Markets Fall on Doubts Rescues Will Succeed
Fed, U.K. Weigh More Action as Initial Salvos Fail to Rally Confidence; Dow Closes Below 10000 in Wild Day for World Exchanges
By JON HILSENRATH and CARRICK MOLLENKAMP
The global financial crisis has taken a perilous turn: As government efforts to tame it grow more aggressive, markets are becoming less confident those efforts will succeed.
On Monday, the Federal Reserve and European governments stepped up relief efforts, above and beyond the $700 billion rescue package approved by the Congress last week. But markets around the world responded with a massive vote of no confidence. European stocks saw their biggest drop in at least 20 years, and the Dow Jones Industrial Average dropped below the 10000 mark, a stark sign that the crisis may be outpacing policy makers' ability to contain it.
The deepening malaise illustrates how the financial crisis has moved far beyond U.S. subprime-mortgage troubles to a much more fundamental breakdown of trust. The best efforts of U.S. and European officials haven't solved the central problem: Nobody knows which firms will go under, making almost everybody afraid to lend.
The problem has become so severe that it's affecting not only banks, but regular companies, which are finding it more difficult to borrow money for everyday activities such as paying workers and buying supplies. If sustained, the freeze in short-term-lending markets will weigh heavily on the weakening global economy. Investors are now coming to recognize this harsh reality.
"In order to shore up confidence in the system -- and by the system, I mean the money markets -- you need something bigger, and you need something that is pretty consistent across countries," says Hans Lorenzen, credit strategist in London for Citigroup Inc. "And you need it pretty quickly."
The Fed, 12 months into a sometimes makeshift campaign that is rewriting textbooks on central banking, unveiled more measures Monday to unblock the stoppage that has plagued short-term-lending markets for the past few weeks. It said it will begin paying interest on the reserves that banks leave on deposit with the central bank, a key addition to its playbook. The move will make it easier for the Fed to manage interest rates while it floods a damaged financial system with loans that nobody in the private sector will make.
U.S. officials are also examining ways to ease deepening strains in the commercial-paper market, a crucial source of short-term loans for banks and other companies in the U.S. and Europe. Interest-rate cuts by the Fed look increasingly likely to follow....
