By Willem Buiter:

On Wednesday, 12th December 2007, five central banks, the Fed, the ECB, the Bank of England, the Bank of Canada and the Swiss National Bank (SNB) are reported to have launched a coordinated attack on the North Atlantic liquidity crisis that has been with us since August 2007.  If they did engage in coordinated action, I missed it.  What I did observe was the simultaneous announcement by these five central banks of "measures designed to address elevated pressures in short-term funding markets".  Except for the timing of the announcements, no substantive coordination was involved. 

The only other bit of coordination included in the announcement was pure eye-candy – window dressing without substantive economic significance.  I am referring to the news that the ECB and the SNB have entered into currency swap arrangements with the Fed of up to $20bn and up to $4bn respectively.  The ECB will conduct repos (sale and repurchase agreements) in US dollars against the usual ECB collateral and the SNB will conduct repos in US dollars against the usual SNB collateral.

Why are these US dollar repos by the ECB and the SNB, and the associated currency swaps meaningless window dressing?  It is because, given the financial opportunities available to central banks and private financial institutions (and given the incentives motivating the latter), the economic impact of the ECB’s (up to) $20bn repo is the same as that of a repo in euro by the ECB for an amount up to the euro equivalent of $20bn, and mutatis mutandis for the economic impact of the SNB’s US dollar repo.  The reason is – and I know this will come as a shock to the central banks involved – that the US dollar, the euro and the Swiss franc are convertible currencies, for both current and capital account transactions, and that the foreign exchange markets for these currencies remain perfectly liquid, thank you very much.

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