Fed will lend directly to firms in bid to halt slide

The Federal Reserve reached deeper into its bag of tricks yesterday to slow the financial crisis. Wall Street was not amused.

Frantically trying to thaw frozen lending and get the economy moving again, the Fed for the first time said it would lend directly to businesses that aren't banks and hinted that it soon could slash interest rates.

Stocks continued their free-fall anyway. The Dow Jones industrial average plunged more than 500 points, to its lowest level in more than five years, and the Standard & Poor's 500 fell below 1,000 for the first time since 2003.

Investors remain worried that the financial contagion has spread around the world so far, so fast, that not even the mighty Fed can stop it.

In a speech to the National Association for Business Economics, Fed Chairman Ben Bernanke delivered a strong signal that interest rates may need to be cut. And he warned that the country could be stuck in the economic doldrums for some time.

"The outlook for economic growth has worsened," Bernanke said. "The heightened financial turmoil that we have experienced of late may well lengthen the period of weak economic performance."

The gloomy assessment appeared to open the door wider to an interest-rate cut on or before the Fed convenes again Oct. 28. The Fed's key interest rate now stands at 2 percent.

President Bush again sought to strike a reassuring tone and said the nation would make it through an economy blighted by job losses, record foreclosures and shriveled retirement savings. Congress' top budget analyst estimated yesterday that Americans' retirement plans have lost as much as $2 trillion in 15 months.

"Have faith, this economy is going to recover over time," Bush said in a speech in Virginia. "I wish I could snap my fingers and make what happened stop. But that's not the way it works."

Concerns are mounting that a global recession is developing, and pressure is growing on Washington to do something beyond the $700 billion financial-bailout package that Bush signed into law Friday.

To that end, the Fed announced it would begin buying companies' short-term debt - the first time it has used the Depression-era power outside the financial system.

The government's bailout package was aimed at thawing lending by buying bad mortgage-related debt off the books of troubled financial institutions. The idea is that the banks would then be in a better position to lend and get the economy moving.

Commercial-paper borrowing usually ranges from overnight to less than a week. But in the current climate of mistrust, the market has dried up considerably.

Credit markets, clenched up for weeks now, relaxed somewhat after the Fed's move.

World stock markets were mixed as banking stocks on both sides of the Atlantic took another pounding despite the Fed's announcement.

In Britain, the FTSE 100 index ended 0.4 percent higher at 4,726.20. The CAC-40 index in Paris was 0.6 percent higher at 3,732.22, but Germany's DAX was down 1.1 percent, at 5,326.63.

Britain was the focal point of those banking jitters with Royal Bank of Scotland Group PLC shedding around 40 percent of its value amid ongoing liquidity and solvency concerns and reports that the government might seek a stake in British banks to boost their balance sheets.

Confidence also has drained away in Iceland, which, according to the Prime Minister Geir H. Haarde, is facing the prospect of bankruptcy after its banks went on the acquisition trail across the continent, accumulating massive debts in the process.

The government's latest response was to nationalize its second-largest bank Landsbanki under day-old legislation and fixed its currency exchange rate.

Japan's benchmark Nikkei 225 index erased some of its early losses to close down 3 percent at 10,155.90 - still its lowest level in almost five years.

Efforts by the Russian government to prop up the country's troubled banking sector with fresh cash injections did little to lift the shattered stock markets a day after suffering their worst-ever day of trading.

Latin American stocks sank further yesterday on deepening fears of a global slowdown. *