Yesterday saw dramatic moves being taken by the major Central Banks in an effort to prevent a second serious round of the credit crisis. In this action the Fed was joined by other major central banks in moves to enable foreign banks to be able to borrow and lend money more easily. This was designed to stop an imminent breakdown in global financial markets a the Eurozone continues to deal with the debt crisis. In this new round of central bank intervention we saw the expansion of the Fed program which allows foreign banks to borrow dollars cheaply. This will hopefully allow these banks to provide the finance to companies which is crucial if we are going to see any signs of stronger economic activity. The actions of the normal Central banks (Fed, ECB and Bank of England) was also helped by some independent moves by the Chinese central bank which took action to encourage new lending by their commercial banking system. The reaction of the stock markets was very positive with many stock indexes soaring in value. The German DAX index rose by 5 percent and the US S & P 500-stock index jumped more than 4 percent. While these moves were welcome it should be stated that the actions of the central banks does little to address the fundamental economics problems which have caused the financial and economic crisis across the Europe. We still need to see radical changes if we are going to avoid the break-up of the Eurozone. So times are still very uncertain.
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As we have seen throughout the course, the Central Banks have the faculty of taking different actions to try to direct the behaviour of the financial markets (with their monetary policy). In this case, we see how they used this power to prevent a second credit crisis by injecting more liquidity in the markets which, as they intended, led to a reactivation of them (at least a short term reactivation). This was proved with the rise in stock markets.
However, that is just papering over the cracks. The harsh reality is that solving such a deep global (and even more Eurozone) crisis is not that easy. The real solution needs to be structural and long term, involving all the agents in the financial markets.
As we have already learnt in class, all countries have a national central bank that has two main functions: 1. They are in charge of the monetary policy. 2. They have to control that all financial institutions are operating in the right way.
In this case, the Fed (the central bank of United States) had to take several actions to prevent a new credit crunch, which is one of his task.
This is another attempt to restore some confidence in financial markets. If banks have more money, they will be able to lend it out to the companies. Finally, if the companies can borrow money, they could have the opportunity to continue with their business.
Put it simply, this is another attempt to reactivate the economy by injecting money in the markets.
As we have already learnt in class, all countries have a national central bank that has two main functions: 1. They are in charge of the monetary policy. 2. They have to control that all financial institutions are operating in the right way.
In this case, the Fed (the central bank of United States) had to take several actions to prevent a new credit crunch, which is one of his task.
This is another attempt to restore some confidence in financial markets. If banks have more money, they will be able to lend it out to the companies. Finally, if the companies can borrow money, they could have the opportunity to continue with their business.
Put it simply, this is another attempt to reactivate the economy by injecting money in the markets.
The Bank of England, the Bank of Canada, the European Central Bank, the Bank of Japan, Swiss National Bank and the Federal Reserve of the United States announced these concerted actions to increase their ability to provide liquidity to the global financial system. I have read that these measures aim to reduce tensions suffered by financial markets and thus to reduce the impact on the supply of loans to households and businesses to stimulate the economic activity. These Central banks have decided to lower by 50 basis points the rate applied to current swap agreements for the supply of U.S. dollars, and bring it to the rate Overnight Index swap (OIS) in dollars, increased by 50 basis points.
I have read that in France this decision had also a good impact for the stock market. The CAC 40 Index dropped by 3.85 per cent. Financial stocks have also taken advantage of this announcement: the main Banks in France, BNP Paribas gained 5.54 per cent to 29.73 euros, Credit Agricole 5.54 percent to 4.63 euros and Societe Generale 4.86 per cent to 18.12 euros.
The critical situation of the debt crisis in Europe led to the intervention of major central banks: not only the ECB and the Bank of England but also the Fed, and some other central banks from all over the world (China, Japan…), led an effort to prevent a second round in this major crisis.
As we've pointed it out in class, central banks try to maintain a stable economic situation, using tools like repo operations or lending of cash.
To cope with the recent events, they have used of the second and allowed banks to borrow money cheaply, which means the injected more liquidities on the markets. Thus, companies and households should be able to get from those banks the money they need to recover and reach a better economic situation.
The intervention of the Fed shows how the United States are dependent of Europe companies: they are afraid that a critical situation in Europe has adverse effects on their own economy, because of the many European companies present in the American market.
Although those moves were welcomed by everyone, and seem to be effective, as stock markets reacted very positively, it is not enough to solve the problem. The root cause of the economic crisis are much deeper and need to be tackled for good if Europe does not want to face another crisis round soon.
Nicolas Sechet
K1156178
This clearly shows that the world's central banks are tired of European leaders who cannot come up with a long-term solution to save the Euro(zone). Furthermore, the US is heavily exposed to the Eurozone and is therefore looking to stabilize the financial situation for their good. Central banks are fearing a world-wide double-dip recession, in fact it is already visible in the trade growth figures. However, the biggest pressure is being put and should be put on the European Central bank to intervene with help of a major quantitative easing program. Letting banks borrow more cheaply means injecting more money into the economy, in order to increase economic activity. Although these measures saw a good reaction from stock markets, as i said, there needs to be more done to save the world from going back to a similar situation like in 2007/8, or rather, a situation even worse.
The Central Banks have the faculty of taking different actions to try to direct the behaviour of the financial markets. This is throught the monetary policy. A perfect example is through the prevention of the second credit crisis by creating more liquid markets. This is how their power was used and this was proved with the rise in stock markets.
However, this does not solve the outlining problem. The harsh reality is that solving such a deep global crisis is not that easy. The real solution needs to be structural and long term, involving all the agents in the financial markets.
The injecting of liquidity in the market will give the banks more money that they can lend to companies. This is ofcourse very well needed right now but the sorvereign debt problem can not only be solved by dealing with liquidity. They need to focus on a more long-term solution including economic and fiscal reforms.
It is important that Central Banks intervene in crises such as the financial credit crunch that the world are facing right now. It is essential that the companies can borrow money so they can expand and contribute to the society in terms of providing jobs and pay taxes. Other things a Central Bank can do to intervene with the economy are either rise or cut the interest rates to maintain price stability and keep the inflation at a set target in each region. Right now the interest rates are very low. This is to encourage people and companies to borrow money that they can spend on different services and products. This is different forms of monetary policy.
It is important that Central Banks intervene in crises such as the financial credit crunch that the world are facing right now. It is essential that the companies can borrow money so they can expand and contribute to the society in terms of providing jobs and pay taxes. Other things a Central Bank can do to intervene with the economy are either rise or cut the interest rates to maintain price stability and keep the inflation at a set target in each region. Right now the interest rates are very low. This is to encourage people and companies to borrow money that they can spend on different services and products. This is different forms of monetary policy.
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