Monthly Archives: December 2007

By Charles Wyplosz

The combined central bank injection of liquidity last week was impressive. Still, more than five months after the interbank market froze, banks’ thirst for cash seems unquenchable. The central banks have done everything they can to keep financial markets orderly. They took the risk of feeding the moral hazard beast and what did they achieve? So far they have avoided the much-feared “Big Crunch”, but the end of the tunnel is not yet in sight. The time has come to ask the harder question: do commercial banks get it? Read more

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By Martin Wolf Read more

By Kenneth Rogoff

US Federal Reserve officials were jolted last week by the cacophony of booing that greeted their quarter-percentage-point interest rate cut. Markets badly wanted double the amount. It is part of a growing town/gown rift between a model-oriented Fed and a profit-oriented financial community. Read more

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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By Martin Wolf Read more

By Fred Bergsten

The world economy faces an acute policy dilemma that, if mishandled, could bring on the mother of all monetary crises. Many dollar holders, including central banks and sovereign wealth funds as well as private investors, clearly want to diversify into other currencies. Since foreign dollar holdings total at least $20,000bn, even a modest realisation of these desires could produce a free fall of the US currency and huge disruptions to markets and the world economy. Fears of such an outcome have risen sharply in both official circles and the markets. Read more

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By Martin Wolf  Read more

By Daniel Gros The global economy has been hit by two shocks: the subprime lending crisis and high oil prices. The latter have faded into the background as prices have stabilised near record levels. But it would be a mistake to underestimate their importance. The recent surge in oil prices makes a rebalancing of the global economy more difficult, but it might in fact facilitate adjustment to the “subprime” credit crisis. The core of the issue is simple: oil producers tend to save about half of their windfall gains from higher oil prices. If the oil price stays around $90 a barrel, oil producers will increase their current account surpluses by $200bn-$300bn a year. The question will then be: who is willing and able to run corresponding deficits? Apart from the US, there are only two regions large enough to contemplate a shift in the external position of this order of magnitude: the eurozone and Asia (Japan and China).

The remainder of this column can be read here. Debate from our guest economists appears in the comments below.