Fisher Investments Editorial Staff
Monetary Policy, Developed Markets, Interest Rates

Fighting the Financial Crisis

By, 10/09/2008

Story Highlights:

  • Governments and central banks are dipping into their arsenals to fight the financial crisis, from emergency rate cuts to further government responses.
  • The UK government revealed a £500 billion package to support its banking system and to ease tight credit markets.
  • The EU is increasing guarantees on bank deposits and issuing temporary rescue packages.
  • It's encouraging to know leaders of both industrialized and major emerging economies are in discussions and able to take coordinated actions, though much uncertainty remains about the efficacy of these moves.

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The US battle against the financial crisis is becoming global warfare. Wednesday's coordinated emergency rate cuts were the shots heard around the world, signaling a more aggressive and united front by US, UK, European, and Canadian central bank forces to protect banking sectors.

Governments and central banks are dipping into their arsenals, hoping for the magic bullet to vanquish the crisis and once again free credit flow. In addition to rate cuts, the UK and EU, following on the heels of recent US action, also announced on Wednesday further government responses to the spreading financial panic.

The UK revealed a £500 billion package to support its banking system and to ease tight credit markets. The three main initiatives of the package aim to make new capital available to domestic banks and building societies to help them recapitalize and restructure finances, expand current liquidity facilities to provide sufficient liquidity in the short term, and ensure the banking system has the necessary funds to maintain medium-term lending.

A joint EU response concurrently announced the agreement between finance ministers to raise guarantees on bank deposits in member nations to €50,000 and the issuance of temporary rescue packages to all ailing financial institutions important to the banking system. The European Central Bank will start lending unlimited cash in its weekly auctions at the new benchmark rate and has reduced the cost of emergency overnight cash.

Much about these responses—including logistics and effects—are yet unknown and unveiling in real time. Additionally, doubts continue to linger over EU coordination as Germany has already voiced reluctance to use taxpayer funds for bailout-type programs. But it's encouraging to know leaders of both industrialized and major emerging economies are in discussions and able to take coordinated actions. After all, cooperation and open talks can prevent a repeat of the damaging protectionist policies that prevailed during the 1930's financial crisis (see our cover story, The Benefit of Bad Memories, for more). Indeed, the coordinated rate cuts mean there's less risk of banks moving their capital to countries that uphold relatively higher levels.

It's not certain where on the financial crisis all these bullets will land, or if one or all will bring it to its knees. The perils of the battle are many, not the least are unintended policy consequences and overregulation, but the rewards are great—perhaps vital.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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