Central banks slashing rates as investors flee

By ANTHONY FAIOLA & NEIL IRWIN

MSNBC

Central banks around the world are moving to further slash interest rates as they seek to contain the damage from the bursting of the biggest credit bubble in history.

The Federal Reserve is poised to cut its benchmark rate for the second time in two weeks at a pivotal meeting in Washington on Wednesday, and the European Central Bank yesterday suggested that it would do the same next week. South Korea announced a dramatic rate cut yesterday, by three-fourths of a percentage point.

Governments worldwide have already approved massive bailouts and stimulus packages to halt financial meltdowns. But the trouble spots in the United States and abroad continue to multiply. Yesterday, there were growing signs that the U.S. Treasury Department was close to extending its $700 billion rescue program to cover the ailing auto industry.

Analysts said governments are trying to manage what has become the biggest threat to the global financial system -- a massive pullout by panicked investors from any holding they see as remotely risky. From consumers to multibillion-dollar hedge funds, investors are cashing out to cover losses or guard against further damage by moving into safe havens such as U.S. Treasurys.

Rate cuts, however, are not packing their usual punch. Normally, when central banks cut rates, it becomes cheaper for businesses and consumers to borrow money. But now, with banks and other financial institutions experiencing a severe crisis, lenders have been reluctant to extend credit at any price.

The pullback by investors, known as deleveraging, is extending massive losses on global stock markets; the Hong Kong stock market on Monday had its biggest one-day percentage drop since 1989, and Tokyo's Nikkei fell to its lowest level in 26 years. Check for details...