From USA TODAY:
Stocks soared Wednesday after six major central banks agreed to aid European banks, an effort designed to stimulate economic growth in Europe and prevent its debt crisis from unhinging the global economy…
The Federal Reserve, coordinating with the Bank of England, the European Central Bank (ECB), the Bank of Japan, the Bank of Canada and the Swiss national bank, reduced the cost of short-term dollar loans to banks, called liquidity swaps, by a half percentage point starting Monday.
The central banks’ move ensures that European banks will be able to borrow dollars from their own central banks and continue to lend to households and businesses. “The key here is that all the governments understand that they need to provide the banking system with funds to operate,” says Gary Motyl, chief investment officer of Templeton Global Equity Group…
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EDITOR: We received a phone call yesterday afternoon from a retired corporate CEO who expressed great concern that the various central banks found the worldwide financial situation so dire as to have to intervene in a coordinated basis to provide liquidity for European banks. European banks have become reluctant to make overnight dollar loans to one another. This stems from the uncertainty of the amount and value of sovereign debt (loans to countries) held in the form of bonds.
Our friend pointed out, and the same was heard via the media from other financial experts over the evening, that a similar action had been taken by the Federal Reserve to strengthen USA banks shortly after the Lehman bankruptcy in 2008, stocks had rallied, but then there was a 30% decline in the stock market over the succeeding months and the country and much of the world plunged into the worst recessions since the 1930s.
What took place yesterday was the equivalent of a tourniquet, not any cure, to create liquidity for banks and to subsidize their cost of borrowing. Whether over the next week to ten days the European Union can come up with an effective way to control multi-national fiscal policy is the issue if we are to avert a worldwide double dip recession … or worse.
One thing the friend and the Watchdog agreed upon. We need strong government stimulus and a mild rate of inflation, say 4% a year, in order to gradually lessen the burden of overhanging world debt.
