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Brilliant! what a fantastic development (if you are a banker). Now the bank will be alle to take bailouts using dodgy collateral at the tax payers expense. This should keep their bonuses ticking over, thanks very much.
Or maybe, it would be seen as last ditch attempt to save the un-saveable.

who knows! time will tell.

I think this shows that the problem is global and that the main central banks will now on have to act together to show the global markets that they do and can act on the these problems.

Global problems need global solutions.

The Rock wouldn't have had a problem had they done this to start with.

So the major world central banks are all acting in concert to provide asset backed funding based on assets that are currently not worth it, and may eventually prove to be irreparably impaired?

Are there any horses left in the stable? I have as much of an interest as any to not see the economy fall apart, but I fear that this move merely supports an unsustainable dream, and will only make a bad situation inconcievably worse. Its like suggesting that the alcoholic only needs to drink more so as to avoid waking up to his problems.

I think I need to re-think where I live and work.

How would I react?

I'd be buying gold. Well... I would if I hadn't already.

Robert

I'm no economist but do believe that economists estimate that the supply of credit has contracted by up to 30% since August. If supply shrinks but demand does not compensate, prices should rise. That looks like a part explanation for the spread between libor and central bank administered rates. Presumably the next bit of the answer is changed perceptions of risk. Libor was always defined as the rate at which leading banks were prepared to lend to one another. The problems at UBS and Citi - leading banks for sure - tells us that the risk based pricing models have pushed up rates. Which is surely the right thing to do, especially as the Rock story tells us all that no bank can rely on the FSA to do its credit analysis for it.

How do we know that this will actually bring borrowing costs down for consumers?
Considering the way in which we have seen the banks behaving to rate rises and drops and how the savings and increases have been passed to customers(or not in the majority of cases) makes me think alot of high street banks with burnt fingers and reeling from the implications of their actions will see a way in which to increase revenue. After all its bottom line based and they have alot of outstanding money that needs to be collected on or replaced.
This will benefit cash rich larger business that need this sort of liquidity and assist with the broader economy(plus bail out those that really should go to the wall), however mortgages and credit cards are still going to tighten.

I suppose if you are a banker you will be elated as once again your incompetence is rewarded. Just as it was after the LTCM crisis and the dot-com bubble.

Anyone else in the real economy should become very alarmed as clearly there is something out there which is spooking the central banks into shovelling even more cash into the markets.

I do now question as to whether we can realistically describe these markets as real markets as they seem to have become an extension of the all-consuming Welfare State.

To remove the stigma of borrowing from BoE, why not make it compulsary that all banks must borrow at least once from the BoE in any 3 month period. Simple.

When several prominant economists were warning of irresponsible lending, 2/3 years ago, the Fed and the Bank Of England saw no problems. Goverments told us cheap money was good for the economy and there were no forseeable dangers.

Now the day of reconing has arrived and Central Banks offer to use OUR money to bail out the bankers, if thats the right word for them. These people paid themselves large bonuses,year after year, whilst lending to the likes of greedy buy-to-let speculators, and anyone else who asked for money, regardless of their ability to pay back the loans in the long term..

Robert,

The pessimism disappoints me, to do nothing would be a cause for concern.

We pay our money for the international economic and
political 'fat cats' to consider and act in the interest of the Worlds economy, meaning the well-being of the Worlds people,let them get on with it.

Why are the Japanese not involved, they have been struggling with similar problems for the past 15 years ?

Starting at the top and working down usually works in a crisis, let's be optimistic and help make this potential solution successful.

--[the Bank of England and the Federal Reserve are broadening the range of collateral they will take for loans provided in normal money market auctions, without the imposition of any interest rate penalty.]--

Hmm, but how are those collateral assets being valued? If they're being valued at what the market said they were worth before the credit crisis, i.e. something that no-one may be able or willing to pay in the foreseeable future, then that's "valuation by fiat"!

