Thursday, 13 December 2007

Major central banks act on credit squeeze

To deal with the consequences of financial innovation, global central banks led by the Federal Reserve have come up with their own financial innovation. From Bloomberg:

The Federal Reserve, European Central Bank and three other central banks moved in concert to alleviate a credit squeeze threatening global growth, in the biggest act of international economic cooperation since the Sept. 11 terrorist attacks.

The Fed said in a statement it will make up to $24 billion available to the ECB and Swiss National Bank to increase the supply of dollars in Europe. The Fed also plans four auctions, including two this month that will add as much as $40 billion, to increase cash in the U.S...

A Fed official told reporters that the U.S. central bank's efforts won't add net liquidity to the banking system. The plans are aimed at buttressing so-called term funding markets, such as for one-month loans, rather than overnight cash. The Fed will balance its various operations, including daily repurchases of Treasury notes and direct loans to banks...

[A]ll "generally sound" deposit-taking institutions can participate in the term auction facility, the Fed said. The Fed's 12 district banks will accept the same "wide variety" of collateral that is used for discount-rate loans, the statement said. The regional banks determine the haircuts on the assets submitted.

WSJ's Real Time Economics summarises economists' reactions to the plan as describing it to be a "solid first step".

Similarly, in the blogosphere, Mark Thoma thinks that this is a "useful step".

However, Nouriel Roubini thinks that the plan is "too little too late".

And Steve Randy Waldman does not like the plan, suggesting that the TAF is just a palliative and will result in the Fed taking on private risk that the market refuses to. Nevertheless, he admires it "for tactical brilliance".

Meanwhile, the Norges Bank doesn't seem to be catching the spirit of the season. From Bloomberg:

Norway's krone rose to a four-week high against the euro after the central bank raised its benchmark interest rate for a seventh time since January.

The krone gained against 12 of the 16 most actively-traded currencies after Norges Bank lifted borrowing costs to a 4 1/2- year high of 5.25 percent. The economy of the world's fifth- biggest exporter of oil is growing at the fastest pace in 22 years, with unemployment at a 20-year low boosting spending and pushing prices up. "Inflation is low, but rising," bank Governor Svein Gjedrem said.

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