Central Banks Inject $112bn into Financial Markets to Restore Trust

“Central bankers of the world, unite!”

Karl Marx didn’t actually write that. Marx died in 1883, many years before modern central banking became the credit-dealing kingpin that it’s become today. But his famous quotation captures the spirit of yesterday’s action by five central banks.

Five big central banks combined their powers to announce a US$112 billion dollar injection of liquidity into global financial markets. The Fed chipped in US$40 billion. The Bank of England anted up for US$46.4. The European Central Bank is in for US$20 billion, while the Swiss National Bank offered US$4 billion and the Bank of Canada US$3 billion.

Think of these bankers as manufacturers. Only their product is money. The credit crunch has damaged confidence in that product. In order to restore confidence and get people to use more of the product, the bankers are putting the money on sale. Everything must go! Act now while supplies last…or we’ll make more!

What really is going on? There’s a bear market in trust. This coordinated policy announcement is designed to restore trust by attacking…something. “This is shock and awe,” Lehman Brothers (NYSE:LEH) fixed-income strategist Fred Goodwin told Bloomberg. “The fact that it’s coordinated means they have joined together in the war to attack the problem, which is that banks don’t trust each other.”

Of course bankers don’t trust one another. They know how the whole game works. And they know that right now, lending to one another is a bad risk. Or, as Bank of Canada Governor David Dodge said, “The interbank market isn’t working very well, and when the interbank market doesn’t work very well globally, this creates some problems…It’s part of our normal role as central banks to try to, if you will, unblock that.”

Is he trying to say the credit market is constipated?

Stock markets at first cheered the news that the credit markets might become “unblocked”. “News that global central banks are pledging liquidity was a positive for the market early in the trading day, but, upon further reflection, some might be pondering if it’s really a solution, or further evidence of just how deeply embedded the problems in the financial system have become,” Frederic Ruffy at Optionetics told Bloomberg.

Upon further review, stocks were not convinced. The Dow opened up early, but fell over 300 points from its intraday high before finally settling on a modest gain for the day. It looks like the central bankers are going to have to try something else to get stock market on their side.

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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The Central Bank Rhyme of 1927 and 2007 “What we haven’t really had yet, outside China, is a traditional end-of-cycle rally in equity that takes us beyond the atmosphere to the edge of space. I believe we will manage that within the next 18 months, before most people in Wall Street and the City have to move on to organic farming, bartending, or their parents’ spare room” (John Dizard quoted by Dan Denning, New Money Supply Provides Catalyst for Rising Stock Prices, marketsandmoney.com.au, October 30, 2007). In formulating the stockmarket component of the Future Watch Anglo-American Hegemonic Cycle a “global… Read more »
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