Wednesday, 30 November 2011

Desperate policy for desperate times

The efforts of the world’s major central banks overnight to free up borrowing and liquidity in the banking sector is clearly good policy. Something had to (and still has to) be done to drag the world from a particularly pernicious banking and economic situation.

But is this the silver bullet to once and for all lift the global economy back to health?

It seems very unlikely.

It’s another band aid that had to be applied and it will help which is good. But the very action itself shows how worried policy makers are about the current circumstances.

I am reminded of the shock interest rate cut in the US delivered by Federal Reserve Chairman Alan Greenspan on 3 January 2001. With the Nasdaq bubble starting to deflate, Greenspan rode to the rescue – it seemed - with an out of cycle interest rate cut that triggered a 10% jump in the Nasdaq on the day the cut was announced. Alas – the rate cut didn’t fix the core problem which was a speculative asset price bubble and when reality returned, the Nasdaq kept sliding to a point where its peak to trough fall hit around 80-% - and this despite yet more and more interest rate cuts from Greenspan. The US fell into recession.

Also recall the coordinated interest rate cuts in October 2008 from the same central banks at play last night. It helped support confidence for a while and was a necessary policy move, but again it reflected just how horrid the circumstances of the times were. Alas, 3 years on, that approach was no magic fix... nor are the near zero interest rate settings across the bulk off the industrialised world.

So to the policy change last night. It has sparked a sharp jump in stocks, the AUD has surged and the natural optimism of many people is such that they see it as a fix for the global banking and economic problems.

Sure, this time it might be different. Let’s hope so. This may fix the global ills but it seems more likely that the move, while a good one, is just another desperate attempt from desperate policy makers helping out desperate bankers in desperate times.

1 comment:

  1. Stephen, your comments are spot on. I believe that Central Bankers / Europe are still in the "bargaining phase" as respects current circumstances. With your permission, I would like to "re-blog" your thoughts with full credit due to you.