Wednesday, 12 December 2007
Global Bail out
Today, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing measures designed to address elevated pressures in short-term funding markets.
"The US dollars will be provided by the Federal Reserve to the ECB, up to $20 billion, by means of a temporary reciprocal currency arrangement (swap line)"
"By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress,'' the Fed statement said.
If I translate, "helicopter" Ben is now running full steam on its money printing press, flooding the market with liquidity. I'm not sure about the consequence of this action. After all the banks that had not taken risks and have had rigorous risk management won't be rewarded instead the reckless lenders will.
In the past 3 month, the central bankers opted for promoting "Moral hazard" in order to safeguard the system. Time will tell us if the action taken was the right one but in any case it shows how serious the situation is.
After 20 years of credit binge, one has to pay the price. Not the bankers, not the ensurers, not the small minorities of investors, instead it's the common people through higher interest rates and higher inflation.
It shows you as well the limit of a free market. Market are efficient when its participant are willing to play by the rules and with transparency. It's not the case...There are still many "skeleton in the closet". Most frightening you are wondering if they are behind the curve!
Source : ECB , Bloomberg