affairs, said that the Fed's rate cuts have had much less impact than intended and that the Fed needed to take action that would also bring down Libor rates, which are more closely linked to the rates businesses and consumers pay.