--[the Bank of England and the Federal Reserve are broadening the range of collateral they will take for loans provided in normal money market auctions, without the imposition of any interest rate penalty.]--

Hmm, but how are those collateral assets being valued? If they're being valued at what the market said they were worth before the credit crisis, i.e. something that no-one may be able or willing to pay in the foreseeable future, then that's "valuation by fiat"!

This now seems really disturbing to me... the central banks have access to data that we "mere mortals" do not and the fact that they are willing to act in this unprecedented manner ...and risk the possible inflationary consequences tells me that things are much (much) worse than I had feared.

Interference in the markets in this way may well have consequences which are wholly unintended - and unpleasant.

This now seems really disturbing to me... the central banks have access to data that we "mere mortals" do not and the fact that they are willing to act in this unprecedented manner ...and risk the possible inflationary consequences tells me that things are much (much) worse than I had feared.

Interference in the markets in this way may well have consequences which are wholly unintended - and unpleasant.

This is only a short term emergency facility to make sure banks don't run out of liquid funds. It does not solve the structural problem - the banks need to build up their own cash reserves. The only way to do this is retain some of the cash you receive and not lend it. Which means shutting off the taps on long term credit.

There is something very suspicious about this. Are the banks deliberately keeping the interbank rate high to force the central banks to reduce base rates?

Not so much a problem perhaps in civilised countries perhaps but in the UK lower base rates will soon see the banks back to their bad old ways.

Just who is in charge here?

Oh great, another case of privatize the profits, socialize the losses.

What a great example of moral hazard, the banks lend to anyone with a pulse who can lie on a loan application; then when it inevitably goes sour our tax dollars bail them out!

Now I wonder, when the 'wide range of collateral' turns out to be totally worthless, and the billions in taxpayer cash disappears; will the bankers who got us all into this mess be locked away? Yeah right.

Of course that would not do a thing to bring back collapsed pension funds or shareholder's investments...

Goodbye moral hazard, welcome back rampant inflation?

We have had privatisation of profits for the boom years.

Now, when the going gets tough, we have socialisation of risks. I will have all the rewards in the good times and none of the pain in the bad.

Can someone please explain to me why this is fair and why I (as someone who has been prudent and not mortgaged and loaned myself silly) should bloody well pay for it through inflation?

How can the west lecture other countries on 'free markets' when we have just abandoned any pretence of this.

Absolutely unbelieveable.

The only consolation is that it is probably only delaying the inevitable.

That's goodbye to 'moral hazard' then.
Might the shortage of liquidity not be because there are no longer any buyers for securitised loans? I think that I am just beginning to realise that this massive lending boom over the past few years was not actually money that the banks lent. They managed to get other people to lend it instead - unfortunately, probably including my pension fund (NU). Somehow they managed to pass on risky loans rated as AAA safe and therefore at a really low interest rate. How did that happen?
Now that there are no more buyers for securitised loans the banks have to find all of the cash to lend from their own resources and they know what the real risks are, hence a higher rate is inevitable. Why have shares not plummeted? Probably because the pension funds have to put their money somewhere. They cannot put it in gold or commodities, they don’t trust the banks any more, so they are putting it into the only other thing that they can – shares & gilts.

A great number of banks around the world are probably insolvent, not just "illiquid". Manipulating monetary policy via these central banks is not going to solve anything. It would be laughable if it wasn't so frightening. Very very very frightening.

I just wanted to know why is it that when the US index goes down the FTSE does the same and when it goes up the FTSE does not always does the same. I know they say when America sneezes the world catches cold however it is now commom knowledge with the sub-prime woes that the Americans are not necessarily wizards in the world of finance so with the sub-prime lesson hopefully behind us can the FTSE bosses or City wotkers start using their own brains and stop relying on the Americans who we know like to shoot first and ask questions later, if that had been the case the exposure to sub-prime/ Iraq would have been minimal I think it is time to follow the Chinese since we are programmed to follow like zombies who knows we might just have surplus reserves instead of deficit and yes we would pay later with higher taxes just wait until after the elections when the govt. of the day does not care what peope think after they've won

The obvious question is exactly where is all this new money coming from? Or is it just new credit based on (potentially bad) debt?

