The New York Times wrote:
WASHINGTON — As pressure built in the credit markets and stocks spiraled lower around the world on Monday, the Federal Reserve was considering a radical new plan to jump-start the engine of the financial system.
Under a proposal being discussed with the Treasury Department, the Fed could buy vast amounts of the unsecured short-term debt that companies rely on to finance their day-to-day activities, according to officials familiar with the discussions. If this were to happen, the central bank would come closer than ever to lending directly to businesses.
While the move would put more taxpayer dollars at risk, it underscores the growing sense of urgency felt by policy makers in a climate where lending has virtually dried up.
The plan was being formulated amid cascading losses in global stock markets, as the banking crisis spread across Europe and investors feared dire consequences for the world economy. The Dow Jones industrial average fell as much as 800 points before a late recovery, finishing down 369.88, below 10,000 points for the first time since 2004.
Even before bankers on Wall Street reached their desks, European stocks were plunging. The Russian stock market dropped 19.1 percent, the biggest decline since the fall of the Soviet Union. Major indexes in London and Frankfurt lost more than 7 percent; stocks in Paris fell by 9 percent. Stocks in Latin America and other emerging economies took their worst collective tumble in a decade.
Volatility reached the highest level in two decades, and oil prices fell below $90 for the first time since February.
The contagion showed no signs of stopping when Asian markets opened Tuesday morning as the Nikkei index of Japanese stocks fell 3 percent and the Hang Seng index of stocks in Hong Kong fell 5 percent.
“There is a growing recognition that not only has the credit crunch refused to be contained, it continues to spread,” said Ed Yardeni, an investment strategist. “It’s gone truly global.”
Investors are worried about what the evaporation of credit will do to an already-weakened global economy.
In the United States, consumers appear to be significantly curbing spending; last month, employers cut more jobs than any month in five years. The $6 decline in oil prices, which settled at $87.81 a barrel, stemmed in part from fears that demand will slacken in the face of a deteriorating economy.
The Fed plan is intended to renew the flow of credit on which the economy depends. Under its plan, the central bank would buy unsecured commercial paper, essentially short-term i.o.u.’s issued by banks, businesses and municipalities.
The market for that kind of debt has all but shut down in the last week, with many major corporations unable to borrow for longer than a day at a time, as banks become more fearful of giving out cash. The volume of such debt totaled about $1.6 trillion as of Oct. 1, down 11 percent from three weeks earlier.
These credit fears persisted over the weekend despite the $700 billion bailout package that Congress approved last week.
The cost of borrowing from banks and corporations remained high on Monday, increased in part by a series of high-profile bank bailouts in Europe, where governments scrambled to save several major lenders from collapse.
The United States government appears to be pressing ahead with other radical efforts to shore up the financial system, even wading into corners of the markets where it has rarely interfered.
Buying commercial paper could open the Fed to difficult conflicts of interest, because it would be juggling the goals of protecting its investment portfolio with its traditional goals of promoting stable prices and low unemployment.
“The Federal Reserve really would become the buyer of last resort, trying to jump-start the commercial paper market by taking on credit risk,” said Vincent Reinhart, a former top Fed official who worked under Alan Greenspan, a former Fed chairman, and Ben S. Bernanke, the chairman now.
The Federal Reserve has already stretched its resources to the limit by providing hundreds of billions of dollars in short-term loans to banks, Wall Street firms and money market funds.
On Monday, the Fed announced that it would once again redouble one of its key emergency lending programs, increasing the size of its Term Auction Facility to $600 billion, from $300 billion. On top of that, the central bank plans to provide an additional $300 billion to banks to meet their end-of-the-year cash needs.
To pay for its burgeoning responsibilities, the Fed has no choice but to keep printing more money. To prevent that flood of new money from reducing the central bank’s overnight interest rate to zero, the Fed also announced on Monday that it would start paying interest on the excess reserves that banks keep on deposit at the Fed.
Paying interest on reserves allows the central bank to set a floor on interest rates and retain at least some control over monetary policy.
In its announcement on Monday, the Fed said it would pay an interest rate of 1.25 percent —three-quarters of a point below its target of 2 percent for the overnight Federal funds rate.
But the possibility of propping up the vast market for commercial paper could represent an undertaking even broader than the Treasury Department’s plan to buy as much as $700 billion in mortgage-backed securities.
In statements on Monday morning, the Federal Reserve and the Treasury said they were “consulting with market participants on ways to provide additional support for term unsecured funding markets.”
By referring to “unsecured funding markets,” policy makers signaled that they wanted to intervene directly in the credit markets. Officials said on Monday evening that they wanted to finish a plan as quickly as possible, perhaps as early as Tuesday.
But the effort is fraught with legal complexities. Though the Federal Reserve has sweeping power to create money and lend it out, experts said it was normally prohibited from buying assets that could lose money.
One way around that legal limitation would be to provide money to a separate legal entity that would do the buying and investing on the Fed’s behalf. That would be similar to Maiden Lane Funding L.L.C., a special-purpose entity that officials created last spring to hold $29 billion in hard-to-sell securities from Bear Stearns.
But so far, the myriad efforts by government regulators to shore up confidence have seemed to yield little relief among investors, some of whom believed the actions have taken on a haphazard air.
“People are slowly but surely coming to the realization that playing ‘Whack-a-Mole’ with each of these issues as they arise, on an ad hoc basis, doesn’t get the job done,” said Max Bublitz, chief strategist at SCM Advisors, an investment firm in San Francisco.
On Wall Street, Monday was a frightening day for investors — the type of day where a 369-point deficit in the Dow is considered a relief.
A broad sell-off began at the opening bell and intensified throughout the morning. After 2 p.m., the Dow was down a hair over 800 points, worse than the 777-point drop one week earlier.
But around 2:30, investors began to hunt for bargains, sending the Dow briefly back above the 10,000 mark, before finishing the day at 9,955.50. The broader stock market closed down 3.9 percent, as measured by the Standard & Poor’s 500-stock index. Shares of financial firms, manufacturing outfits and industrial companies all fell sharply. The Dow has lost 1,187 points, about 10.7 percent, and the S. & P. almost 13 percent in a week.
The sharp slide on Monday came despite assurances from President Bush that it would “take a while to restore confidence to the financial system.”
“We don’t want to rush into this situation and have the program not be effective.”
Following are the results of Monday’s Treasury auction of 72-day cash management bills and three-month and six-month bills.