On the opening of New York trading, central banks from 6major countries cut interest rates by 50 basis points, withJapan and Norway not participating.

Here are the banks and the rates:

• U.S. Federal Reserve cut the Fed Funds rate from 2.0% to1.5% and the discount rate to 1.75% from 2.25%
• The European Central Bank cut overnight rates from 4.25%to 3.75%
• The Swiss National Bank cut overnight target to Liborfrom 2.5%-3.5% to 2.0%-3.0%
• The Bank of England cut overnight rates from 5.0% to4.5%
• The Bank of Canada cut overnight rates from 3.0% to2.5%
• The Swedish Riksbank cut overnight rates from 4.75% to4.25%
• The Peoples Bank of China cut rates 27 basis points on 1year depo rates and dropped reserve requirements to 17% from17.5%.

Here are the key lines from the Fed's statement:

"Incoming economic data suggest that the pace of economicactivity has slowed markedly in recent months. Moreover, theintensification of financial market turmoil is likely toexert additional restraint on spending, partly by furtherreducing the ability of households and businesses to obtaincredit. Inflation has been high, but the Committee believesthat the decline in energy and other commodity prices and theweaker prospects for economic activity have reduced theupside risks to inflation."

This is another piece of the puzzle to stabilize thefinancial markets. I believe these central banks acted inconcert to address the continued deterioration in lending andthe further tightening of credit.

Prior to the announcement, there was massive deleveragingout of yen carry with one cross down 17.5% in 48 hours. Priorto the announcement, the Nikkei was down 9.38% today. Prior tothe announcement, 3 month Libor to OIS spreads were 10-20points higher from yesterday. Prior to the announcement, theTED spread was at a new high of 391.5.

This meant that there was no current, positive movement oncredit from either the announced passing of the TARP programnor the Fed agreeing to buy commercial paper.Thus, action was required to stem the tide until theseplans get up and running and making an impact.

The markets are in the process of significantly downshiftingtheir outlook on economic growth and earnings. From Alcoa toSAP, companies are warning that the future is bleak due to thelack of credit and therefore dramatically reduced vendorfinancing. Economists are forecasting U.S. GDP to drop in Q4,Q1, and maybe be flat for Q2. Unemployment is expected to soarfrom 6.1% to as high as 8.0% by the end of 2009.

This adjustment is all occurring now and the markets havebeen simply brutal. I expect the direction we've taken over thelast weeks to remain intense until the end of October and intoNovember, as the frozen credit markets' negative impact show upin the economic data released in this time frame. My view isthat the volatility and uncertainty are far from over and willpersist well into Q4.At the minimum, we'll need a month of CP and TARP[troubled asset relief program] buying and lower rates toarrest the fall.

As I suggested, TARP was only the beginning. Additionalmeasures could be direct investments into U.S. banks torecapitalize them and expansion of assistance programs toconsumers. Think 1930s-style programs and you'll be closer towhat is possible. A new U.S. Presidentialadministration/Congress will be very active to expand thesetype of plans.All will help, all will take time.

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The Fed and Central Banks around the world cut interest rates. Beyond the symbolic, the practical effect is that borrowing costs go down and can be lent at higher rates so the "yield curve" is steeper and that could improve bank profitability. This is another in the string of actions taken by the Fed to improve liquidity.

Yesterday's move to buy commercial paper directly is designed to thaw the credit markets. Ordinarily, about 40% of commercial paper is 1-4 days in maturity. It is now almost 80% and that is no way to finance a business. The Fed's offer covers most issuers and is up to 90 days in maturity which helps a business plan its finances.

Yesterdays auction conducted under the Term Auction Facility -TAF- saw $139 billion of the $150 billion offered subscribed for. This is the first time the auction was undersubscribed. It was the largest auction- they started at $40 billion originally- and it can be seen as a sign as to how much money the system needs. This facility goes to $900 billion by the end of the year and if one weeks auction is indicative, the $900 might be more than enough.

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Barney Frank and Ben Bernanke have both indicated that the rescue plan agreed to by Congress--the Troubled Asset Relief Plan or TARP--can be used to make direct investments into financial institutions. In addition to buying the troubled loans, this might be the best action to reliquify the banking system. The other move left would be for the Fed to guarantee interbank transactions. These might be necessary steps to end the crisis.

