Central Banks Join To Battle Credit Crisis; Markets See Great Gains
The Federal Reserve and five of the world's other major central banks just announced "coordinated actions ... to ease strains in financial markets" and make more credit available to consumers and businesses by pumping money into the global financial system.
In a statement released at 8 a.m. ET, the Fed says:
"The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity."
Translation, according to The Associated Press: The central banks are making it easier for financial institutions to get cash, especially dollars, that they can lend — hopefully at lower interest rates. The central banks are doing that, in part, by lowering the cost of "existing dollar swap lines by 50 basis points," Reuters adds.
The AP says: "Stocks surged following the news. Germany's DAX was trading 4 percent higher as were Dow futures in New York. The financial system has been showing signs of entering another credit crunch as Europe's debt crisis has shown alarming signs of spreading."
Update at 4:25 p.m. ET. Markets Have Best Day Since March '09:
At close, the Dow Jones Industrial average closed 490 points ahead. The AP reports that's Dow's biggest gain since March 2009.
The AP adds:
"Large U.S. banks were among the top performers, jumping as much as 7 percent. Markets in Europe surged, too, with Germany's DAX index climbing 5 percent.
"'The central banks of the world have resolved that there will not be a liquidity shortage,' said David Kotok, chairman and chief investment officer of Cumberland Advisors. 'And they have learned their lessons from 2008. They don't want to take small steps and do anything incrementally, but make a big bold move that is credible.'"
NPR's Marilyn Geewax put it in simpler terms when talking to our Newscast unit. Essentially, today's action by central banks doesn't solve the European sovereign debt problem, "but it does let bankers know that the world's top bankers are on their toes and are trying to make sure that European banks don't freeze up and start lending."
Earlier this afternoon, traders also received some more good news. The Federal Reserve released its Beige Book, saying that the U.S. economy was expanding at a "moderate pace."
The report reinforces the central bank's view that the economy, while strong enough to skirt a recession, remains too weak to bring down an unemployment rate stuck near 9 percent or higher for more than two years. At their last meeting Nov. 1-2, some Fed policy makers said the central bank should consider easing policy further, according to minutes of the meeting.
The Beige Book underscores other recent reports showing that "the U.S. economy is in a much better place, no chance of a double dip recession," Allen Sinai, president of Decision Economics Inc. in New York, said in an interview on Bloomberg Television. "Jobs will keep going up, the unemployment rate will keep going down, but very, very slowly."
Update at 11:15 a.m. ET. Markets Continue To Rally; Why The Banks Acted; And Why The Dollar Is The Best Looking Horse In The Glue Factory:
Meanwhile, Paul Brown of the NPR Newscast team spoke with Nariman Behravesh, chief economist at IHS Global Insights, who said the central banks took this action because "a lot of investors and banks in Europe are beginning to dump euros, as it were, and buy dollars and buy dollar-denominated assets." And that's created a shortage of dollars in Europe. So the goal of today's move by the central banks, he said, is to inject dollars into the European financial system so that commercial banks there will have them to lend.
And why is the U.S. dollar still a safe haven, given that the American economy has problems too?
In part, there's just so much fear about a possible break-up of the eurozone and that some countries will dump the euro and return to their own currencies that the dollar looks great in comparison, Behravesh said.
"The good news is that the dollar and dollar-denominated assets are [still] safe havens," he told Paul. "I often joke and say 'you know, we have problems, but the problems in Europe and other parts of the world are even worse.' Or, another way of saying it is 'the dollar is the best looking horse in the glue factory.' "
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