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Wednesday, October 08, 2008

Whatever's Needed!

Merely noting that the FactCheck.org report on last night's debate included the phrase "wishful thinking", let us turn to the joint moves of several central banks last night.

Federal Reserve (US), European Central Bank (ECB), Bank of England, Bank of Canada, Swiss National Bank and Riksbank (Sweden) cut 50 basis points. The Swiss target for 3 month Libor went from 3-2.5% to 3-2%. Bank of Japan really cannot cut much, because its overnight rate is 0.5% already, but it expressed its moral support and notes that it has been and will be baking nice batches of financial cookies to support the action.

A basis point is a .01%, so that's .5%. China works a little differently, and lowered its one-year lending rate by 0.27%. China had cut just recently, but this was the first cut by the ECB. Their main rate is now 3.75%. The US Fed Funds rate goes to 1.5% and the discount rate goes to 1.75%. The discount rate is the rate charged to banks and now broker dealers going to the discount window for money.

Fed statement. At the bottom of the statement you can access the statements of other banks.

ECB statement.
The Governing Council of the ECB, by means of teleconferencing, has taken the following monetary policy decisions:

They still need to do more.

It is hard to tell how much effect these decisions will have, because in the short term, the problem is distrust between financial companies, including banks. Thus Euribor and Libor, to which many mortgage loans are indexed, have been zooming up.

Libor is the London Interbank Offered Rate, and Euribor is the EU equivalent.

Yesterday, the Fed opened a commercial paper lending facility which is likely to do more than rate cuts:
The CPFF will provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV) that will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers. The Federal Reserve will provide financing to the SPV under the CPFF and will be secured by all of the assets of the SPV and, in the case of commercial paper that is not asset-backed commercial paper, by the retention of up-front fees paid by the issuers or by other forms of security acceptable to the Federal Reserve in consultation with market participants. The Treasury believes this facility is necessary to prevent substantial disruptions to the financial markets and the economy and will make a special deposit at the Federal Reserve Bank of New York in support of this facility.
...
By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to once again engage in term lending in the commercial paper market. Added investor demand should lower commercial paper rates from their current elevated levels and foster issuance of longer-term commercial paper. An improved commercial paper market will enhance the ability of financial intermediaries to accommodate the credit needs of businesses and households.
Commercial lending is the lifeblood of the economy, and preventing that from locking up completely is absolutely necessary. Having to go to these lengths to accomplish that is an indication of a severe problem.


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