New-Stimulus Talk Helps Buoy Stocks

Part of the problem, said Smith, is that the Fed now pays interest rates on deposits. Banks now face two alternatives, he said: They can earn interest without risk by banking with the Fed, or they can earn a premium lending to other banks in a very risky environment.

"Once you establish that, there's no need for these banks to turn around and lend to each other when they're getting short-term interest from the Fed," said Smith.

Rates nonetheless remained elevated, causing wrinkles in other companies' plans. The Journal reported that General Motors (GM Quote) was having trouble getting funding for a purchase of fellow automaker Chrysler.

Testifying before the House Budget Committee in Washington, Fed chief Bernanke said that calming the financial markets would not immediately resolve all the problems faced by the broader economy. He said a second economic stimulus package may be necessary, but he warned Congress should plan it carefully.

Bernanke's sentiments about the economy were highlighted by headlines that indicated the pain was far from over for several big firms. Merrill Lynch (MER Quote). CEO John Thain said he foresaw job cuts numbering in the thousands for the brokerage, which is slated to be bought by Bank of America (BAC Quote)

Treasury Secretary Henry Paulson also made an appearance to discuss details of his agency's bank recapitalization program, saying that there is enough funding available for all qualified banks to take part. He also said that the capital infusion is ultimately unlikely to bring additional costs to taxpayers.