Central Banks and strange games
Posted by markharrison on December 13, 2007
I’m still trying to work out the meaning of what happened yesterday. Let’s start with a quick summary of the facts:
A group of Central Banks (who are part bankers and part civil servants), led, but the US Federal Reserve, and including the Bank of England, the European Central Bank (which is the central bank for the EU), plus the central banks in Switzerland and Canada made a joint move.
They each announced that they will be providing Billions of pounds ( or dollars / euros / whatever) in loans to banks… basically to try to prevent “another Northern Rock.”
Basically, the concern was that, even though the base rates had been cut, the actual rates banks were charging their customers weren’t coming down as fast, because banks were borrowing from each other at rates quite a lot higher than the base rates. I wrote about this in the UK in this article a couple of weeks ago, and the Wall Street Journal picked up on the story yesterday.
This move by the banks is clearly a response to the problem – the fact that the central banks and the markets are telling very different stories.
On the one hand, this is good. Central Banks are stepping in, as a group, to try to prevent further bank runs.
On the other hand, this is very, very, very, bad. Central Banks need to step in, as a group, to try to prevent further bank runs.
Key learning – the economy is NOT acting like it has in the period since the second world war – the economy is acting in ways last seen in the 1920s-1930s. Not even the LTCM crisis a few years back prompted this kind of action.