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The first thing that you need to know is that bank panics are inherently deflationary. They were in 1879; they were in 1837 and they were in 1929. Even if there is plenty of money on the national balance sheet, you get deflation when money gets hoarded.

Taking the money out of active circulation has the same effect as shrinking the money supply. This means that the central bank must aggressively add money to the system in times of panic.

It also means that it must aggressively take money out of the system in times of recovery. Under normal monetary policy it takes a long time for new money to work its way from the ‘printing press’ to final consumer purchases. But panics are different, since they deal with the circulation of money that is already out there in the economy, panics can cause very sudden deflation, and recoveries can cause very sudden inflation. The fed needs to be agile in order to deal with this.

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The Fed has not been particularly agile. Today’s rate cut was late and small. Really, the cut was not actually a cut at all. Bernanke had already been pumping enough money into the system to lower the rate at least to 1.5%. What changed today is that it was made official. We didn’t get more money today – we got an announcement of what had already been happening. Will it be enough? No.

It does show the markets however, that the Fed has the direction right. That’s a big step which may help markets in the short run. But like so many other Bernanke moves will there be a follow-up on the promising start? Don’t count on it.

What are other CNBC.com guest commentators saying?

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There seems more to cover than is possible. In "The Call" today we gave a mighty effort to touch all bases, however. The big deal is the Fed's move to buy commercial paper. This was a necessary move as the total CP outstanding had fallen by over $200 billion in the last three weeks.

The market was freezing and needed to be defrosted. Additionally, the government is allowing US based multinationals to borrow without tax consequences some of the several hundred billion they hold offshore. This money represents profits on foreign sales held externally to avoid paying the US tax. An "in-house" CP facility is essentially being set up and that will take some of the strain off the general market.

There was some discussion was on whether this is a bottom or not. Trying to call that is a non-starter, but I tried to look at valuation with Trish and Melissa. The earnings season starts after the close today with Alcoa's announcement. The consensus of strategists for earnings for the S&P for next year is $96. I think that is way too high. Taking a drastic cut in line with earnings declines from prior periods of economic stress in mind you can come up with $77. That is about as low an estimate as I have seen. If earnings were to fall that much (it would be a 17% decline from the annualized peak of $91.50 hit in Q2 2007) I would guess that inflation would not be a problem.

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The "Rule of Twenty", which is not a rule but an observation, holds that the market multiple and the inflation rate add up to 20. If inflation were to head to say 3 or 4% then a multiple of 15-16 would be justified. Let's slash that as well and use 13 times. That would give us a downside of about 1,000 on the S&P against its current price of 1029. I do not mean 1,000 as a target, but rather as a directional signal. It seems to me the market is in a bottoming process.

When terror strikes, all the analysis in the world goes out the window. But if we believe that Bernanke's study of the Great Depression offers him insight as to what to do now against what wasn't done then, it is possible we will get through this and valuation tools will be helpful.

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Results of the Federal Reserve's weekly opening of its Term Auction Facility, the facility the Fed created last December to auction loans to depository institutions, were intriguing, indicating that for the first time since the facility was created fewer dollars were taken by banks than the Fed was offering.

Today's results were for yesterday's auction of $150 billion in loans. The results show that the bid/cover ratio was below 1.0 for the first time, at 0.92. Mind you, the amount of money taken, $138.09 billion, was the most ever, chiefly because the offering was the most ever (the previous largest offering was $75 billion), but what is new here is the idea that the Fed has finally arrived at a number by which we can judge just how much money banks need. This discovery process is something that has been ongoing for quite some time but will now speed up and be made clearer. (Crescenzi and Jim Bianco argue for the Fed to cut rates in the video)

The rebound from the absolute depths of despair in the stockmarket was related to a rumor/FT article/CNBC reporting thatthe US Federal Reserve is considering a plan for the commercialpaper market.

The FT reported yesterday that the Fed is working with theUS Treasury on plans for a dramatic move into unsecured lendingin the hope that this extreme step could help bring creditmarkets back to life. "As well as unsecured lending to banks,this could lead to the Fed directly purchasing commercial paperor funding a special purpose vehicle set up to do this."

