Central Banks’ Actions: Important, But a Safety Net Rather Than Strong Medicine
Central banks made a coordinated 50bps cut today, but to a facility that almost no one uses and apparently fewer understand, as the NY Fed’s detailed breakdown of exposures shows.
Commentaries like CNBC’s leave out important points, like the reason the ECB needs those dollars… which is to lend to banks in Europe which can’t borrow dollars directly from the Fed. Those dollars actually are used to settle maturities and make payments.
If US banks needed euros but couldn’t access markets, the shoe would be on the other foot and the Fed (which can’t create euros) would need to borrow from the ECB and pay interest. (The Fed or the ECB could also borrow dollars or euros from normal commercial banks, which I guess is embarrassing or untoward, and would also exacerbate the strain on moneymarkets.
By not telling the whole story CNBC is misleading readers into thinking these operations are insignificant and illusory. They’re not; funding markets are like oxygen for the financial system… taken for granted, almost invisible, but ever so important — especially when it’s in short supply! That said, the announcement today is good insofar as it will help avoid a dollar-LIBOR blowout like in 2008-09, and this was indicated by swap spreads moving down around 15bps (that’s fifteen, not fifty!). In reducing the risk of a repeat interbank funding crunch, it is a positive, but it does little to address fundamental issues, and the idea that (as the Fed states) this will help households, businesses, or foster activity is a joke — it helps the megabanks and large financial institutions and throws the weakest ones a life preserver.
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