Several of the world's central banks acted in unison today, for the second time in a short span of months, to attempt to stave off the worldwide recession that US banks' recklessness in making loans--and big profits--had gotten us into. The US Federal Reserve Bank, the Swiss Bank, Bank of England, Bank of Canada and EU central bank all took action to ease the liquidity crisis. See this Reuters story, World Central Banks Unite to Ease Credit Strain, Mar. 11, 2008.
This doesn't solve the problem, but does grease the wheels to make the devaluation and "deleveraging" take place without there being any funding for ongoing activities. Says Kathleen Stephansen, director of global economics at Credit Suisse in New York. "It doesn't take away the credit crunch because deleveraging will still have to take place. But this will make it a more orderly process." Id.
Banks have been charging higher interest rates to the few people and businesses who could get loans, even those with good credit ratings, in part because of an over-cautious reaction to having been burned, and in part to make a bigger spread on these loans to make up for money lost on their reckless loans. One of the not-so-tasteful things about this mess is that the big bankers and their big money makers have made lots of money out of being rash, yet because they are so big and important to the financial infrastructure of the economy, the federal government is doing all it can to help them out.
The Fed had already lowered benchmark interest rates by 2.25%. Friday the Fed announced about $200 billion of assistance--auctions of short-term cash and repurchases. And today the Fed provided a further injection of $200 billion in Treasury securities to big banks and several big borkerage firms--taking as collateral some of the risky mortgage-backed securities that the banks made all that money off creating and that created the problem to start with. The US says it won't take as collateral any securities that the ratings agencies have already put on a watch for downgrading, but of course those very rating agencies missed the mortgage crisis by a mile, giving safe ratings to some securities that ended up defaulting. Is this a bail out by federal taxpayers of the big banks? It starts to look that way.
The injection provided a cure--at least temporarily. The DOW shot up today, gaining 416.66 points, the biggest climb in 5 years. See Michael Grynbaum, DOW Gains 416.66 Points for its Biggest Gain in Over 5 Years, NY Times, Mar. 11, 2008. Bank stocks gained by large percentage point movements.
But notice. The move was accomplished by the issuance of even more U.S. debt--that's adding to the US taxpayers' long-term burden. And crude oil rose to a new high--more than $109 a barrel, causing most ordinary Americans to worry about making ends meet. Stephen Mufson, Fuel Prices Siphoning Money from US Economy, Washington Post.com, Mar. 11, 2008. And this huge gain only gets the market back to where it was before the last three days of losses. And there are undoubtedly more losses to come: $200 billion just begins to drain off the soured mortgage-backed securities, since there are more than $2 trillion mortgage-backed securities out there. Investors may be responding to the Treasury injection today, but selling off to take their profits again tomorrow.
"As with the other liquidity measures introduced, the new facility will not alleviate the current credit crunch or economic recession," Merrill Lynch economist David Rosenberg wrote in a research note. World Central Banks Unite to Ease Credit Strain, Mar. 11, 2008
Meanwhile the big banks are reluctant to write down home loans to people whose homes are now worth less than the loan, because it would require the banks to recognize the loss now. And they are fighting the movement to make home mortgages dischargeable in bankruptcy, because they don't want to be forced to write down those loans on the bankruptcy court's timing rather than their own. (They argue that it is because mortgages for everybody would be made more expensive, but I find that unconvincing, when the banks are going to lose more from foreclosures than from a modification that leaves the family in the home.) Congress should pass the bankruptcy change now: that's the least that it should do in recognition of the fact that the federal government is standing behind these banks (and ultimately likely to act to make good its implied guarantee behind other private enterprises like Fannie Mae and Freddie Mac).
Although the rise in the market may have made people feel better, at least for a little while, we should remember that our single-minded focus on GDP as the only significant measure of growth may lead us astray in setting policies. For more on that, read this article by Robert Costanza, The Three-Decade Recession, LA Times, Mar. 10, 2008.
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