Finance and Economic

The financial crisis entered a potentially dangerous new phase Wednesday when many credit markets stopped working normally as investors around the world frantically moved their money into the safest investments, like Treasury bills.

As a result, the Dow Jones industrial average fell nearly 450 points, or more than 4 percent, compounding Monday’s loss of more than 500 points. The broader Standard & Poor’s 500 and Nasdaq indexes saw similar percentage losses.

The stocks of Wall Street firms like Goldman Sachs and Morgan Stanley that only a couple of weeks ago were considered relatively strong came under assault by waves of selling. The fear factor was so strong that investors snapped up three-month Treasury bills with virtually no yield and pushed gold to its biggest one-day gain in nearly 10 years.

The stunning flight to safety, away from other kinds of debt as well as stocks, could cause serious damage to an already weakened economy by making it more expensive for businesses to finance their day-to-day operations.

Some economists worry that a psychology of fear has gripped investors, not only in the United States but also in Europe and Asia. While investors’ decision to protect themselves may be perfectly rational, the crowd behavior could cause a downward spiral that has broader ramifications.

"It’s like having a fire in a cinema," said Hyun Song Shin, an economics professor at Princeton. "Everybody is rushing to the door. You are rushing to the door because everyone is rushing to the door. Clearly, as a collective action, it is a disaster."

Faltering confidence could have an infectious effect in Asia, whose savings have essentially bankrolled America for decades. "Asia, perhaps more than other markets, is a bit more volatile, a bit more based on sentiment," said Dan Parr, the head of Asia-Pacific for brandRapport, a marketing consulting agency with an office in Hong Kong. "It doesn’t take much for the man on the street to become very, very concerned." In early trading today, Japan’s major stock index fell 3 percent.

Despite government efforts to reassure investors over the last 10 days by rescuing some giant institutions — Fannie Mae, Freddie Mac and American International Group — many investors remain worried that the financial system has been badly battered and that more firms may fail as Lehman Brothers did.

The Federal Reserve has greatly expanded its lending to banks and securities firms this year and is continuing to relax rules that govern financial companies in hopes of alleviating the credit squeeze. Central banks around the world are also injecting more money into their economies and lowering reserve requirements for their own institutions out of concern that the problems in the U.S. financial system will inflict further damage.

If the problems in the financial system persist, businesses will have less money to put to work, job cuts will spread, and consumers, already fearful, will have less money to spend, knocking the economy down another notch. High borrowing costs will further weaken the housing market, which has yet to show signs of life cash advance in one hour. The Commerce Department reported Wednesday that housing starts fell to their lowest level since early 1991.

Flashes of fear were evident Wednesday as investors clamored for government debt. When investors bid up the price, the yield falls, and it sank on three-month Treasury bills to 0.061 percent, from 1.644 percent a week ago. The yield was the lowest in more than 50 years.

In the stock market, the S&P 500 stock index fell 4.71 percent, to 1,156.39, the lowest close in more than three years. Worries over financial investments hammered even the venerable Wall Street firms of Goldman Sachs, whose shares fell nearly 14 percent, to $114.50, and Morgan Stanley, whose shares dropped more than 24 percent, to $21.75, causing both firms to reconsider what their best strategies might be in such a fearful market.

The cost of borrowing shot up for corporations and banks. One key overnight lending rate was above 5 percent Wednesday, more than double its level a week earlier. GMAC, the auto finance company owned in part by General Motors, had to pay interest of 5.25 percent Wednesday for a form of short-term financing known as one-week commercial paper, up from 4 percent the previous day.

Businesses stung by the high cost and without ready access to bank loans will be forced to look for ways to trim their costs, an ominous turn in a slowing economy with the unemployment rate on the rise.

Local governments and other enterprises will feel pressure, too. The city of Chicago and Lincoln Center in New York postponed debt offerings because they would have to pay such high interest rates to investors, said Daniel Solender, director of municipal bond management at Lord Abbett & Co.

"This is throwing sands in the gears of the economy," said G. David MacEwen, chief investment officer for the bond department of American Century Investments. "The economy depends on credit to finance homes, automobiles, student loans and inventories."

Money market funds braced for possible fallout from the disclosure that one big fund’s net assets fell below $1 a share, because it had held securities issued by Lehman Brothers. It is so rare for money market funds to fall below that threshold that many investors consider them as safe as cash or a checking account.

Some mutual fund companies reported that customers were moving money from broader money market funds that have had higher yields to more conservative funds within the same company, said Peter Rizzo, a senior director of Standard & Poor’s, late Wednesday afternoon. The overall effect is to reduce the appetite for securities of companies with anything other than the most stellar reputations.

Governments around the world stepped up their efforts to ease the strain on the global financial system. The Bank of England extended a special bank lending program for another three months, while central banks in Japan and Australia injected more money into their banking system. Russia lowered reserve requirements to assist its banks.

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