Oh, Ben. 

Stocks tumbled again even though the Federal Reserve pulled out a new tool and promised an old one. Ben Bernanke, the chairman of the Federal Reserve, gave the strongest hint yet that an interest rate was imminent, while the Fed moved to shore up the commercial paper market.

But the Dow Jones industrial average slid more than 500 points, and the S&P 500 fell below 1,000 to its lowest close in five years. The market reaction underscores that many investors believe that central banks and governments are running out of ammunition to fight the global financial crisis. 

Fears over the health of many large banks dominated trading today. Shares of Bank of America tumbled after the bank announced late Monday its plans to cut its dividend in half. It also plans to raise $10 billion in capital through a stock offering. Shares of rival Citigroup fell nearly 13 percent. Morgan Stanley shares plummeted nearly 25 percent amid rumors, denied by the firm, that its deal with Mitsubishi UFJ was in trouble. Since a year ago, financial stocks have slid 55.2 percent,  losing $1.48 trillion, Standard & Poor's estimates.

In a speech in Washington, Ben Bernanke, the chairman of the Federal Reserve signaled that a cut in interest rates is in the offing. 

"The heightened financial turmoil that we have experienced of late may well lengthen the period of weak economic performance and further increase the risks to growth," Bernanke said. "To support growth and reduce the downside risks, continued efforts to stabilize the financial markets are essential. The Federal Reserve will continue to use the tools at its disposal to improve market functioning and liquidity."

His comments came after the Fed announced a plan to provide a "liquidity backstop to U.S. issuers of commercial paper." It will do so through a special-purpose vehicle that will buy commercial paper, short-term debt that many companies use to finance their day-to-day operation

The plan buoyed the market in early trading. But stocks resumed their slide after the Fed chairman's speech. At 1:30 p.m., the Dow was down more than 230 points.

The Fed said that the commercial-paper market "has been under considerable strain in recent weeks." The stresses in that market have been cited as evidence that the credit crunch is spilling beyond Wall Street and hindering nonfinancial companies and businesses.

"The Treasury believes this facility is necessary to prevent substantial disruptions to the financial markets and the economy and will make a special deposit at the Federal Reserve Bank of New York in support of this facility," the Fed said. It did not indicate how much commercial paper it might buy.

Yves Smith on Naked Capitalism is skeptical that this would be effective. "Once the Fed steps in as a major player (major is required to have any impact), how does the Fed wean the market of its support?" she asks.

"Warm up the helicopters, and welcome to central planning."

On Monday, markets around the world plunged. The Dow Jones industrial average fell as much as 800 points before trimming its losses to a decline of 369.88 points. The plan buoyed the market in early trading. But stocks resumed their slide after the Fed chairman's speech. At 1:30 p.m., the Dow was down more than 230 points.

Also today, the Federal Reserve Bank of New York held a meeting with banks and institutional investors about setting up an exchange or clearinghouse for credit-default swaps.

The idea would be to give greater transparency and oversight to the $55 trillion market, whose opaqueness and complexity have been a fertile breeding ground for fears.

And the Fed is now widely expected to cut its benchmark interest rates, now at 2 percent, by a half point, possibly in conjunction with rate cuts by the European Central Bank, the Bank of England, and other central banks.

Markets were buoyed a bit today by a surprise move by Australia to cut its benchmark interest rate by a full percentage point. But other than India's, no other major central bank followed.

The stresses in the global financial system were evident today. Iceland nationalized its second-largest bank and said it was in talks with Russia (Russia!) over a $5.4 billion loan.

The British government is in talks with three of the country's largest banks—Royal Bank of Scotland, Lloyds TSB, and Barclays, fresh off its purchase of Lehman Brothers' U.S. operations—over a possible public investment of $79 billion, Bloomberg News reports.