Wednesday, October 8, 2008

More Overnight/Early Morning Developments

. Wednesday, October 8, 2008

The Federal Reserve, along with the European Central Bank, the Bank of England and the Swiss, Canadian and Swedish central banks enacted, a coordinated, emergency cut in their benchmark interest rates early this morning. This comes in response to massive stock market declines in Japan, Russia, Indonesia and many other global indexes overnight along with further market interventions by European governments and central banks to prop up failing institutions, as Tom observed. The cut's timing also shows the urgency of central bank officials attempting to stem the fear of the aforementioned developments from further battering European and American markets during today's trading.

This is purely and clearly a psychological move by the world's central banks. Something needed to be done, in a coordinated way, to show the markets that the central banks were ready and able to intervene to stem any remote possibility of global financial collapse and the central banks believed further liquidity was the answer. But the problem is not liquidity, its confidence. How lowering a target rate that does not actually really matter (check out the data on the effective FFR over the past 3 weeks), will fix the problem, I can not see. Lowering the target as a purely psychological tool to attempt to impact investor confidence, may have an impact. How much of an impact and will the impact be enough? I have no idea but, I guess we'll see.


Sarah Bauerle said...

I don't know if I'd say this is all a matter of confidence rather than liquidity. Inter-bank lending is frozen because banks don't trust that other banks are solvent, but they have good reason to think this way.

I definitely agree that confidence building is important right now, but I think it's a mistake to chalk everything up to psychological panic that's rationally baseless.

More Overnight/Early Morning Developments
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