Very interesting.

When I was a young graduate student of economics I learned, and from Karl Brunner no less, that open market operations -- the central bank's purchase/sales of government securities -- were how monetary policy was implemented. The discount rate and how much the central bank opened the discount window were basically symbolic. Milton Friedman held the same ideas.

You may recall the "targets and instruments" discussions we used to have. Interest rates and measures of activity were seen as targets of monetary policy, the stock of money (or money and near money or ... ) as the instrument that the FRB could use to influence the targets.

Appeal to authority is dangerous, but the FRB's reliance on the fed funds rate as THE lever of monetary policy, now augmented a little by noises about opening the discount window wider, strikes me as strong denial of the eternal verities. I stopped doing macroeconomics and following macro data after I left Wharton Econometrics, but can't help wondering how the levels of the US money stock have moved over the past three years. I also can't help wondering about the models the FRB now uses.

I am now more worried about the actions of the central banks than about a recession at this time. If this indeed is a correction in the market, for all the bad loans banks have given out, then why don't the Central Banks let it ride? Taking too many evasive actions (without dealing with the real issue) would only pass the losses onto those that did not gain from the market in the first place. Don't get me wrong, but is some form of a recession (after a bubble) always a bad thing? I don't think so, and I believe that the world has changed in a number of ways making the classic definition of recession obsolate.

Dear Mother-England:

This is your American Cousin calling; please send money...there is NO money here....

This policy response is perfect

a) they have restored liquidity between banks to ensure i) businesses can still get the bank funding they need to survive ii)consumers can access credit and therefore reduce , not remove the impact of the credit tightening seen already.

a) it does not bail out the banks or their shareholders. They will take all the pain through reduced profits and probably dilution as new capital is sought

Anyone suggesting that we should stand back and let the banks go bust is not thinking through the damage that would do to the economies of the world and jobs. We would be in a depression not a recession or slow down. Be happy it will still get worse but this is the right step at the right time and the right people are left holding the can

I think people are misunderstanding where these funds are comming from in the worlds central banks. No longer do they print currency to match their ledgers. They only need to punch a figure into their reserves and hey presto the cash has arrived. This is early 20th century economics and can only cause currencies to deflate. The post September 11th mass reduction in interest rates has to be paid for, it was a foolish act and will eventually show that cash was made too cheap. You cannot maintain the asset inflation of the past 6 years. Printing money shows how far the world will go with the stupidity of low interest rates and high asset values. Sorry asset holders but we need to cut zeros off the value of your assets rather than print money. Zimbabwe's 10,000% inflation shows where we are all heading.

Have we forgotten why money is borrowed?Because an investment opportunity exists or to finance the purchase of a consumer product like a car, a house .....

What opportunity exists today? Since how many years now has the economy been growing because the Fed has had a radical easy money policy? Everything from share prices, commodities to service fees charged by banks in addition to municipal taxes have spiraled out of control( not to mention housing). Leaving the economy stagnant, leaderless and people in a state of financial insecurity. In addition radical monetarism has run into to the reality that in the world of finance money borrowed has to be paid back and you can't borrow more than what you can afford. So who is in charge? And what is the boss going to do now that he has us hooked on cheap Asian labor, when inflation in China starts to ripple into the West's consumer price index? We are in an economic quagmire sort of like GE plastics which lost control of its supply pricing to the point where it had to sell. And if the consumer has been unseated by business what is business going to do? Unless the Fed figures out how to stabilize subprime on main street.......

Have we forgotten why money is borrowed?Because an investment opportunity exists or to finance the purchase of a consumer product like a car, a house .....

