The world’s major central banks unleashed coordinated action Wednesday to ease the increasing strains on the global financial system, a move that sent stock markets up sharply.
The European Central Bank, U.S. Federal Reserve [cnbc explains] , the Bank of England and the central banks of Canada, Japan, and Switzerland are all taking part in the operation, which is designed to “enhance their capacity to provide liquidity support to the global financial system.”
The ECB said in a statement the banks are making it cheaper for banks to get U.S. dollar liquidity when they need it, starting next Monday.
They are also taking steps to ensure banks can get ready money in any currency if market conditions warrant.
Fears of more financial turmoil in Europe have already left some European banks dependent on central bank loans to fund their daily operations. Other banks are wary of lending to them for fear of not getting paid back.
Such constraints on interbank lending can hurt the wider economy by making less money available to lend to households and businesses.
You have to like the last part: They’re doing it for the average household, not the big bankers sitting on sovereign debt.
Although the Fed likes to say that it “bears no exchange rate risk” in such swaps, and though (back a few months when they expanded the swap lines with Europe in a different “coordinated central bank action”) they like to stress that the Fed isn’t on the hook when the ECB lends the dollars to European banks, strictly speaking this isn’t true. If the Fed gives $50 billion in dollars to the ECB, which (at those market prices) gives $50 billion worth of euros to the Fed, then the ECB lends out the dollars to private banks and, before they repay the loans, the euro crashes against the dollar…then the ECB has no means of acquiring dollars to repay the Fed. Even though the ECB has a printing press, it is configured for euros, not dollars.
The experts tell us that these types of arrangements are necessary, lest the whole (financial) world fall apart. Back in September 2008, when many of us were vociferously objecting to TARP and Bernanke’s incredible monetary inflation, the experts told us such things were necessary lest the whole world fall apart.
The current round of interventions will not solve the problem. Down the road–probably much sooner rather than later–the central banks of the world will engage in some further extraordinary measures, again lest the whole world fall apart.
Even so, printing money doesn’t fix the underlying problems. No matter what they do, eventually the whole financial world will fall apart.