Worsening Economic Outlook Triggers Another Stock Sell-Off

Skye Kim, right, checks the price on a dress at Fair Oaks Mall while shopping for homecoming at Lake Braddock. "Now we think more about price than we did before," Kim said. (By Lois Raimondo -- The Washington Post)

Troubling new signs of a deep economic malaise touched off some of the worst stock market losses in history yesterday, a day after the government announced a massive intervention that officials hoped would boost investor confidence.

New data showed that consumers stayed away from malls, nixed plans for new cars and made do with old clothes in September, forcing the largest monthly decline in retail sales in three years. Federal Reserve Chairman Ben S. Bernanke added to the gloom, cautioning that the nation should not expect an economic rebound any time soon.

The Dow Jones industrial average fell 733.08, or 7.9 percent, its second-biggest point drop in history, while the Standard & Poor's 500-stock index, a broader measure, sank 90.17 points, or 9 percent, the most since the crash of 1987, infamously dubbed Black Monday.

The market declines came after the Treasury Department said it would spend at least $250 billion to take ownership stakes in financial firms and insure most forms of bank debt. Officials had hoped those measures would calm investors' nerves and heal the crippled financial system.

Bernanke said, "the turmoil in financial markets and the funding pressures on financial firms pose a significant threat to economic growth." His remarks appeared to signal that the central bank was open to lowering its benchmark interest rate, which it cut just last week to 1.5 percent.

The credit crisis has penetrated so deeply into the American psyche that consumers, whose spending is the most important component of economic activity, have become too scared to shop.

"The consumer has been hit over the head by so many two-by-fours that the consumer may end up going into a coma here," said Brian Bethune, chief U.S. financial economist for consulting firm Global Insight. "How do you bring them back?"

The rate banks charge each other for loans, a critical gauge of whether the government's proposal is working, has barely shown any improvement since the Treasury's new plan was unveiled. This rate, known as the London interbank offered rate, or Libor, remains higher than it was a week ago and about 61 percent higher than a month ago.

Joseph Stiglitz, a Nobel Prize-winning economics professor at Columbia University, said it was a "mystery" why Libor didn't drop after the government guaranteed lending between banks.

"Clearly, there still is some uncertainty . . . about the terms of the guarantee," said Stiglitz. "There could be uncertainty about the speed of collection. For someone in the market, that could be very worrying. We don't know how much of an injection is really required. There are a lot of unanswered questions."

Regulators pleaded for patience yesterday, saying it would take some time for the effects of the government's actions to work their way through the financial system.

"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."

Joseph Stiglitz, a Nobel Prize-winning economics professor at Columbia University, said it was a "mystery" why Libor didn't drop after the government guaranteed lending between banks.

"Clearly, there still is some uncertainty . . . about the terms of the guarantee," said Stiglitz. "There could be uncertainty about the speed of collection. For someone in the market, that could be very worrying. We don't know how much of an injection is really required. There are a lot of unanswered questions."

Regulators pleaded for patience yesterday, saying it would take some time for the effects of the government's actions to work their way through the financial system.

"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."