A look at the action by central banks
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Stacey Vanek-Smith: Lots more sturm und drang today. Morgan Stanley’s share price hit a 10-year low, and it’s reportedly in merger talks with Wachovia and other banks. And Washington Mutual is desperately seeking a buyer. The country’s biggest savings and loan says it can’t raise the money it needs to stay afloat. That problem is at the root of our current economic crisis. Borrowing costs have skyrocketed, and companies can’t get cash.
Today the world’s central banks banded together to try and help. The Federal Reserve in this country joined the European Central Bank and central banks in Canada and Japan to inject $180 billion into global money markets. Julian Callow is an economist with Barclay’s Capital. Julian, this seems like a pretty drastic move.
Julian Callow: Exactly. We have never really seen anything quite on this scale before. What the U.S. Federal Reserve has done is to expand the amount of dollar liquidity it is prepared to give out to commercial banks outside of the United States by $180 billion. This is a very large amount. This liquidity, I think, has been very important at helping to improve sentiment in the financial sector during the course of today so far.
Vanek-Smith: Do you think this will work? Do you think this will loosen things in the markets?
Callow: I think suddenly it is a very important help. I think we’re in a situation here where the private sector really does require involvement by the government in order to help ease the concerns that have been arising about the availability of liquidity. It’s a classic case where the public authorities do really need to be stepping in. And I think, as well, although the measure may sound very large — it is very large, and it is unprecedented — nonetheless these central banks have demonstrated that they are ready to act quickly and indeed therefore could act more if more is yet required here. That said, I think, still we are in a situation where the central banks have to watch very closely the market developments here.
Vanek-Smith: Will this be enough to save some of the banks and other institutions that are in a lot of trouble right now or is this more something that will help in the longer term?
Callow: I think it has led to a significant improvement in sentiment today. I think, as well, the public authorities do need to be still willing to consider the possibility at least of other unorthodox measures. That still may yet be necessary. But I think it shows that the public authorities are acting in a very decisive way here, which is the most important thing. So, of which, I take significant comfort.
Vanek-Smith: Julian Callow heads up global economics for Barclay’s Capital. Julian, thank you for speaking with us.
Callow: Thank you very much.
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