The global investment audiences were treated to quite a performance this morning by a handful of central banks which reached the conclusion that certain strings had to be pushed while others needed to be played. A simple official statement of the CCBA (Coordinated Central Bank Action) contained the important kernel as follows:
“The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.”
In effect, the five central banks mentioned above lowered the cost of dollar swaps and extended existing temporary US dollar swap lines with others in the quintet in order to ease the strains that were increasingly threatening to turn the global symphony into something that sounds like a John Cage composition. Nobody, it seems, among central bankers anyway, wants to hear the sounds of silence. Silent factories and silent markets might make for some very vocal rank-and-file audiences out there later, and they might throw more than just tomatoes at government buildings if conditions deteriorate far enough.
Arguably, the move by the string quintet this morning could be interpreted as a substitute for the lack of action by the ECB and/or Germany and/or the IMF as regards Europe. While debates about the scope, size and structure of the EU and such continued in endless fashion, conditions had decayed sufficiently to result in last night’s warning (to Europe’s finance ministers) that Italy was at risk of becoming insolvent.
That, at least, is what Britain’s Guardian reported based on a confidential report it got a hold of. Said report indicated that without concrete action on the part of someone, the liquidity crisis in Europe stood a good chance of turning into a Lehman-like event. Europe’s finance ministers threw in the proverbial towel when they let it be known that they had fallen short of expanding the bailout fund and were looking to the IMF/ECB duo to pick up the lead. Europe’s leaders meet on Dec. 9 to try to perhaps bring about changes in governance, changes which might then make it possible to allow for a larger role for the ECB going forward. Dr. Rumack would say: “We just want to tell you all good luck. We’re all counting on you.”
The coordinated central bank sortie does provide a stop-gap measure for the moment and it once again demonstrates that moneyticians – and not politicians – are in charge when it comes to matters perhaps more critical than even national security (one could call it national insecurity). However, even now, all eyes remain on Germany and the ECB despite today’s turning of the spigots. Consider what Bloomberg’s Simon Nixon has to say on the delicate matter:
“But the ECB's response to the crisis remains dependent on politics. The good news is that domestic German politics isn't the decisive factor. The German government has made clear it respects the ECB's independence and won't tell it how it should interpret its price stability mandate. And while the Bundesbank has spoken publicly against wider intervention in the euro crisis, it only has two votes on the 23-person governing council. But like the German government, the ECB's chief concern is moral hazard: It won't intervene unless it sees a clear commitment from Eurozone leaders to adopt iron-clad new rules to ensure fiscal discipline. Eurozone leaders are to meet on Dec. 9 to discuss governance reforms. The stakes couldn't be higher.”