Central banks team to ease credit crunch
It was the biggest coordinated action among central banks since after the Sept. 11 terrorist attacks. The move was greeted by an initial surge in stock prices and a drop in a key interest rate to which a wide range of lending is tied. Investors read the move as a sign central bankers were pulling out all the stops to thaw credit markets, which in some cases have seized up in the fallout from the U.S. subprime mortgage meltdown.
"This could be the high water mark of the financial crisis," Wachovia global economist Jay Bryson says.
But Maria Fiorini Ramirez, who runs an economic consulting firm, says the credit market problems are so big and so deep that the policymakers' actions will only act as a "Band-Aid." "It's a crisis in confidence ... it's going to be hard for the Fed to fix a lot of this," Waddell & Reed Investment Management chief economist Diane Coe Dercher says.
The plan has two parts:
- The Fed will hold special auctions starting next week and lasting at least through January that will allow a wide range of banks to borrow directly from the central bank. The Fed will provide up to $40 billion in funds in next week's auctions.
While the Fed lends to banks through its so-called discount window, banks have been reluctant to borrow from the Fed for fear of it being seen as a sign that they are having financial trouble. The auction system will provide greater anonymity.
The Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank announced similar liquidity moves in concert with the Fed.
- The Fed also set up "swap lines" with the European Central Bank and the Swiss National Bank to provide $24 billion in dollars to be lent to foreign borrowers.
The central bankers are seeking to promote lending between banks, which have grown reluctant to lend to each other as they try to assess who is holding bad subprime debt. That has pushed up interest rates and, in some cases, frozen borrowing.
The London Interbank Offered Rate, or LIBOR, declined after the central banks' announcement Wednesday. Many loans worldwide, including adjustable-rate U.S. business and mortgage debt, are tied to LIBOR.
The news came a day after the Fed cut its target for short-term interest rates from 4.5 percent to 4.25 percent. Investors Tuesday were disappointed the Fed didn't do more and sent stocks tumbling. But a senior Fed official who on Wednesday briefed reporters on condition of anonymity because of the sensitive nature of the actions stressed the timing of the central banks' announcement, in the works for weeks, had nothing to do with stocks' plunge.
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