Can the present financial crisis be solved by central banks injecting money?
*Reuters, by James Saft, December 13, 2007
“The central banks’ money market rescue is more like a heart defibrillator than a Heimlich Maneuver: a trip to intensive care is needed afterwards, rather than just a deep breath and drink of water.
Central banks including the ECB and U.S. Federal Reserve on Wednesday announced plans designed to provide more liquidity for longer terms to gummed up interbank money markets, including steps to allow anonymous borrowing against a wider array of collateral.
The plan should ease funding over the critical year-end period, reducing the chances of an otherwise sound bank getting caught in a liquidity death spiral.
But banks’ unwillingness to lend each other money is a symptom of their underlying weak capital position and of justified suspicion over the value of assets and the health of their peers.
What’s worse, with every day the value of U.S. real estate declines, increasing the size of the bill that must be paid, and spreading darkening clouds over the rest of the economy.
‘It doesn’t address the root of the problem,’ said Richard McGuire, fixed income strategist at RBC Capital Markets in London.
‘It perhaps promises to ease the year-end acute liquidity problems but over the medium term the real issue remains the uncertainty as to loss provisioning from the U.S subprime mortgage debacle.’
Which is not to say the plan is not worth doing. To the extent that high interbank interest rates are about liquidity, it will work, and should help to reduce the impact on consumer and corporate borrowers.”
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