What opportunity exists today? Since how many years now has the economy been growing because the Fed has had a radical easy money policy? Everything from share prices, commodities to service fees charged by banks in addition to municipal taxes have spiraled out of control( not to mention housing). Leaving the economy stagnant, leaderless and people in a state of financial insecurity. In addition radical monetarism has run into to the reality that in the world of finance money borrowed has to be paid back and you can't borrow more than what you can afford. So who is in charge? And what is the boss going to do now that he has us hooked on cheap Asian labor, when inflation in China starts to ripple into the West's consumer price index? We are in an economic quagmire sort of like GE plastics which lost control of its supply pricing to the point where it had to sell. And if the consumer has been unseated by business what is business going to do? Unless the Fed figures out how to stabilize subprime on main street.......

I wonder if any of this would have happened had Al Gore been declared the winner of the 2000 US Presidential Elections?

Time was when national economies mainly comprised making things and moving them about. But more recently debt financed consumption became the main motor and that ultimately relies on the security of national assets. Our governments abdicated responsibility for the latter and debt financed consumption was secured on the inflated values of existing and otherwise unproductive housing stock. But as Keynes once said, what is unsustainable cannot last - and so our national taxpayers must now start bailing out the banks. In short, it's the stupid economy - stupid!

Isn't banking a wonderful business?

In which other line of work can you jawbone your regulator into taking action to get rid of all your busines problems?

Unprecedented action by the central banks is more telling in respect of what they are trying to avert. It is not the recesssion or growth recession, as implied in most of the comments that is on the top of their mind. Principal worry is the unwinding of global financial system as it existed and evolved over the decades. Present crisis is the outcome of creativity of financial engineers who doctored the very basis of sound financial theory in order to earn super bonuses. Now who would pay the price? Tax payers, who else.

This plan has moral hazard written all over it. It is a massive transfer of wealth to those who have taken incorrect decisions on allocating capital from those who pay taxes and those who have taken correct decisions. Such a measure leads to the expulsion of efficient actors in a market to the benefit of those who are less efficient.

A more efficient solution would be to use the funds allocated to this type of scheme for a broader deposit insurance scheme, while waiting for shareholders of financial institutions to either let their investments go bankrupt or, if they truly believe the companies in which they have invested are efficient, put up the additional capital to ensure survival.

I am surprised to see that many people are thinking that the whole thing is a problem for only banks? And crying central banks are (irresponsibly) giving away tax payers money? Agreed, this problem was brought in by greedy banks, but if the banks fail, it will bring down the entire economy. This is not like your corner shop closing down. Banking system is like oxygen, and without oxygen, you know what! And I think, the role of central banks is not only to collect tax, printing money, but more importantly to enable stability in the banking system AT ANY COST. And greed was not limited only to bankers. Tell me, how many home owners were UNHAPPY abour raising property values? Tell me, how many sub-primers jumped into property market, speculating the property price will go up and they can make a dosh? Gleefully shouting at the banks may feel some one happy, but eventually that will bring only more pain even for people who had not benefitted from any of these!

Amidst all this drama in the banking world, can somebody explain to me how the FTSE is still heading past 6500 and the Dow 14000, how Goldman Sachs just announced a record 18 billion dollar bonus pool for its employees, how the US economy grew at nearly 5% p/a in the last quarter and how unemployment is at a 35 year low in the UK?

As I understood it, private equity deals and M&A activity, which was largely dependent on borrowing, was driving much of the stock market growth in the last couple of years. Hasn't the credit crunch completely stifled this activity? And if so, how come so many economic indicators (apart from house prices) are still looking so bullish in the face of the credit crunch? I'm confused.

This is all entirely avoidable. With our existing monetary system, all banks are inherently insolvent... That's the nature of the fraction in the fractional reserve. Ban fractional reserve lending. Require full reserves.

Banks are not "oxygen", the death of a bank or two won't send the entire economy into a depression. They simply create money. The mint can do that just as easily.

What worries me about this is that it's vaguely reminiscent of what happened on Black Wednesday back in 1992. For the benefit of those too young to remember it, the Bank of England (and other central banks as well, IIRC) spent billions on propping up the value of sterling before they finally had to admit defeat and the pound crashed out of the ERM anyway.

The lesson from that seemed to be that central banks can't buck the market.

