Investment Markets » Banking and Finance
Bernanke And Co To The Rescue
Central banks have acted en masse to sort out the credit crisis. Have they done enough?
Just in time for Christmas, the cavalry has arrived. A posse of five central banks has pledged to inject some £50bn into the world's money markets in hopes of thawing the frozen credit pipes before imminent economic slowdown turns into full-blown recession.
The significance of the package, hatched as an emergency contingency plan at the G20 meeting in November, cannot be overstated. It's a once-in-a-generation measure. Yet the first signs are that it has been only a partial success.
Stock markets tumbled on fears that it shows just how worried central banks are. But the critical measure is whether inter-bank lending rates (which have soared because panicked banks are hoarding cash) will fall. They're down, but not by much.
But this move may be seen as an invitation for banks to load up on cheap hooch. The message is that if inebriates are shivering and shaking, the best and quickest remedy is the reintroduction of Happy Hour. Yet it's no coincidence that the scheme's main mover, Fed chairman Ben Bernanke, is a professional student of the Great Depression. He knows what a terrible toll can be exacted when falling asset values and a weakened banking sector are left to stagger on unaided.
The moral hazard argument has its place, but there comes a point when democratic societies have to cast it aside. We have reached that point.
Will the cash injection work? It better had because the only alternative is interest rate cuts so deep that inflation becomes a cast-iron certainty. On the upside, it looks like central bankers have learnt from past mistakes: the cash is available on favourable terms, and the package is tailored to meet the specific needs of national markets.
Most importantly, by presenting it as an auction, central bankers have removed the stigma of applying for loans – hitherto seen as the financial equivalent of casting yourself as the little boy with "kick me" pinned to his short tail.
Yet markets are right to be worried. The package doesn't fix the fundamental reason people are unwilling to lend freely: fear of insolvency and a crippling lack of information about potential losses. It's reckoned the total hit will exceed $300bn; yet only $60bn has been accounted for.
Still, this is the authorities' best shot and surely worth a try. The hope is that a peaceful Christmas will help improve sentiments in January. But don't be fooled: it is only a hope.
Vericool Related Articles
- The Fall Of Lehman Brothers
- Who Should Pay For Equitable Life?
- Fannie and Freddie
- Chaos At Bradford & Bingley
- Knives Out At Mansion House
- Panic At Bradford & Bingley
All articles are free to reproduce on your website as long as you provide a link to the source of the article on the Vericool Finance website.