Arguing that a global crisis demands a global response, the Federal Reserve and five other central banks slashed interest rates Wednesday morning in a surprise, coordinated bid to boost the international economy and reassure plunging stock and credit markets around the world.
But fresh bad economic news and market uncertainty continued to buffet investors, with Wall Street's major indexes losing ground again despite the half-point cut on the Fed's key federal funds rate for overnight bank loans to 1.5 percent a level not seen since 2003.
Wall Street could face yet another test Thursday with the expiration of an order banning "short-selling" on the stocks of nearly 1,000 commercial banks and financial firms. The Securities and Exchange Commission's order restricting short-selling essentially a bet that a stock will go down was set to expire at midnight Wednesday.
Opinion has been sharply divided over the impact of the SEC order. Some analysts and corporate heads blame short-sellers for concentrated attacks on individual stocks that undermined some of Wall Street's most powerful firms and exacerbated the stock and credit panic.
Short sellers say they play a critical role in helping investors determine the real value of stocks, and note that U.S. stock markets have suffered major losses in the three weeks the ban has been in place.
The losses continued Wednesday as the Dow Jones Industrial Average dropped 189.01 points (2 percent) Wednesday, giving away a nearly 200-point gain at the beginning of the trading session after the rate cuts were announced. The broader S&P 500 index also fell 11.29 points (1.13 percent) to 9,849.94.
Many international markets were more bearish, with Japan's Nikkei 225 Stock Average losing nearly 10 percent of its value Wednesday. The FTSEurofirst 300, a broad index of European stock markets, closed down 6.3 percent at 940.78 points, its lowest close since December 2003.
Russia, Indonesia, Ukraine and Romania all closed their stock exchanges and Brazilian stocks fell for a fifth day as emerging markets had their worst week in at least two decades.
Federal Reserve officials said the coordinated cut was the largest of its kind by far for the world's central banks, traditionally jealous of their national prerogatives. Treasury Secretary Henry M. Paulson Jr., in a briefing for reporters, said the move underscored the gravity of the problems facing the U.S. and world economy.
"We must take care to ensure that our actions are closely coordinated and communicated so that the action of one country does not come at the expense of others or the stability of the system as a whole," Mr. Paulson said.
The Treasury secretary revealed he wants to hold a emergency meeting of the Group of 20, which includes the major industrial nations and emerging powers of the developing world such as China, Brazil and India. World finance ministers gather in Washington this weekend for the annual World Bank and International Monetary Fund meetings.
With economists now widely predicting a sharp global economic downturn, both the White House and Democratic presidential nominee Sen. Barack Obama praised the central banks' move as a step toward limiting fallout from the crisis.
"We hope that this action will start to stem the crisis," said Dana Perino, President Bush's spokeswoman.
But Mr. Paulson cautioned that the recovery will take time despite a series of recent government moves that include the just-approved $700 billion Wall Street rescue package and the Fed's Tuesday announcement that it will for the first time buy short-term debt, known as "commercial paper," directly from banks and businesses in a bid to unclog blocked money markets.
And there was no shortage of gloomy economic data for investors and traders, despite the international rate cut.
Britain and Spain became the latest countries to roll out major bailout plans for their banks, dragged down by their investments in the U.S. mortgage markets and by overheated housing markets at home. British Prime Minister Gordon Brown served up a $437 billion rescue package to "restructure the banking system," including $87 billion for the government to purchase ownership stakes in Barclays, Lloyds TSB and six other British lenders.
"This is not a time for conventional thinking or outdated dogma, but for the fresh and innovative intervention that gets to the heart of the problem," Mr. Brown told reporters.
There was fresh evidence the U.S. consumer the prime engine of growth for the economy in recent years has pulled back in the face of bad news on the housing, credit employment and investment fronts.
Leading retailers reported sluggish sales for September, with market leaders such as J.C. Penney Co., Kohl's and Target reporting disappointing traffic and the need for deep price cuts just to attract shoppers. Only discount giants Wal-Mart and Costco reported relatively strong results for the month.
"Consumers are shell-shocked right now, and I don't think they've got the ability to spend," Stephanie Hoff, an analyst at Edward Jones in St. Louis, told Bloomberg News. "Usually if sales are weak for this time of year, it doesn't bode well for the holiday."
Iceland, whose small economy has become a global poster child for the difficulties posed by the credit crunch, was forced to drop plans to nationalize the country's second largest bank, placing failing Landsbanki in receivership instead. With confidence evaporating in the country's financial system, Iceland officials also said they were abandoning a doomed effort to defend the value of the krona, the country's currency.
The move by the Federal Reserve and other central banks was a rare instance of international cooperation on lending rates. Federal Reserve Board Chairman Ben S. Bernanke had hinted broadly in a Tuesday speech that the U.S. central bank was preparing its first rate cut since late April, but many had assumed the move would come at the board's scheduled Oct. 28-29 meeting.
The "Fed funds rate" was cut from 2 percent to 1.5 percent, with major U.S. banks like Wells Fargo and Bank of America almost immediately cutting the prime rate given to top-quality borrowers from 5 percent to 4.5 percent.
In Europe, where continental leaders have scrambled to coordinate their response to the economic implosion, the European Central Bank cut its key rate from 4.25 percent to 3.75 percent, while the Bank of England also sliced a half-percentage point off its leading rate to 4.5 percent.
The Bank of Canada and Sweden's Riksbank also cut their benchmark rate by 0.5 percent. The Bank of Japan, which already has historically low lending rates to boost the long-suffering domestic economy, said it "supported" the global rate cut but left its benchmark rate alone.
In a joint statement, the central bankers said that the recent market woes had increased their fear of a global slowdown while easing, for now, fears that the rate cuts could spark inflation. "Some easing of global monetary conditions is therefore warranted," the group said in a statement.
The central bank action comes after an extraordinary moves by governments around the world -- conservative and liberal alike -- to intervene in private markets, bail out banks, claim new regulatory powers and cushion losses for investors, all financed with taxpayer money.
"There can be no isolated response to the global challenges we face," French President Nicolas Sarkozy, a leading proponent of government action in the markets, told reporters on a trip to Brussels.
But there were also signs Wednesday that the coordination between financial officials across national boundaries was not being matched by coordination between political leaders.
French Finance Minister Christine Lagarde, in a radio interview, criticized the decision by the Bush administration last month to allow the major Wall Street investment bank Lehman Brothers fail last month, the first in what she called a series of financial "dominoes" that fueled the panic.
Mr. Paulson defended the U.S. government's handling of Lehman Brothers.
"There was no buyer out there," he said. "There was no hole to fill."
And Britain's Mr. Brown pointedly noted the differences between his country's bank rescue plan and the approach used in the $700 billion American package. He also said the United States was the main culprit in sparking the meltdown.
"This problem started in America with irresponsible actions and lending by some institutions," he told reporters in London. As a result, "the global financial market has ceased to function."