The crisis: A timeline

A series of gloomy economic reports painted an unpleasant picture. Retail sales suffered their biggest drop in three years last month, as American households reined in spending amid a tough job market, the financial crisis and falling home values. And the Fed's latest survey of business conditions around the nation showed economic activity weakening.

A comment from San Francisco Federal Reserve President Janet Yellen late Tuesday, who said that the economy "appears to be in a recession," helped drive the point home.

Federal Reserve Chairman Ben Bernanke was less dour in a speech Wednesday, but warned that the U.S. economy will take some time to recover - even if the credit markets return to normal soon.

"I am not suggesting the way forward will be easy, but I strongly believe that we now have the tools we need to respond with the necessary force to these challenges," he said.

The markets were spooked, and the Dow Jones industrial average fell 733 points, its second worst single-day point loss ever, after having slid as much as 780 points earlier in the afternoon. The index closed at 8,577.91, down about 7.9%.

NEXT: Thurs., Oct. 16 - Stocks fight back