WASHINGTON — With financial markets in near-meltdown on Monday, governments around the world scrambled to find new ways to infuse vast amounts of cash into banks and even directly to companies to help resuscitate the global financial system.
The Federal Reserve was weighing a plan Monday night that would in effect make it a major funder of a wide range of U.S. businesses facing imminent cash shortages. The Fed also said Monday that it would push $900-billion into the U.S. banking system, a sixfold increase in its program of lending money to banks.
Just three days after the $700-billion U.S. financial bailout was approved, it looked like a pebble tossed into a churning sea. The Dow swung wildly, dipping 800 points at one point and down 369.88 at closing, below 10,000 for the first time since 2004. The bailout plan seems to have done little to reassure investors, particularly in Europe. Global stock markets plunged as the banking crisis spread and investors feared dire consequences for the world economy.
"People are realizing that the Paulson plan is not going to be nearly enough. It's not because the plan is ill-conceived. It looks like it's the right thing to do, but the problem is just growing astronomically," said Martin Evans, a professor of economics at Georgetown University.
Robert Zoellick, president of the World Bank, said the global financial system may have reached a "tipping point" — the moment when a crisis cascades into a full-blown meltdown and becomes extremely difficult for governments to contain.
The mushrooming problems "will trigger business failures and possibly banking emergencies," he said, threatening to reverse years of prosperity that financed economic growth in developed and emerging countries through a global system that made credit widely available.
Even before bankers on Wall Street reached their desks on Monday, European stocks were plunging. Volatility reached the highest level in two decades, and oil prices fell below $90 for the first time since February.
The ripple effects from Europe and the United States were amplified as they spread to stock markets in Russia, Brazil, Indonesia and the Middle East. These countries had little to do with the subprime crisis but were vulnerable to a sudden halt in the flow of money.
"Global economic malaise" is setting in, said Sean Snaith, a University of Central Florida economist. He predicted tourism in Florida would suffer as the dollar gets stronger, and U.S. vacations and spending sprees stop feeling so cheap to European and Canadian travelers.
Under the radical 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.
The central bank would come closer than ever to lending directly to businesses, a potential move that underscores the growing sense of urgency in a climate where lending has virtually dried up.
Investors are worried about what that evaporation of credit will do to an already weakened global economy, and the Fed plan is intended to renew the flow. The central bank would buy unsecured commercial paper, short-term IOUs 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. The volume of such debt totaled about $1.6-trillion as of Oct. 1, down 11 percent from three weeks earlier.
A healthy world economy relies on the easy flow of such short-term loans among banks, businesses and consumers, a stream that has been choked as banks become more fearful of giving out cash.
Buying commercial paper through the new entity would increase risks for the Treasury, and ultimately taxpayers, while potentially relieving companies of the downside risk of bad behavior, financial experts said.