Thursday, October 16, 2008; A01

Troubling new signs of a deep economic malaise touched off some of the worst stock market losses in history yesterday, a day after the government announced a massive intervention that officials hoped would boost investor confidence.

New data showed that consumers stayed away from malls, nixed plans for new cars and made do with old clothes in September, forcing the largest monthly decline in retail sales in three years. Federal Reserve Chairman Ben S. Bernanke added to the gloom, cautioning that the nation should not expect an economic rebound any time soon.

The Dow Jones industrial average fell 733.08, or 7.9 percent, its second-biggest point drop in history, while the Standard & Poor's 500-stock index, a broader measure, sank 90.17 points, or 9 percent, the most since the crash of 1987, infamously dubbed Black Monday.

The market declines came after the Treasury Department said it would spend at least $250 billion to take ownership stakes in financial firms and insure most forms of bank debt. Officials had hoped those measures would calm investors' nerves and heal the crippled financial system.

Bernanke said, "the turmoil in financial markets and the funding pressures on financial firms pose a significant threat to economic growth." His remarks appeared to signal that the central bank was open to lowering its benchmark interest rate, which it cut just last week to 1.5 percent.

The credit crisis has penetrated so deeply into the American psyche that consumers, whose spending is the most important component of economic activity, have become too scared to shop.

"The consumer has been hit over the head by so many two-by-fours that the consumer may end up going into a coma here," said Brian Bethune, chief U.S. financial economist for consulting firm Global Insight. "How do you bring them back?"

The rate banks charge each other for loans, a critical gauge of whether the government's proposal is working, has barely shown any improvement since the Treasury's new plan was unveiled. This rate, known as the London interbank offered rate, or Libor, remains higher than it was a week ago and about 61 percent higher than a month ago.

Joseph Stiglitz, a Nobel Prize-winning economics professor at Columbia University, said it was a "mystery" why Libor didn't drop after the government guaranteed lending between banks.

"Clearly, there still is some uncertainty . . . about the terms of the guarantee," said Stiglitz. "There could be uncertainty about the speed of collection. For someone in the market, that could be very worrying. We don't know how much of an injection is really required. There are a lot of unanswered questions."

Regulators pleaded for patience yesterday, saying it would take some time for the effects of the government's actions to work their way through the financial system.

"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 in a speech to the Economic Club of New York. "Economic activity will fall short of potential for a time."

Bernanke also raised concerns that the banking industry has become overly consolidated as big financial institutions have collapsed or been swallowed up by one another during the crisis. Now the nation may have a "too-big-to-fail problem," in which the collapse of any of the big banks could threaten the entire system.

Despite his grim outlook, Bernanke also attempted to inspire confidence in the government's response to the crisis.

"Americans can be confident that every resource is being brought to bear to address the current crisis," he said. "We now have the tools we need to respond."

After meeting with a group of small-business owners yesterday in Ada, Mich., President Bush also put a good face on the worsening crisis.

"I'm optimistic that we're going to come through it," Bush told reporters. "I'm realistic about how tough the situation is . . . and I believe when we come through it, we're going to be better than ever."

But several key reports pointed to serious trouble ahead for the economy. 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.

Meanwhile, economic activity weakened across every region of the country last month as businesses and consumers pulled back, the Fed said in its monthly state of the economy, known as the "beige book." Labor market conditions also deteriorated, though the Fed noted that inflation moderated in some areas.

The U.S. Commerce Department yesterday released data that underscored how broadly shoppers have pulled back. Retail sales in September -- which cover everything from sofas to sporting goods -- dropped 1.2 percent compared with the previous month. Auto dealers were the biggest drag, with their sales falling 4.2 percent, followed by sales at furniture and clothing stores.

"It is nearly impossible for companies to fully counteract a complete pullback in consumer spending," said Rosalind Wells, chief economist for the National Retail Federation, a trade group.

At the Regency Furniture store in Largo yesterday afternoon, the storeroom was empty but for two customers, Gerald Dyiches and his girlfriend, who were looking for a dining room set and sofa for their apartment. Outside the store, giant signs blared, "No Credit . . . No Problem" and "Instant Approval. Everyone Qualifies!"

"They have really good terms, but I'm going to look around some more," said Dyiches, manager of a local Outback Steakhouse.

William Cook, a retired shipping and receiving manager for Chevrolet, has already started scaling back his holiday shopping plans.

"I'm slowing down my spending, careful about my shopping, not buying clothes or prime ribs or lobster or steaks," said Cook, who has seen the price of his GM stock -- a significant part of his portfolio -- plummet nearly 80 percent in the past year.

The auto industry was particularly hard hit last month. Demand for new vehicles was drying up, and loans were more difficult to come by for those who were in the market. Compared with September 2007, sales at auto dealers were down 20 percent, the Commerce Department said.

The only two categories in the department's report that posted gains last month were gas stations and health and personal-care stores, and even they rose less than half a percentage point. For the third quarter, consumer spending is expected to decline for the first time in 17 years.

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. The average recession is about 10 months, he said.

"It's not going to be short and shallow," Roubini said. "The macro news from now on is going to be really awful."

Shares in many companies with ties to credit markets declined this week. Investors drove down the price of Domino's Pizza stock by 32.8 percent after the company disclosed Tuesday that Lehman Brothers had been the primary part of a $150 million credit facility the chain had lined up.

But Domino's chief executive David Brandon said that the pizza company had enough cash and that the credit facility was "untapped and unused."

"The materiality of that to my company is like a spit in the tea of life," Brandon said. "People are very spooked, and it's almost unnerving to me that the reflexes of the market are such that all we had to do is mention the word Lehman and our stock is being pounded as though we relied on them."

Staff writers Peter Whoriskey, Lori Montgomery, Steven Mufson, Binyamin Appelbaum, Heather Landy, Anita Huslin and Dan Eggen contributed to this report.