Rolf Englund IntCom internetional
A perfect example of one of these fallacies recently exposed is the widespread report in August that the
The European Central Bank will lend banks 96.9 billion euros ($141 billion)
ECB policy rates are now at 3.75%, and it was not even the most important decision the ECB took yesterday.
The solution to this crisis will have to come from governments.
Central banks on Monday added $330 billion to the funds they can pump into money markets as more financial institutions ran into trouble in Europe and the U.S.
The U.S. Federal Reserve said it boosted its currency-swap facility, which lets foreign central banks pump dollars into their cash-strapped banking systems, to a total of $620 billion from the previous $290 billion.
“The reasons why the massive liquidity injections and policy rate cuts by central banks have miserably failed are clear,”
The ECB, Fed and British bailouts involve a serious problem - repayment.
Bank of England's GBP50bn plan
Many investors, concerned at what happened to sub-prime mortgages in the US, no longer want UK mortgage-based assets. The disappearance of this market has deprived banks of tens of billions of pounds of finance for mortgage lending.
The BBC's business editor Robert Peston said "This is a banking market bail-out of an ambition we haven't seen in this country since the early 1970's and possibly longer than that,"
In the US, the Federal Reserve took similar action with a $200bn programme to boost liquidity in financial markets last month.
How well can an economy long characterised by soaring house prices, exploding debt and a dynamic financial sector adjust to a new world?
A plan to loan billions of pounds to British banks is needed to stop the UK's financial crisis worsening, the chancellor has said.
Mr Darling confirmed a scheme to lend banks money to help them operate during the credit squeeze. But he insisted that the loans would have to be paid back.
Government sponsored enterprises
The policy approach should start with the GSEs. These institutions’ viability with anything like their current operating model depends on the implicit federal guarantee of their several trillion dollars of liabilities. It is appropriate at a time of crisis in the mortgage markets that they become, as their regulator put it last week, the “lender of first, last and every resort”.
It is not appropriate that their shareholders’ “heads I win, tails you lose” bet with the taxpayer be expanded for this purpose.
Given their past and prospective losses, their regulator – supported by the Treasury, the Fed and, if necessary, Congress – should insist that they stop paying dividends and raise capital promptly and substantially as they expand their lending. In the unlikely event that the boards of these institutions refused, policymakers should put them into an appropriate form of administration that insures that their obligations will be met.
FANNIE MAE and Freddie Mac, the twin titans of America’s mortgage markets, think of themselves as big, friendly giants.
In the end, the Fed can always stop a deflationary spiral.
Hold tight, the central banks have no plan
The idea was that a co-ordinated response would reassure the markets, but it had the opposite effect. It turned out that market participants are not infinitely stupid.
It is a fully fledged solvency crisis that has arisen because two giant and interlinked bubbles burst simultaneously – one in property, one in credit – leaving banks and investors on the brink of bankruptcy
Efforts ineffective aimed at containing a subprime credit crisis,
The good news about the problems in the financial sector and the larger economy in the United States emanating from the persistent drop in house prices is that they will eventually end, and the underlying resiliency of the U.S. economy will reemerge. The bad news about these problems is that they are going to continue for some time and get worse before they improve.
Efforts to address them so far have been ineffective because they have been aimed at containing a subprime credit crisis, not at containing a rapidly spreading prime-credit, solvency crisis that is leading the U.S. economy into recession.
The Treasury has undertaken two efforts to support the financial sector, one aimed at lenders and another aimed at borrowers. The first effort, known as the "Super SIV," was directed at helping banks to organize a $100 billion fund to purchase off-balance-sheet holdings of special investment vehicles (SIV) that were having difficulty obtaining financing in the commercial paper market.
The U.S. housing stock is worth about $23 trillion, so a 15 percent drop in house prices represents a wealth erasure of $3.45 trillion over a period of about two years. That figure represents about a quarter of annual GDP or about 12.5 percent of GDP per year for two years. The total equity capital of U.S. banks, brokers, and finance companies, most of whom are exposed to losses and to levered credit markets tied to falling real estate prices, is barely $1 trillion. While their share of total cumulative real estate losses will be only a fraction of the potential $3.45 trillion in losses that would result from a 15 percent drop in house prices, their share of the losses will certainly impair their capital and thereby their lending ability to a substantial extent.
Why Do Financial Firms Take Too Much Risk?
Prepare for a global economic downturn, but not a meltdown
What has made it so severe and immune to monetary policy is that financial actors no longer have blind faith in the solvency of their counterparties.
In past financial crises - the stock market crash of 1987, the aftermath of Russia's default in 1998 - the Fed has been able to wave its magic wand and make market turmoil disappear. But this time the magic isn't working.
My story about a basically sound bank beset by a crisis of confidence, which can be rescued with a temporary loan from the Fed, is more or less what happened to the financial system as a whole in 1998. Russia's default led to the collapse of the giant hedge fund Long Term Capital Management, and for a few weeks there was panic in the markets.
