Central Banks Deliver Coordinated Program to Counter Funding Strains

November 30, 2011

At 13:30 GMT, the European Central Bank, Federal Reserve Bank, Bank of England, Swiss National Bank, Bank of Japan, and Bank of Canada simultaneously posted statements on their web sites announcing new actions to grease their collective ability to address financial market strains that are constraining credit to final users. 

The statements have three parts.

  • Opening sentences that are common to all six statements outlining the broad intent and content of the actions, which essentially cheapen the cost of dollar liquidity swaps and put in place the temporary ability to draw on other bilateral swap lines among them.
  • Some further sentences, which are different in each case and customized to inform what the particular central bank has agreed to do and indicating the state of funding in its market.
  • Links to the other five statements.  The ECB statement, for instance, illustrations these three sections.

Here’s what to like about this move.  At least somebody is trying to do something.  With Italy moving to the forefront of the crisis in November, the euro debt crisis had appeared to fit “Emperor Nero fiddling while Rome burns” uncomfortably well.  2008 demonstrated how quickly financial market funding strains can spread and cripple the whole global economy.  Clearly, a role should be played by central banks to ensure against that happening. 

Here’s what not to like.  Central banks acted because government leaders and legislatures have not met their responsibilities.  The euro debt crisis is an offshoot of the global financial meltdown, which began over four years ago.  Way too little progress has been made to reduce current account surpluses as well as deficits.  Within Europe, no feasible plan has been fashioned to strengthen relative competitiveness of the economies at the heart of that problem.  Everyone is waiting around for somebody else to make painful adjustments and resolve the problem.  European Economic and Monetary Union from the start lacked an adequate popular mandate, and that remains the case.  Central banks alone cannot end the global crisis and have been reluctant to take the kind of action announced today for very good reason.  These kinds of steps are less likely to work if done without other fiscal and structural changes that address the underlying economic misalignments.  If today’s show of force doesn’t stop the crisis, confidence may sink further yet.  After all, what moves confidence if not the scorecard of successes and failure?   One good barometer to watch the rest of this week and in the December wind-up to 2011 will be long-term interest rates in Greece, Italy, Portugal, Belgium, Spain, Ireland, and even France.  Their failure to drop substantially would be a very worrying sign.

There’s even more not to like.  The economic landscape faced by advanced economies remains very fragile.  The euro area is in recession.  Japan had been emerging from a downturn, but that recovery has already stalled in some respects.  The Fed’s latest Beige Book, a rundown of America’s regional economic trends, strikes a more guarded pose than many analysts were anticipating.  In none of the twelve Fed districts did activity expand more than “moderately” over the six or so weeks upon which the report was based, and one of the districts in fact decline.  All this points to a continuing growth recession in which demand and production advance too slowly to reduce unemployment.  The Beige Book reflects present conditions, and ahead lies the circus of a presidential election campaign and the mother of all fiscal austerity programs.  In Britain, which already has a mix of very loose monetary policy and very tight fiscal policy, economic growth has been very slow.  Finally, today’s action really is not as dramatic as it might have been.  Swap lines between the central banks were not enlarged but rather simply made less costly if drawn upon.  None of six central banks coordinated the shared move with a domestic interest rate cut or additional domestic quantitative easing.

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



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