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Is this the beginning of the end of the credit crisis?
Telegraph.Co.UK 13/12/2007 - By Damian Reece
It's clear that yesterday's dramatic intervention in the markets by the Bank of England and other central banks will not be a silver bullet to kill the credit crisis stone dead. But to expect so much would be foolish. Markets confused by banks' aidGreat Depression drives Bernake's rescue
The extra liquidity will certainly go some way towards tiding over troubled banks during the difficult Christmas and New Year period, but to assume it will rebuild confidence in capital markets is unrealistic. advertisement
However, while this is hardly the end of the whole miserable episode, to coin a phrase, it may well turn out to be the beginning of the end.
One reason for optimism is that for the first time in recent economic history, central banks around the world have taken co-ordinated action to clamp down on the money market mayhem which has reigned since August. They have co-ordinated in the past on currency problems. But while in previous years central bank governors would take soundings from their counterparts all over the world, they would still take action independently. To have them club together so explicitly underlines the global nature of the credit crisis.
Might the central banks be groping their way towards a new international framework for markets and financial stability? Recent history would certainly suggest there might be grounds for governments and their central banks to formalise aspects of their policies.
However, we should certainly expect more collaboration and co-ordination as the central banks work out the best way of solving the current crisis. Yesterday's action, while a start, exposed the sort of anomalies that are contributing to the markets' problems.
Why, for instance, was the intervention not announced on Tuesday, hand in hand with the Fed's decision to cut rates? The two together would have had a greater impact.
At a time when central banks know their ability to cut rates is hobbled by the lurking presence of inflation, such tactics would give their activity greater weight.
Finally, the Bank of England seems to have acknowledged that its concerns about moral hazard are now outweighed by the gravity of the situation.
It makes you wonder how much of this year's problems could have been avoided with a more concerted effort from central banks?
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