reportonbusiness.com: Central banks slash rates in extraordinary move to ease crisis. “Central banks in Canada, the United States, Britain, the European Union, Sweden and Switzerland cut key lending rates by half a percentage point.” the next story is going to be about where to buy shotguns and canned food.
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this post was added on wednesday october 8th 2008 around 7am. it was added to the link category and was tagged: canada, economy, europe, usa
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The worst thing is it didn’t work. The over night lending rate between banks increases after the rate cut. Banks are still not willing to lead to one another.
What likely going to happen if this doesn’t work is the major central banks will act as central lender by providing funding for banks and other businesse and states. They will in effect replace the lending facility that used to be taken up by the network of banks and individual investors and become the only bank in town. Central banks can expand their balance sheet by asking their treasury to issure more debt. US govt can issue new debt and deposit the money with the Federal reserve. Since capital requirement is abotu 10%, the Fed will then be able to lend out 10 times that amount of deposit. The purchaser, likely to be another central bank, can then deposit the treasury to the fed and recoup the purchasing cost, and use the interest on the treasury to cover what’s charged by the Fed. This operation can increase money supply.
The problem with this approach is the Fed does not have a mean to deliever the money to the broader economy. It depends on banks to do that job. To encourage them to lend, treasury can infuse captial into the bak in exchange for some control. It can also establish banking outpost at the local level to acheive reach. After WWII, Japan and Germany uses their post office as banking outpost while they restore their banking system. But it will just take a lot longer.