On Dec 12, 2007, at 4:38 PM, Ira Glazer quoted Roubini:
> Given the worsening of the global liquidity and credit crunch – with a
> variety of short term interbank Libor spreads relative to policy rates
> and relative to government bonds of same maturity being even higher
> recently than at the peak of the crisis in August – it is no surprise
> that central banks were really desperate to do something.
>
> The announcement today of coordinated liquidity injections by FED,
> ECB,
> BoE, BoC, SNB is however too little too late and it will fail to
> resolve
> the liquidity and credit crunch for the same reasons why hundreds of
> billions of dollars of liquidity injections by these central banks
> – and
> some easing of policy rates by Fed, BoC and BoE – has totally and
> miserably failed to resolve this crunch in the last five months. What
> was announced today are band-aid palliative that will not address the
> core causes of this most severe liquidity and credit crunch.
Well, yeah, maybe.
What exactly are the symptoms of this terrible crisis? Elevated interbank lending rates and a freeze-up of the commercial paper market. What have the real world consequences been? Hard to measure. In the U.S., bank credit continues to grow - weakly in real estate, but consumer and commercial & industrial (C&I) loans are growing strongly. (In the early 1990s credit crunch, C&I loans, the lifeblood of business finance, contracted sharply - a big difference.) Evidently banks are offsetting the loss of the CP funding mechanism. The housing and mortgage problems are real, but as Roubini himself concedes, there's not all that much that central banks can do about that. It's going to take time and some kind of government restructuring/assistance to get through it.
The central banks don't really seem desperate or panicky. They're doing this joint action, but to ease the pressures in the interbank market. My guess is that they're trying to target assistance carefully without going nuts cutting interest rates - for the reasons I mentioned yesterday, namely that the Fed *wants* the U.S. economy to slow down and stay that way for an extended period of time.
You can see from the trajectory of the stock market that Wall Street liked the headline, but as they read the details of the plan, didn't like it so much anymore. Apparently it requires a lot of collateral, and Wall Street wants free money, because they're Wall Street and they deserve it. It's hard to distinguish their petulant screaming, which often resembles that of a toddler denied immediate gratification, from an actual problem.
Doug