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Central banks step in to attack credit crisis

The world's central banks on Wednesday unleashed a co-ordinated assault on the liquidity squeeze in global capital markets.

The Federal Reserve, European Central Bank, Bank of England, Bank of Canada, and the Swiss National Bank all announced measures to attack the liquidity crisis.

The Fed said it was creating a temporary credit auction facility, as revealed in today's FT, and entering into foreign exchange swap agreements with the ECB and the Swiss to tackle the shortage of dollar funds in Europe.

The move comes after several weeks of mounting tension in the global money markets, due to a combination of normal, year-end funding pressures and deepening gloom among banks about the impact of the losses on subprime-linked securities.

Until recently, some bankers had hoped that these money market pressures would be short-lived. However, in recent days some of the money market indicators have started to move in ways that suggest banks are now worried that funding problems will last into the New Year, or even the summer. This appears to have prompted the central banks to launch their joint action - a step which is unprecedented in terms of the degree of co-ordination that it implies between the leading central banks.

Panic, desperation, or something else again?

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Dec 12th, 2007 at 09:41:44 AM EST
Reuters: Euribor money market rates fix at near 7-year high (December 4, 2007)
Benchmark interbank lending rates in the euro zone rose to near seven-year highs on Tuesday, showing strong demand for liquidity early next year as well as around year-end.

Two-month Euribor an average of daily quotes offered by banks to lend money to each other, rose to 4.856 percent, from 4.840 percent on Monday, the highest since the end of December 2000.

Three-month funding fixed at 4.858 percent from 4.839 percent, also the highest since late 2000, and one-month Euribor fixed at 4.848 percent, from 4.834 percent on Monday, the highest since April 2001.

Still, with inflation slightly above 2%, inflation expectations below 3%, and the ECB base rate at 4%, things are not that bad for the Eurozone, are they?

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Wed Dec 12th, 2007 at 09:50:48 AM EST
[ Parent ]
http://www.capital.fr/cotations/taux.asp

Going up, up, up...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Dec 12th, 2007 at 10:10:48 AM EST
[ Parent ]
It seems to me that this credit crisis can only end after a few more bank failures. Central banks should be prepared to guarantee deposits and intervene to prevent cascading failures. But I think this was said by LondonYank before.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Wed Dec 12th, 2007 at 12:50:45 PM EST
[ Parent ]
Even central banks run out of money eventually.

And if they're being managed by mini-me Greenspan clones, it shouldn't be taken for granted that they want to avoid a melt-down.

I think you're right about the bank failures, however. If a few banks vomit and die it will steady the rest, because they'll be left feeling that a few sacrificial victims are enough atonement - and they can get back to raping and pillaging with a clear conscience.

Which is why I think I think the fraud angle is the most interesting response, politically. It would enforce accountability, of sorts, and shock the banks and financial houses into the realisation that they're not above the law.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Dec 12th, 2007 at 01:50:45 PM EST
[ Parent ]
Central banks cannot run out of money, but they can trigger hyperinflation.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Wed Dec 12th, 2007 at 04:17:53 PM EST
[ Parent ]
True, if this money is paid out as wages etc (Zimbabwe), or used to pump up asset prices.

But not if - as with Northern Rock - the Central Bank is printing money which is being used to pay off existing bank loans.

The monetary effect in that case is neutral, and the "tax-payer" makes a small fortune from the "seignorage" arising from the privilege of money creation. In this case receiving 5.5% plus penalties for something that costs nothing to create.

So the truth of it is that the longer that the Northern Rock saga goes on, and the more the Bank not the "tax payer" pumps in - the better off the tax-payer will be....

Although it was interesting to see Tim Congdon letting the cat out of the bag, we are also seeing FSA's Hector Sants beginning to think the unthinkable.

These thoughts are essentially financial pornography.  No decent newspaper has for generations printed anything that exposes the reality - and redundancy - of the banking system.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Dec 12th, 2007 at 04:48:29 PM EST
[ Parent ]
The BoE creates money to lend to NR for paying off debt owed to bank A this doesn't really change the money supply but it shifts the loan from A's assets to the BoE's assets.

Now, why is it not a problem for the BoE if NR then defaults on that debt to the BoE?

We have met the enemy, and he is us — Pogo

by Migeru (migeru at eurotrib dot com) on Wed Dec 12th, 2007 at 05:02:12 PM EST
[ Parent ]
There has been some interesting stuff on the Gang8 Yahoo list of late and this little snippet came a week or so ago in response to my questions re Northern Rock.

The author is Geoffrey Gardiner - one of the "founders" of Gang 8 - who has probably forgotten more about banking than most people, including me, will ever know.

