How come in real life the bad guys always win? While you are pondering those mysteries of life, read these stories…..
Central banks’ aggressive moves stun markets from the Financial Times. Short quote….
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The European Central Bank stunned markets on Thursday with its aggressive intervention to quash a brewing liquidity crisis in European financial markets.
The ECB move far exceeded in scale and scope the relatively modest steps taken by the Federal Reserve to sustain adequate liquidity in US markets.
After noting a sharp rise in overnight interest rates to 4.7 per cent – far above the target 4 per cent – the ECB put out a statement in the morning saying it stood “ready to assure orderly conditions in the euro money market”.
Within a couple of hours it acted: taking the unprecedented step of offering a pre-announced unlimited tender so that European banks could get as much cash as they wanted.
The last time it stepped in to provide large-scale liquidity in response to market concerns was in the aftermath of the September 11 terrorist attacks. But even then, it did not offer unlimited support.
Equally striking was the amount of money the 49 banks that took up the tender received: €94.8bn ($129bn). This was far above the €69bn banks took on September 12 and the €40bn the next day. By contrast, the Federal Reserve – which also saw overnight rates move up to above 5.75 per cent, compared with its target rate of 5.25 per cent – took less drastic action to support liquidity.
Central banks take emergency credit crunch action from the Times. Short quote from the article…
The Fed said that it would provide $12 billion of temporary reserves to the American banking system through 14-day security repurchase agreements. That was more than double the $5 billion of temporary reserves added through such “repo” agreements last Thursday.
In London, a spokeswoman for the Bank of England said that it had not intervened in markets as of lunchtime.
The disruption to markets in Europe was triggered after BNP Paribas, the French bank, announced the closure of three of its asset-backed credit funds, blaming a drying up of credit. BNP said that it was suspending trading in its Parvest Dynamic ABS, BNP ABS Euribor, and BNP Paribas ABS Eonia funds after the “complete evaporation” of market liquidity.
The German Bundesbank also denied that it was holding emergency talks to discuss problems at West LB, the government-controlled state bank.
The ECB’s intervention came just as its latest monthly bulletin sought to play down fears over a credit crunch, emphasising that “overall financing conditions remain favourable, money and credit conditions vigorous, and liquidity ample”.
A “Significant Liquidity Event” from the Economist’s View. This is a good explanation of what went on today in economic terms. Here is a quote….
If the Fed did not respond, the ff-rate would begin rising, potentially even reaching the discount rate. To avoid this, and maintain a federal funds rate of 5.25%, the “Federal Reserve subsequently poured a little more cash than usual into the U.S. banking system in order to deal with demand spilling over from Europe.” The total amount of the injection was $24 billion, and this is represented by the shift in the supply of reserves indexed by (b) in the diagram. The result is a new equilibrium at E2 where reserves have been increased to accomodate the increase in demand, and the ff-rate is at 5.25%. once again.
If you can’t understand the above read the whole post.
In addition to the links above, there is this post and this post over at calculated risk. But you already read both of those posts right?