13 October 2008

The First Victim in an Economic Crisis is Truth

Yves Smith over at Naked Capitalism first picked up on this story from Bloomberg and blogged it here.

The reason for the short term need for US dollar overseas is explained here.

Bloomberg seems to have subsequently pulled this story and replaced it with an optimistic statement from George W. Bush here.

We do appreciate the little touch of irony but the frontpage of Bloomberg still carries the old headline over this new news story. Shoddy work at the Ministry to say the least.

To the experienced eye, there are other unmistakable efforts this morning to calm the markets with a false enthusiasm and the somewhat heavy handed management of key market signals.

When the going gets weird, the weird become ..... weirder.

Fed Leads Unprecedented Push by Central Banks to Flood Market With Dollars

Oct. 13 (Bloomberg) -- The Federal Reserve led an unprecedented push by central banks to flood the financial system with dollars, backing up government efforts to restore confidence and helping to drive down money-market rates.

The ECB, the Bank of England and the Swiss central bank will auction unlimited dollar funds with maturities of seven days, 28 days and 84 days at a fixed interest rate, the Washington-based Fed said today. All of the previous dollar swap arrangements between the Fed and other central banks were capped.

``By providing unlimited dollar funds they are acting on the back of the G-7 plan to ensure the system is fully liquidized,'' said Lena Komileva, an economist at Tullett Prebon Plc in London. ``We're going to see even more liquidity provided and more aggressive rate cuts are coming.''

Leaders of the world economy have redoubled efforts to unfreeze credit markets and avert the worst global recession in thirty years after last week's 20 percent slide in the MSCI World Index. Policy makers from the Group of Seven nations pledged at the weekend to take ``all necessary steps'' to stem a market panic and European governments are today announcing plans to avert a banking collapse across the region.

The cost of borrowing in dollars for three months today fell to 4.75 percent from 4.82 percent, the highest this year. The rate for euros over the same timeframe declined to 5.32 percent from 5.38 percent.....

``Taken together, the latest moves increase the chances that we will begin to see some relaxation of the intense funding stresses,'' Dominic Wilson and other economists at Goldman Sachs Group Inc. wrote in a note today. ``This is because bank solvency risk should decline as the government offers protection.''

As well as slashing interest rates in concert last week, global central banks are expanding their toolkits to push down money-market rates. The Fed on Oct. 7 said it will create a special fund to buy U.S. commercial paper and the ECB last week said it would offer financial firms unlimited euro funds. The Bank of England is scheduled to revamp its own money-market operations later this week.