Stocks Sink as Gloom Seizes Wall St.

The Dow's daily close over the past month
SOURCE: Bloomberg | GRAPHIC: The Washington Post - October 16, 2008

"Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away," Bernanke said in a speech to the Economic Club of New York. "Economic activity will fall short of potential for a time."

Bernanke also raised concerns that the banking industry has become overly consolidated as big financial institutions have collapsed or been swallowed up by one another during the crisis. Now the nation may have a "too-big-to-fail problem," in which the collapse of any of the big banks could threaten the entire system.

Despite his grim outlook, Bernanke also attempted to inspire confidence in the government's response to the crisis.

"Americans can be confident that every resource is being brought to bear to address the current crisis," he said. "We now have the tools we need to respond."

After meeting with small-business owners yesterday in Ada, Mich., President Bush also put a good face on the worsening crisis.

"I'm optimistic that we're going to come through it," Bush told reporters. "I'm realistic about how tough the situation is . . . and I believe when we come through it, we're going to be better than ever."

But several key reports pointed to serious trouble ahead for the economy. Three of the nation's largest banks reported that consumers are having increasing difficulty paying off their credit card debt and more are going into default.

Meanwhile, economic activity weakened across every region of the country last month as businesses and consumers pulled back, the Fed said in its monthly state of the economy, known as the "beige book." Labor market conditions also deteriorated, though the Fed noted that inflation moderated in some areas.

The U.S. Commerce Department yesterday released data that underscored how broadly shoppers have pulled back. Retail sales in September -- which cover everything from sofas to sporting goods -- dropped 1.2 percent compared with the previous month. Auto dealers were the biggest drag, with their sales falling 4.2 percent, followed by sales at furniture and clothing stores.

"It is nearly impossible for companies to fully counteract a complete pullback in consumer spending," said Rosalind Wells, chief economist for the National Retail Federation, a trade group.

At the Regency Furniture store in Largo yesterday afternoon, the storeroom was empty but for two customers, Gerald Dyiches and his girlfriend, who were looking for a dining room set and sofa for their apartment. Outside the store, giant signs blared, "No Credit . . . No Problem" and "Instant Approval. Everyone Qualifies!"

"They have really good terms, but I'm going to look around some more," said Dyiches, manager of a local Outback Steakhouse.