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.
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.
ReplyDeleteI 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.