This new foray is a great example of what I wrote about lastweek when I said there would be more programs coming to addressthe frozen credit markets. Why if the Fed considering this? Inthe money markets now, there is no trust to lend money toanything but Treasuries and overnight only as this is thesafest and shortest arrangement for money. Banks are completelyoverloaded with money, but no lending is occurring except inthis structure. To show how insane this is, money is beingplaced for zero percent. Again, it's not return on money, butreturn of money.

Program Note: Andy Busch will appear today onCNBC'sStreetSigns .

So in the playbook of what to do during a crisis, we haveseen dramatic easing of interest rates, dramatic flooding ofliquidity, and a government program to buy securities.....andwe're still in lock down of lending. As an example of thecoming economic downturn generated from the crisis, SAP'swarned yesterday that 3rd quarter revenue would be much lowerthan expected and blamed the global financial turmoil for asudden drop in customer orders in September. The reason this isso disturbing is that normally businesses are reluctant to cutIT spending in a downturn as this investment usually leads toproductivity gains.

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How do we get out of this spot? Here is where somecreativity is needed. (Thank Ja for liberal arts majors!) Theabove mentioned move into CP is interesting and I would suggestlooking at guaranteeing corporate paper rated investment gradeout to 3 years to break the logjam at this point. Also, aclearing house for CP wouldn't be a bad idea like the FICC foragency and US Treasury debt.

This would provide assurance that banks/investors would beable to lend past overnight and have confidence they could gettheir money back. It's all about length of term and re-startinga critical component of funding for corporations. This willallow them to provide vender financing to generate orders fortheir products. BTW, this also allows farmers to borrow to buyfertilizer to plant crops.

As if on cue, the Fed announces they have created acommercial paper funding facility to provide liquidity to termfunding markets and to provide a backstop to US issuers of CPthrough a "special purpose vehicle". This has sent stocks andYen carry soaring. It's a good start.....let's see if itholds.

The credit crisis has now moved well beyond lack ofliquidity to an extreme lack of confidence in the structure ofthe financial markets. Longer term, I believe this structurewill devolve back to the 1980s where plain vanilla balancesheet lending based off of deposits is the core paradigm. Thiswould explain the competition and fight over Wachovia and theirdeposits.

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Our market participants need to understand this today. This is Market Psychiatry 101. People will sell in panic and in a week or less will be overtaken with regret. Also, those who are trying to pick a bottom will be hurt. The point is that the markets are constructed in such a way as to separate the most money from the most people. They are constructed to inflict the most pain on the most people. Every successful trader and investor knows this. This is why so many fail (over 90% of new traders blow out their accounts in the first year!). This is, in large part due to their inability to understand the psychology of the markets which is no more than their own psychology.

Please review the Investor Sentiment Cycle that we have discussed so many times.

We are nearing levels 10 and 11 in the diagram below. The market is behaving like a crybaby who is now asking for a Fed rate cut ( despite the fact that it will do little to help this crisis since there already has been a stealth cut … but that is for another day).

We are heading into a full blown recession now and I cannot imagine that it will be "short and sweet" as the last two were. As Rome burned last week and Nero (aka Congress) fiddled away, Main Street got the picture and started a boycott, not out of spite or anger but out of fear. Parking places were suddenly easy to find on Main Street because the shops were empty. Talking to people who have their life savings invested in stocks, bonds and cash, one can palpably sense their fear. I cannot remember a situation like this in the forty years I have been in the investment business.

Even high school children are talking about the adversities that surround us. They are listening to their parents and they are hearing about jobs lost and savings wiped out and homes foreclosed and they are getting the picture.

The banking system, only so recently the willing source of more money than one should ever have needed or wanted, has suddenly and completely clammed up, cutting off funding and reneging on agreed upon lines of credit. Just listen to the stories of small business owners trying to finance inventories and homeowners counting on a line of credit to pay for their children’s college tuition. Just read the newspapers and listen to call in radio shows. It’s not just sad – it’s downright scary.

The passage of TARP last Friday was essential, but it is far from a panacea much less an instant solution. The loss of confidence that has gripped the banking industry will take a serious toll on businesses and consumers and those business and people are the economy. Unless the banks are willing to step up to the plate and make loans to healthy business and worthy individuals, they will only add to an already dreadful situation. Right now the banks are hording their cash because they have no confidence in the value of the assets backing their existing loans.

This problem is not just a US problem. The contagion has spread worldwide – Europe is no better off than the US and Russia’s capital system appears to have completely shut down. The spillover impact will hit India and China, whose economies will absorb the slowdown in demand from Europe and America.

