Global rate cut does little to calm markets

"You’re actually starting to threaten legitimate companies in their daily business activities where they have no cash for payrolls," said Diane Swonk, chief economist at Mesirow Financial.

California and Massachusetts have warned that without federal help, they will soon run out of cash.

Until the credit crisis burst into the open in August 2007, the Fed largely confined its occasional market calming moves to setting short-term interest rates and lending money to banks through its "discount window" — a quaint reference to the days when bank tellers stood behind barred windows to dispense cash. In just the past few months, the Fed has converted that window to a warehouse loading dock, offering over $1 trillion in loans to just about anyone who wants one.

"We’re getting pretty close to them saying, 'We’re going to lend to everybody,' " said Swonk. "It is unprecedented."

Established in 1913 following the panic of 1907 — which was in many ways as calamitous as the stock market Crash of 1929 — the Fed was designed as a kind of financial fire brigade and given broad powers to deal with financial crises. The Federal Reserve Act provides the central bank’s governors — "in unusual and exigent circumstances" — the power to lend to "any individual, partnership or corporation" as long as certain conditions are met. The central bank is now using that authority to create tools that have never been used — or even existed.

"That 'exigent circumstances' covers just about anything you can conceive of," said David Resler, chief economist at Nomura Securities. "So the Fed has a great deal of latitude to create new ways of handling the crisis."

The Fed isn’t alone in developing new tools for a financial crisis that has so far defied measures that have worked in the past. Congress has authorized the Treasury to spend up to $700 billion to buy up bad debts from banks in an effort to free up more cash to lend. The government is also considering suspending rules that force banks to mark down the value of mortgage-backed assets that are currently almost impossible to value.

But those measures don’t attack the immediate problem — the day-to-day fear and lack of confidence among investors and lenders.

"The market's in a state of great confusion and fear," said Robert McTeer, a fellow at the National Center For Policy Analysis and former president of the Federal Reserve Bank of Dallas. "I just don't think what's going on in the markets makes much sense at all."

Fed watchers generally agree that even though the central bank’s actions — including Wednesday's rate cut — have so far fallen short, they’re all steps in the right direction.

"It can't hurt," said McTeer. "It probably will help. It probably has already helped. But you have to measure that against what would have happened had they not done it."

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