Coordinated Central Bank Provision of Dollar Liquidity: Good or Bad News?

September 15, 2011

Central Banks in Switzerland, the euro area, and Japan have simultaneously posted notices on their web sites of a coordinated effort to undertake longer-term 84-day tenders of dollar liquidity, thereby covering a period that extends beyond end-December.  Here’s an example from the ECB.  One sees that each of the announcements provides links to similar announcements by the other central banks.  This visual display subliminally underscores that policymakers in different countries are not a herd of cats but rather a fraternity of experts facing similar dangers and communicating closely with one another.  With banks abroad struggling to obtain dollar funding, this effort to alleviate such strains over the critical yearend months has lent support today to equity markets

There is a dark side to this attempt to reassure the financial community.  Early in my career at the Federal Reserve Bank of New York, I came to appreciate the closeness of communication between and among different central banks and finance ministries.  There wasn’t a vacuum between face-to-face meetings.  In that era of land phones and no internet, communication was a daily occurrence, and actions were closely coordinated.  We at the Foreign Department knew not only what foreign exchange intervention the United States had conducted but also the operations of numerous other central banks, and our information was updated every day.  When statements like today’s are released that stress international policy coordination, a higher degree of coordination isn’t really happening, and the public fanfare generally means the situation has become very difficult and hasn’t responded to earlier steps.  A change in market psychology is needed urgently, and so the visibility of policy coordination is enhanced.  It’s not surprising that some analysts are reading the move as a preventative step to limit collateral damage should Greece default before yearend.  At a minimum, officials are anticipating further trouble of one sort or another.

Sometimes a statement posted on multiple official web sites proves to be a harbinger of significantly greater market deterioration.  The statements today, at least in format, remind me of the coordinated interest rate cuts announced of October 8, 2008, such as this offering again from the European Central Bank that day.  It was just over three weeks since the Lehman Brothers fiasco, and the Great Recession would get far worse in the weeks and months to come.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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