How long this state of affairs will last is a function of how long it takes the world to deleverage. And deleveraging is a deflationary event. That is not good for economies, for profits, for the prices of assets and that includes the price of one’s home. The stock market does not work well in a deflationary environment. The only thing that looks good in deflation is cash. And right now cash is looking pretty good to me.

What other CNBC Contributors are Saying ...

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Patricia W. Chadwick has had more than 35 years of investment experience. She is the founder and president of Ravengate Partners LLC, a consulting firm that provides advice on financial markets and global economics.

The take over of Fortis was complicated by the Dutchnationalizing their portion of the bank. This left Belgium andLuxembourg officials to take the remaining pieces and sell itto French bank BNP.

This is precisely why investors have become nervous over thecapabilities of European officials to deal with the creditcrunch in a coordinated, EU wide manner. Each action appears tobe country centric with no over-arching solution like in theUnited States. However, they do play follow-the-leader wellafter Ireland guaranteed all bank liabilities last week,Germany guaranteed all of its consumer bank deposits withSweden, Norway, Austria and Denmark engaging in similaractions.

However, the meeting over the weekend by European financeofficials did result in one major change. "The European Unionintends to make exchange rates a permanent part of the agendaof its regular summit meetings with other countries, theFinancial Times Deutschland reported Sunday.

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According to MNI, the paper cited an EU declaration entitled"A coordinated response to the economic downturn" that it saidEuropean finance ministers would ratify at their meeting onTuesday in Luxembourg. "The finance ministers are above alladdressing Europe's view that currencies like China's yuan areundervalued vis-a-vis the euro, the FTD reported." To me, thismeans Europe is now going to aggressively pursue a weakcurrency policy to help stimulate their economy.

With the turmoil in Europe, the change in the EU financeministers targeting the euro, and exiting of yen carry, the USdollar has become king. If it's even needed, this will provideadditional comfort for the Federal Reserve to remain aggressivein supplying liquidity to help ease the credit crunch.

These are dark times for the equity markets and the globaleconomy. The majority of new economic projections are negativeand are calling for prolonged recessions with growth notreturning until late 2009. The safe havens appear to be the USdollar and the Japanese yen.

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The Association of Financial Professionals (AFP) hasreleased a report detailing how finance executives have takendefensive measures to deal with the credit crunch. (AFP is amembership organization that serves more than 16k corporatetreasury and finance executives.)

From the AFP Short-Term Credit Access Survey, these actionsinclude reducing capital spending, freezing hiring, consideringlayoffs, and delaying payments to their suppliers. "Fortypercent of finance executives report that their organizationshave less access to short-term credit than they did one monthago, with 16 percent reporting significantly less or no accessto short-term credit. As a result, 62 percent of financeexecutives report that their organizations have already takendefensive actions. These organizations have:

• Moved all or most of short-term investments tobank deposits and U.S. Treasuries (41 percent);
• Reduced capital spending (37 percent);
• Shortened the duration of their investment portfolios(29 percent);
• Frozen or reduced hiring (26 percent);
• Drawn on existing credit facilities to build cash (26percent); and,
• Considered staff reductions or layoffs (22percent).

These actions could increase should the credit access notimprove by year end. Federal Reserve data shows that the U.S.commercial paper market contracted for the 3rd week in a rowand has dropped 11.5%. Along with other conduits of short-termborrowing, the commercial paper market is freezing up withcompanies and banks unable to access borrowing. I would cautionanyone who thinks that the credit crisis is only impacting themarginal borrowers or those with marginal credit. Clearly,these two reports illustrate the stressed nature of creditmarkets and a bleak future for the economy should credit notimprove.

This plan is just the start of government programs that willbe brought up and voted on in Congress until something works.If we go back to the Great Depression, FDR tried everythinglegal and not legal to get the gears of the economy movingagain. It re-wrote the rules for the economy and for governmentintervention.

In his proposals, FDR went far beyond what was permissibleby the constitution and the US Supreme Court struck many of hisproposals. It got was so contentious that FDR tried to changethe size of the court and pack it with his cronies. This is myassessment for the future especially if we have a Democraticpresident and a Democratic Congress. We should expect moreaggressive programs if we see no response shortly from theeconomy.

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