In August, the Fed tried again to do what it did in 1998, and at first it seemed to work. But then the crisis of confidence came back, worse than ever. And the reason is that this time the financial system - both banks and, probably even more important, nonbank financial institutions - made a lot of loans that are likely to go very, very bad.
First, the United States had an enormous housing bubble in the middle of this decade. To restore a historically normal ratio of housing prices to rents or incomes, average home prices would have to fall about 30 percent from their current levels.
Second, there was a tremendous amount of borrowing into the bubble, as new home buyers purchased houses with little or no money down, and as people who already owned houses refinanced their mortgages as a way of converting rising home prices into cash.
The central bank helicopters are planning a co-ordinated drop of liquidity on troubled market waters.
Doomed to Fail
This week's announcement by the Fed that it will create a new mechanism to provide funding for credit challenged banks has been lauded by Wall Street as an innovative approach to solving the credit crisis. In truth, it is really just the same response the Fed has had for all problems great and small: crank up the printing presses, shower money on the problem, and hope that financial pain can be obscured by the balm of inflation. Both the Fed and Washington politicians are completely clueless regarding the ill effects of the plan, and are simply acting in desperation to keep a ticking time bomb from exploding before the next election.
The Fed and other foreign central banks will provide this liquidity by auctioning low interest rate loans to holders of U.S. mortgaged-backed securities. The loans will be made under the same terms currently in use at the Fed's “discount window”, with the added benefits of even lower interest rates and anonymity (borrowers wish to avoid the public stigma that comes from utilizing the discount window). Since the loans can be collateralized by mortgage-backed securities, the Fed will be on the hook should these loans not be repaid. In other words, the losses will simply be monetized, or more precisely socialized, as they are passed to the public in the form of inflation.
Paul Tucker, Bank of England head of markets, said:
The unprecedented move is a sign of the severity of the problems
Up to 110 bn dollar in loans will be made available to world money markets by central banks
A surprise move by the Bank of England, the US Federal Reserve and three other central banks to inject cash into money markets has had an immediate effect.
There have been fears that if the rate, known as the London Interbank Offered Rate or Libor, remained high then this could lead to slower economic growth.
Seeing its biggest one-day loss since 16 August, the FTSE ended down 3% or 196 points to 6,364, with banks among the biggest fallers.The fall came despite central banks saying on Wednesday they would move again to ease credit availability.
Centralbanker samarbetar mot finansiell kris
Flera centralbanker med Fed i spetsen lättar nu på trycket på penningmarknaden genom att tillföra likviditet till bankerna. Beslutet kommer att sänka interbankräntorna, menar bedömare. Federal Reserve, Europeiska Centralbanken, Bank of England, Bank of Canada och schweiziska centralbanken SNB gjorde tunder eftermiddagen gemensam sak för att öka tillgången på kortfristiga krediter på interbankmarknaden.
Krediter kommer att bjudas ut i ett auktionsförfarande som löper över årsskiftet, en tid då behovet av krediter normalt är stort. Vid Federal Reserves två första auktioner är beloppen satta till 20 miljarder dollar vardera. Federal Reserve kommer även att tillgodose behovet av dollar genom att erbjuda 24 miljarder dollar i så kallade swaplinor till europeiska banker.
Jan Häggström som är chefsekonom på Handelsbanken tror att åtgärden kommer att göra det billigare att låna pengar mellan bankerna.
Riksbanken välkomnar initiativet från kollegorna i Europa och USA, men ser ingen anledning att följa exemplet.
The charge of the central banks
When financial markets break down completely a central bank has no choice but to take their place.
The US cavalry arrives, but is it already too late?
Why the Fed bailout might not work
Before this move, banks could borrow directly from the Fed through the so-called discount window, at 4.75 percent. The key Federal funds rate is lower, at 4.25%, but that is open to a narrower range of financial institutions and accepts a narrower range of collateral than the discount window. The new program - called the Term Auction Facility (TAF) - will auction funds to banks at rates very close to the lower Fed funds rate. The first TAF auction, for $20 billion, is scheduled to begin on Dec. 17.
Federal Reserve announced it is coordinating with other central banks
They have each announced that they will provide billions in loans to banks
The Fed made the most dramatic changes. It introduced a “term-auction facility” through which all banks eligible to borrow from the discount window could bid for one-month money. The first two auctions are to be held on December 17th and 20th, with $20 billion to be sold at each. Two more are to follow in January. The Fed also announced temporary swap lines with the ECB and the Swiss National Bank, worth $24 billion, allowing those central banks to lend dollars to banks pledging euros or other currencies.
Central banks will now be more intricately involved in the unwinding of the credit mess. Since eligible banks have similar access to the liquidity auction, the central banks are implicitly subsidising weaker banks relative to stronger ones. By broadening the range of acceptable collateral, the central banks are taking more risks onto their balance sheets.
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