Thursday, September 18, 2008

While You Were Sleeping... Federal Reserve Acts with Massive Global Liquidity Injection

The US Federal Reserve acted in the dead of night to try to stem the tide of the global financial crisis that rose to a economic tsunami level in recent days as major bank and insurance company failures in the U.S. and U.K. threatened a systemic failure of financial institutions around the globe.

In a press release dated 3 am, September 18, the Fed announced its Federal Open Market Committee (FOMC) has authorized a $180 billion currency swap with other central banks, namely the EU's European Central Bank, the Bank of England, the Bank of Japan, the Swiss National Bank, and the Bank of Canada. These arrangements will underpin the extension of greater liquidity to the financial systems of the respective countries in the hope that global financial markets will settle down after the wave of recent failures of large financial institutions.

No news yet out of the Reserve Bank of New Zealand as to its reaction to the moves.

On the good news front, the Reserve Bank Amendment Bill (No 3) was passed by Parliament on 3 September making the Reserve Bank the regulator of non-bank deposit takers such as finance companies, building societies, and credit unions. One fly in the ointment: the Reserve Bank will assign an important role to "reputable" credit rating agencies in the new regulatory set-up, the same kind of credit rating agencies implicated in failing to effectively monitor the sub-prime meltdown in the U.S. Huh?

Nothing like waiting till the horse has bolted. Shame on governments and policymakers both in the U.S and New Zealand for not having established effective regulatory regimes 30 years ago when they liberalized markets concurrent with a wave of new financial innovations in the form of financial derivatives.

Perhaps they would be singing different songs from these now:

Heard in many financial districts around the world this week:

Meantime, the Central Banker Chorus is wailing:

Wake Me Up When It All Ends...

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