Dow Drops 370 Points

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As traders pondered details of the U.S. bailout plan enacted Friday, they also eyed reports that European banks were considering guaranteeing bank deposits but Germany, France, Britain, and Italy decided against a coordinated bank bailout, while vowing to stabilize markets.

European stocks plunged as the banking crisis widened. In London, the FTSE 100 index fell 6.88% to 4,637.53. In Paris, the CAC 40 index dropped 8.25% to 3,744.06. Germany's DAX index sank 6.87% to 5,398.72.

Asian markets also finished sharply lower. Japan's Nikkei 225 index fell 4.25% to 10,473.09. In Hong Kong, the Hang Seng index slumped 4.97% to 16,803.76.

Back in the U.S., Chicago Fed President Donald Evans, speaking at the National Association for Business Economics annual meeting in Washington, said the U.S. economy faces difficult challenges, and weak growth will probably linger into 2009. Evans said core inflation, at 2.6%, was "too high" and that even as commodity prices fall far off their peak there was still a chance high inflation expectations could become embedded in price- and wage-setting behavior. Evans said real economy activity would stay sluggish into the new year and that the level of uncertainty about the timing of a pickup in growth, which will depend on improvements in the financial and credit markets, "is very high."

The Fed is doing everything it can to ease the freezing up of the credit markets, said Dallas Fed president Richard Fisher in a Q&A session after his speech before the NABE. Fisher said that the capital markets are operating in "semi-panic, if not outright panic mode" right now.

NABE members sharply lowered their expectations on near-term economic growth, with a stall expected in the fourth quarter, according to the National Association of Business Economics October outlook. The more negative economic outlook stems from the tightness in credit markets and weakness in consumer spending.

Federal Reserve Chairman Ben Bernanke is scheduled to speak at the NABE meeting on Tuesday.

The Fed faces increasing market pessimism about the outlook for the economy. Goldman Sachs economist Jan Hatzius wrote in a note Monday that "with the boost from fiscal stimulus gone and the impact of tighter credit conditions working its way into the real economy, U.S. economic activity has decelerated sharply in recent weeks." Hatzius adds that the intense distress in financial markets -- which seems unlikely to dissipate quickly -- "further darkens the outlook."

As a result, Goldman marked down its forecasts for growth and interest rates substantially. "The recession that we have been forecasting now looks likely to be deeper and longer, taking the unemployment rate to 8% by late 2009 and pushing the Fed to cut interest rates to 1% or lower."