If the loans to the Rock go sour (for instance because the penal rate of interest has made the Rock unprofitable and it has to be liquidated), the Bank of England will still have a liability to the other banks, but reduced assets as counterparty.

If it merrily invents the money there will be no great harm to the taxpayer. The situation is reminiscent to what happened in 1914. The start of the Great War bankrupted all British Banks because the German and Austrian bills of exchange they had  bought became worthless.

The Bank of England bought all the bills at face value, inventing the money to do it. The war went merrily on, unfortunately. The bills may still be in the Bank of England's archives perhaps.

My point in relation to Northern Rock is that in a default the Bank of England would lose no more from the destruction of this freshly minted money than they would if they burnt a few more skiploads of time-expired bank-notes.

What they would lose - as they do with the retirement of bank-notes in circulation - is the Seignorage on this virtual Money.

Difficult to get your head around, maybe, but the reality of Central Bank credit creation is that there can be no "loss" when there never was any value in the first place.

Central Bank money is a Chimera.

So you will understand that I find it difficult to characterise as "tax-payers' money" something that has been created ex nihilo and has never been anywhere near a tax-payer.


"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Dec 12th, 2007 at 07:42:09 PM EST
[ Parent ]
Nice inverted curve, too! Has the peak been at a fixed future date (March) or has it been at 3 months for the past three months?

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Wed Dec 12th, 2007 at 04:30:56 PM EST
[ Parent ]
Jerome, on a tangent, did you see Martin Wolf's column in the FT today?
by Metatone (metatone [a|t] gmail (dot) com) on Wed Dec 12th, 2007 at 09:57:45 AM EST
[ Parent ]
Thanks for pointing it out.


Why the credit squeeze is a turning point for the world

First and most important, what is happening in credit markets today is a huge blow to the credibility of the Anglo-Saxon model of transactions-orientated financial capitalism. A mixture of crony capitalism and gross incompetence has been on display in the core financial markets of New York and London. From the "ninja" (no-income, no-job, no-asset) subprime lending to the placing (and favourable rating) of assets that turn out to be almost impossible to understand, value or sell, these activities have been riddled with conflicts of interest and incompetence. In the subsequent era of "revulsion", core financial markets have seized up (see charts).



In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Dec 12th, 2007 at 11:50:25 AM EST
[ Parent ]
Rhetorically, it's not a great leap from "Anglo-Saxon model" to Anglo-Saxon disease".

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman
by dvx (dvx.clt št gmail dotcom) on Wed Dec 12th, 2007 at 11:52:58 AM EST
[ Parent ]
I've just sent the LTE to the FT further to their Monday editorial (as discussed in this story) and have copied Martin Wolf on it.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Dec 12th, 2007 at 12:31:52 PM EST
[ Parent ]
As always, excellent post about Greenspan. Please look at the following link which is a report from a California mortgage broker stating the sub prime is only 25% of the mortgage meltdown at least in California, Florida and other states which have 'real estate bubbles'. I am impressed with his explanation of how all real estate mortgages have been part of the increase in the real estate values and how a 50% reduction in home values is the only way there will be a viable real estate market unless wages go up significantly which we all know won't happen. Sounds like the central banks don't realize what is coming or realize it is coming but are putting a 'bandaid' on the problem when 'major surgery' is required.

The link is:
http://blogs.marketwatch.com/greenberg/2007/12/straight-talk-on-the-mortgage-mess-from-an-insider/

by An American in London on Wed Dec 12th, 2007 at 12:31:09 PM EST
[ Parent ]
that post was quoted earlier on ET, it's chilling.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Dec 12th, 2007 at 12:32:29 PM EST
[ Parent ]
Sounds like the banking sysytem is on life support and the only solution at this time is to print,print,print not knowing when to stop and when the crisis will be over. Real estate prices will continue to implode. In California back in 1982; selling real estate was so bad that the owner of individual homes would take back unrecorded seconds as the down payment. I can see this happening again. It is not a panacea as the combination of mixing sub prime etc into investment packages plus all the other manipulations were not present in 1982. Could be a total meltdown of the system with the only recourse being keep printing.
by An American in London on Wed Dec 12th, 2007 at 12:46:25 PM EST
[ Parent ]
The world's central banks...
The Federal Reserve, European Central Bank, Bank of England, Bank of Canada, and the Swiss National Bank

All others are irrelevant, ´of course´...

tackle the shortage of dollar funds in Europe.

What would happen if we had to pay for trade in euros?  That scenario is hard to follow.

Our knowledge has surpassed our wisdom. -Charu Saxena.

by metavision on Thu Dec 13th, 2007 at 12:05:06 PM EST
[ Parent ]

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