Moves by Fed, Europeans Fail To Calm Investors

Dow Falls 5% Despite Hint at Rate Cut, Massive Efforts to Loosen Credit

Economic policymakers around the world again threw vast amounts of money into their efforts to stabilize chaotic financial markets yesterday, but even hints of a long-anticipated interest rate cut in the United States failed to halt Wall Street's slide.

Aggravating the market downturn was a gloomy assessment from Federal Reserve Chairman Ben S. Bernanke, who said in a speech that the deepening financial crisis had darkened the economic outlook. Because of those conditions, he signaled that the Fed might soon cut interest rates, a step that in normal times would make it easier for banks or investors to borrow.

But in these times, even that wasn't enough to cheer the markets.

They remain roiled, as investors were concerned that banks and real estate companies are in more trouble than they had thought, following Monday's announcement that Bank of America -- until now considered a rock of the U.S. financial system -- would cut its dividend and seek to raise new capital.

The Dow Jones industrial average declined for a fifth consecutive day, falling 508 points, or 5.1 percent. The Standard & Poor's 500-stock index, a broader measure of the market, dropped 60.66, or 5.7 percent; it is down 15 percent so far this month. Separately yesterday, the rate that banks charge for loans to each other, a crucial measure of the flow of credit, rose.

In Europe, markets were flat after authorities in Britain and on the Continent moved to shore up their banking systems. The British government was preparing an emergency plan that could inject tens of billions of dollars into its banks. One of the biggest, Royal Bank of Scotland, lost more than $17 billion of its market value as its shares dropped 39 percent.

The 27-nation European Union, meanwhile, raised its protections on bank savings, and finance ministers of its member nations pledged to better coordinate their response to the financial crisis.

The troubling signs came despite a morning announcement that the Fed will buy up commercial paper, the short-term debt that funds the daily operations of banks and ordinary businesses. In a bold new attempt to jump-start the lending that is the lifeblood of American business, the central bank said it would create a special entity to purchase this short-term debt.

The investors that normally snap up those relatively low-risk investments, such as college endowments and money-market mutual funds, aren't doing so. That is causing stresses throughout the financial system that are damaging the overall economy. So the Fed has moved to essentially funnel cash to companies -- up to the entire universe of $1.3 trillion of high-quality commercial paper that has been issued.

"The central bank is finally starting to get aggressive," said Drew Matus, a senior economist at Merrill Lynch. "Now they're trying to keep things functioning until the Treasury plan starts up," he said, referring to the $700 billion fund to buy up troubled assets from financial firms.

Yesterday's action by the Fed could even lay the groundwork for future interventions in credit markets, should the troubles deepen.

"It could be expanded for different types of securities," said Michael J. Feroli, a U.S. economist at J.P. Morgan Chase. "Today Bernanke said they're going to continue to be aggressive and innovative, and I don't expect that to slow down anytime soon."