In the last two weeks, fear also has gripped other parts of the credit markets.
Money market mutual funds, for example, normally buy short-term IOUs of companies, financial institutions and municipalities. But the $3.3-trillion money fund business has been upended since Sept. 16, when one of the oldest money funds revealed that it had lost 3% of its principal value because of losses on Lehman Bros. IOUs it held.
That marked only the second time in 38 years that a money fund had suffered a loss. The news triggered record outflows from the sector as nervous investors pulled their cash, which in turn drove many fund managers in recent days to stop buying corporate debt and instead load up on super-safe short-term U.S. Treasury bills.
Other big investors, spooked by what they see happening in the banking system, are shunning long-term bonds in favor of hoarding cash. That has stymied states and cities that need to borrow in the bond market to fund public works projects.
If the state of California were to try to issue a 20-year bond now, it would have to pay an annualized interest rate of about 5.4%, up from 4.84% just two weeks ago.
Of course, many consumers had already been facing tighter restrictions on credit.
Bert Boeckmann, who owns Galpin Motors in North Hills, said the credit crunch had made it tougher for all but "prime" borrowers to get car loans.
As for mortgages, Wells Fargo & Co. this week was charging 9.25% for "jumbo" 30-year loans -- those larger than about $730,000.
With the credit markets in a deep freeze, all eyes have turned to Washington and the bank bailout plan.
As proposed by the Bush administration, the Treasury would swap cash for up to $700 billion of banks' troubled loans.
The assumption is that, by relieving the banks of a large chunk of bad assets -- and removing the possibility that the banks would suffer more losses on those loans -- the program would damp fears about the financial system and encourage banks to lend again, breaking the credit market logjam.
Many experts say that with the bailout already so anticipated, it would be a psychological blow to markets if Congress balks.
Particularly for foreign nations that provide much of the funding for the U.S. economy, the program "will show that the government is doing something" about the credit crisis, said Loomis Sayles' Fuss.
But he and others say the only real solution for the nation's financial woes is time -- time for banks to rebuild their finances, for housing prices to bottom and for investors to regain confidence.
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tom.petruno@latimes.com
walter.hamilton@latimes.com
Times staff writer Peter Y. Hong contributed to this report.
