Stock markets plunged anew on Wednesday, nearly wiping out the record gains of Monday and sending another wave of wealth destruction washing over American households.
The government's rescue of banks has been widely embraced, but the frenzied selling underscored how the economy's troubles are too broad to be fixed by the bailout of the financial system. The Dow Jones industrial average plunged 733 points, the second-biggest point drop in history — topped only by a 778-point decline on Sept. 29.
Investors are recognizing that the financial crisis is not the fundamental problem. It has merely amplified economic ailments that are now intensifying: vanishing paychecks, falling home prices and diminished spending. And there is no relief in sight.
The United States has not endured a deep and prolonged recession in more than a quarter century, enough time for many Americans to forget what one feels like. But unlike the last two relatively short recessions, this one could be much longer and more severe, potentially bringing with it anxiety and job losses not seen in many years.
Wednesday's rout began in the morning with the latest evidence of the nation's economic deterioration — reports showing the biggest drop in retail sales in three years in September and broader signs of a pullback among American consumers.
Selling picked up momentum in the afternoon as the Federal Reserve's chairman, Ben Bernanke, cautioned Americans that the bailout would not swiftly lift the economy and that continued weakness was certain.
"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. "Economic activity will fall short of potential for a time."
By day's end, the Dow had surrendered most of Monday's 936-point gain, dropping 7.87 percent. The broader Standard & Poor's 500-stock index was down 9 percent, and the technology-heavy Nasdaq was down 8.47 percent. Asian stocks followed suit today, with Tokyo's market plunging more than 10 percent.
Signs of improvement continued in the credit markets, making it somewhat easier for companies and states to secure financing, but interest rates remained elevated. Three of the nation's largest banks reported that consumers are having increasing difficulty paying off their credit card debt and more are going into default.
Bernanke's remarks — offered in the sober tones of a man cognizant that a stray syllable may prompt the annihilation of fresh billions on Wall Street — heightened the reality that the economy's troubles go well beyond the financial crisis. The United States and many other major economies are almost certainly headed into an unpleasant slog through economic purgatory.
"People have focused so much on the immediate financial crisis that they haven't realized how much the real economy is going down, largely independently," said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. "I don't think there's a way we can get out of this without a full-fledged recession and a lot of people losing their jobs."
New York University economics professor Nouriel Roubini, who had long been predicting a housing downturn that would trigger a recession, said he expected an economic slowdown to last 18 to 24 months. "It's not going to be short and shallow. The macro news from now on is going to be really awful."
On Monday, as the Dow posted its fifth-largest one-day percentage gain in history, some investors found quantifiable proof that the crisis was solved. Yet an unpalatable historical detail complicated that takeaway: The four previous largest percentage gains occurred from October 1929 to March 1933, in the early days of the Depression.
Then, the markets swung far more widely than they do in this era, and an epic collapse would still be required to bring the United States anywhere near another Depression. Bernanke, a leading academic expert on the Depression, offered assurances that no repeat of that disaster would unfold on his watch.
The Fed stands ready to use all the tools in its kit to battle the crisis, he said. He exuded confidence that the U.S. economy "will emerge from this period with renewed vigor."
But when? Bernanke could not say. That uncertainty added to the worry gripping the economy.
"Ultimately, the trajectory of economic activity beyond the next few quarters will depend greatly on the extent to which financial and credit markets return to more normal functioning," he said.
Bernanke expressed concern about how huge amounts of capital are increasingly concentrated in a handful of enormous financial institutions.
"The real concern that we have is that we have got and developed, in this country, a very serious 'too big to fail' problem," Bernanke said. "And that problem, we've just recognized now in the current situation, how severe it is."
It seemed a curious worry from a man whose central bank has worked with the Treasury to engineer shotgun weddings, such as Bank of America's purchase of Merrill Lynch and JPMorgan Chase's acquisition of Bear Stearns — deals that have further concentrated money in fewer hands.
Bernanke's prognosis and the latest carnage on Wall Street lent urgency to the debate over what the government should do now to soften the blow to the economy.
In Washington, and on the campaign trail, conversation centers on putting together a second round of so-called government stimulus spending, following the $152-billion unleashed this year.
Democrats in the House are crafting a roughly $150-billion package of spending measures aimed at spurring the economy, according to senior aides, including aid for cash-strapped states, large-scale construction projects to generate jobs and the expansion of unemployment benefits.
Republicans on Capitol Hill have emphasized tax cuts for businesses in any stimulus package, a stance that puts them at odds with Democrats, though recent signs suggest greater potential for a compromise.
"We need fiscal stimulus," said Douglas Elmendorf, a former Treasury and Fed economist now at the Brookings Institution. "The outlook is much darker than it was even a few months ago."
Information from the New York Times, Washington Post and Associated Press was used in this report.