Bailout has yet to ease fears on Wall Street

WASHINGTON – Why isn't it working?

The Federal Reserve is pumping more than more than $800 billion in loans and investments into banks and corporations. In a move coordinated with other central banks around the world Wednesday, the Fed cut interest rates.

The Treasury has $700 billion to buy mortgage-backed securities, with the hope of rebuilding a market for these complex debt instruments. Treasury officials are still saddling up, but the fact that Congress approved the bailout and President Bush signed it has not restored confidence to stop the panic.

Stocks are still going down. More dangerously, banks are still refusing to lend to each other.

So why?

In part, economists say, because we still don't have a clear grasp of the extent of the problem. There are mortgage foreclosures still to come, credit card debts to charge off and many questions still unanswered about the value of the complex derivatives that came to underlie the financial system in the last decade.

Patience, counsels Liz Ann Sonders, chief investment strategist with Charles Schwab Corp. Things haven't calmed down in part because the financial crisis is still spreading.

"It's almost like, we're coming up with solutions, but while the global domino effect is still in its crescendo phase," Ms. Sonders said.

Some economists say a fundamental problem is that the financial community can't tell the difference between a company with a liquidity problem that's short a few bucks and one that's insolvent, or wiped out. Loans can handle the first problem. Capital obtained from selling all or part of the company is required to fix a solvency problem.

"When a bank gets in trouble, it seems like it's always a liquidity issue, but what drives the liquidity issue is the solvency concern: 'Am I going to get my money back?' " said finance professor Frank Anderson of the University of Texas at Dallas.

In this uncertainty, many older investors have panicked and are selling their stocks to try to save what they can of their retirement nest eggs.

"Millions of people relying on 401(k)s for their retirement, they are just freaking out now," said Bernard Weinstein, director of the Center for Economic Development and Research at the University of North Texas. "The brokers call it GMO – 'get me out!' "

Finance professor Dr. Anderson noted that the Dow Jones Industrials Average hit its all-time high of 14,164 points one year ago, and has since fallen more than 5,000 points.

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