Now I know it's not an exact parallel with what is happening here, but I wonder if that lesson is still relevant?

Very Angryly

I'm a first time buyer and playing the game the other side. As with the normal market rules BOOMS and BUSTS. I have paid high rent through the boom and now waiting for the bust to buy.

Its just one side game to make the billionaire in the city more billions

To Ted,
I dont know about specific cases like Goldman Sachs, but as you rightly mentioned, the stock market still holding at its peak, because M&A activity in the past has increased the value of the companies, I say notional value of the companies, rather than intrinsic value. Particularly about FTSE 100 index. The heavy weights in FTSE index is Banks and Mining companies. Mining companies will be largely unaffected in the long term, as they deal with natural resources, which are unlikely to go down in value due to avilability is always limited. But banks? It is down to the fact that, the current value is considerably lower than their recent peaks. Like Barclays, which was trading near 700 few months back, now trading at 500+. For some people (or for most of the fund managers, for whom, banks are the safe bet!), think this is the buying opportunity or at least time to hold it, rather than exit. Thats why FTSE is holding its value.

I dont work for a bank. So, my knowledge is limited, but the banks stocks are still worthy of holding.

Look at the money the Central Banks have already allocated to inject liquidity. I doubt more will make a difference in the long run. This is another mistake. It will only postpone the reckoning, which will now be more painful becuase of it.

> we’ll all be struggling to see how a
> serious global slowdown can be
> averted.

Surely we should rejoice, given the need to cut carbon? Or are we
being Nelsonian? Do we turn a blind eye to the fact that the carbon
increase is related to economic activity?

The point is this - how long will it be before the pre-climate-change
generation looses its influence and rational thinking reasserts itself?

It is important. At this very time, discussions are being held
in Bali to determine how to act in concert to _create_
a global slowdown, not how to avert one!

To Colin Smith,
If you think all the banks are doing just creating money, and the mint can do it, mmh, I dont think anybody can argue with you!

So the Central Banks think they can dodge the column of recession!
If it was not so squalid it would almost be laughable.
Constantly low interest rates do not work, look at Japan .5% and they are still struggling with their economy.
The pain of recession cannot be avoided forever and no amount of fiddling the books by the Central and Private banks will avoid the abyss we are just about to fall into.
Hold on tight folks as we tip over into the gaping chasm in 2008.
Andrew

"48. andrew wrote:

So the Central Banks think they can dodge the column of recession!
If it was not so squalid it would almost be laughable.

Constantly low interest rates do not work, look at Japan .5% and they are still struggling with their economy.
The pain of recession cannot be avoided forever"

Actually it can...

But not by using credit to provide liquidity, that just makes the problem bigger.

What they have to do is have the mint start printing £1,000, £10,000, £100,000 and £1,000,000 notes. Then the government begins paying it's debts, the civil service and sub contractors with these notes.

Simultaneously, the BoE begins increasing the reserve requirements of the banks in the UK in proportion with the spend of the new cash. 3%, then 4%, 5%, 10% and higher. Reducing the country's reliance on credit.

Banks reserve ratios are about 3% now. Before the 1980s, the ratios were about 9%. When the BoE was create in 1694, the ratio was 50%. I propose that it reaches 100% and we switch to full reserve banking.

If the reserve ratios are increased in proportion with the spend of the notes there should be little or no inflation. As they replace debts in the economy, the risk and potential magnitude of recession decrease.

With your drama queen style full of yourself and emotive adverbs and adjectives you clearly aim to affect movements of share prices etc.
Could you tell us what written guarantees your employers and your viewers have that you do not own any share yourself?

On the 10th Day of Christmas, Mr Preston shows us either his shockingly poor understanding of finance or his willingness to engage in shameless demagoguery. A bond trading at less than par can do so simply because of movements in interest rates.

In any case, the equity of high yield companies is not 'theoretically worthless'. Despite the high risk that the company may default there may also be a non-zero chance that the company will generate profits in the future, thus providing returns to equity holders.