Markets went to pieces Monday despite strenuous efforts to calm them by world authorities, with the Dow Jones Industrial Average falling as much as 800 points to below 10,000 and investments from oil to municipal bonds tanking in a global rout that stretched from Bonn to Bangkok.
Credit markets remained locked despite U.S. enactment of a $700 billion bailout package for banks last week, prompting the Federal Reserve to offer an unprecedented $900 billion in cash infusions to bank funding markets where lending has all but stopped.
President Bush said it might take time to restore confidence, but analysts said the bailout and scattered actions by European governments this weekend came too late to prevent a frantic bout of deleveraging in the global financial system, not unlike the 1929 crash, as investors from secretive hedge funds and sovereign funds to apprehensive retirees liquidate their holdings to cover losses and pay off borrowed money.
"This is a global deleveraging," said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co. While government intervention is helping, he said, investors are peering into the "abyss" and seeing a world where businesses and consumers are forced to rely less on debt, which will have major depressing effects on the global economy for years to come.
Major Wall Street investment houses like Morgan Stanley and Goldman Sachs in the heyday of the credit boom borrowed as much as $30 for every dollar they put into investments, while hedge funds and private equity funds were even more highly leveraged.
Now they are being forced to unwind their extensive holdings around the world to limit and cover their losses, affecting markets in every corner of the globe, from oil to the Japanese yen.
The deleveraging of the financial sector in turn is forcing consumers and businesses who also depended on easy credit to cut back on spending, as loans are harder to obtain. The result is widely expected to be a recession in the United States, Japan and many European countries, and slower growth even when those economies recover.
"What the market is really reading here is that this is a global phenomenon," said Mr. Battipaglia. "When you delever like this, it is a process that takes a very long period of time measured in years, not quarters."
"The financial crisis is accelerating globally, making what seemed like a mild slowdown a few weeks ago potentially far more serious," said David Greenlaw, economist at Morgan Stanley. "The recession now threatens to go global, with industrial economies on the brink, and trade and financial shocks threatening the developing world."
The spreading economic crisis was reflected in a day of steep stock losses erasing more than $2 trillion in value worldwide. Monday's selloff began with 4 percent to 5 percent declines in Asian stocks, where investors registered disappointment that the U.S. bailout plan failed to calm markets.
Stock losses accelerated when European markets opened after a weekend of moves by European authorities to stem a run on banks that did little to console investors. Germany arranged a costly bailout of Hypo Real Estate and appeared to declare it would guarantee all savings deposits, while British authorities pledged to "do whatever it takes" to calm markets.
None of the piecemeal moves by European authorities, after a weekend summit where they failed to agree on concerted action to address the crisis, soothed tormented markets.
All 18 Western European markets posted major losses by the end of the day.
London's FTSE 100 dropped 7.9 percent, the most in 20 years. France's CAC 40 index plunged 9 percent, while German's DAX index fell 7 percent. Russia's Micex plummeted 19 percent, adding to earlier deep losses that have prompted Russia's government to suspend stock trading numerous times.
The global contagion spread from major economies in Europe and Asia to emerging markets that until recently had enjoyed strong growth and sat out the market turbulence experienced in the West.
Latin American stocks fell by 5 percent to 6 percent, while China's Shanghai index lost 5.2 percent and Indonesia's Jakarta Composite Index plunged 10 percent, the steepest in two decades.
By the time New York markets opened, the contagion had wrapped around the globe. Wall Street's nose dive turned into a free fall by midafternoon, taking the Dow on a journey into territory well below 10,000 for the first time in four years.
The Fed and Treasury Department rushed to carry out emergency powers approved in the bailout package, and said for the first time they were studying ways to make unsecured loans to financial firms, in their most drastic step to date to make money available to strapped banks.
Apparently prodded on by these efforts, U.S. stocks partly recovered at the end of the day, with the Dow ending down nearly 370 points, or 3.6 percent, at 9,955.50 The Standard & Poor's 500 index fell 3.85 percent, while the Nasdaq Composite Index fell 4.3 percent.
While the U.S. indexes performed better than their European counterparts, they have sunk deep into bear market territory, with losses ranging from 25 percent to 30 percent so far this year.
Oil and other commodity prices plunged as investors liquidated holdings that are vulnerable to falling growth around the world, but safe-haven investments like Treasury bills, gold and other precious metals posted big gains.
Some analysts blamed the market downdraft on the failure of the U.S. bailout plan to prop up confidence.
Others said the plan was designed to only slow the deleveraging process, which financial leaders regard as painful but necessary to restore health to the economy. Still others said the plan had little impact on markets.