Central Banks pump liquidity into global markets

September 18, 2008 10:20 a.m.

The US Fed, the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Canada,the Swiss central bank are all co-operating in pumping billions of dollars of extra liquidity into global markets in order both to calm the panic that has infected the markets after the collapse of Lehman and the bailout of AIG. the Wall street market fell by 800 points over two days as even giants like Goldman Sachs lost one third of their stock price. Today so far the markets are up with the Dow Jones in New York up 149 points after the losses of the past few days. We shall see if this continues. There is at least one   other big US bank, Washington Mutual that is in trouble and is vulnerable.But with some luck   and co-operation calm will gradually return to the markets.
The central banks were very wise to intervene because otherwise interbank lending would have seized up with terrible consequences for domestic credit world wide. so far the value of US Government bailouts exceeds 300 billion dollars and the Government will be selling additional bonds to underwrite the financing. In present circumstances they will have no problem selling the bonds as the there is an overwhelming demand for safe government securities.The flight to safety and quality is overwhelming as a reaction to the panic selling of equities.Once again the dictum that I have repeated through the years that the public will always lose their faith in the private sector's paper long before they lose faith in the public sector's paper remains correct.  

So far the central banks have acted in a very effective manner, although the Fed's decision not to lower interest rates in order to send the signal that they are not just the servant of the markets but need to act to manage the inflation environment for the whole economy will need to be revisited in the coming month.

(Robert Skidelsky had published an interesting commentary on the return of Keynesian thinking and the periodicity of policy orientations in the Globe and Mail several days ago. Paul Davidson, myself and several other people have contributed short commentaries on the article and the issues it raises which can be seen by visiting the Globe and Mail site and clicking on Opinons and clicking     on the Skidelsky piece near the bottom and reading the comments which follow.Skidelsky's piece has been followed by a good piece by Eric Helleiner on the crisis.