Developments of the past few days (and hours) continue to fall into the “never been done before” and “uncharted waters” file of the Federal Reserve and other central banks around the world. The same could be said of the U.S. Treasury Department and its counterparts around the globe.
globeFor the first time EVER, the Federal Reserve participated in a coordinated and near-simultaneous interest rate cutting action with other major central banks. The Federal Reserve cut its key federal funds rate target to 1.50% from the 2.00% rate in effect since April 30.
Action vs. Inaction
Whether these aggressive monetary policy actions will be effective in curtailing what is now a global financial panic is unclear. However, these actions, combined with other aggressive moves by central banks and the U.S. Treasury (and equivalents) around the globe is a far cry better than simply sitting back (as some would strongly suggest) and letting financial markets work things out.
We have been there before when the fledgling Fed and other central banks largely sat back and did nothing…it is known to us as the Great Depression.
As noted previously, Federal Reserve Chair Ben Bernanke and U.S. Treasury Secretary Paulson have taken steps and implemented aggressive strategies in recent days, weeks, and months that are nowhere to be found in their operating manuals. Similar moves are now perhaps belatedly being undertaken by their counterparts around the world.
Two Markets
We have two distinct financial markets in the world today. The equity, or stock market, is one where the typical U.S. or foreign consumer can look at the Dow average (the U.S.) or the Nikkei 225 index (Japan) or the Hang Seng index (Hong Kong) or the DAX index (Germany) or FTSE 100 (United Kingdom) and get a “feel” as to how stocks are performing.
Such a simple measure is not available in the credit markets. The typical consumer doesn’t really understand how commercial paper issuance provides the funding for thousands of global companies, or how the issuance of BANs and RANs and TANs might be used by municipalities to temporarily fund their operations.
Consumers many times “see” problems in credit markets when they can’t get a mortgage or an auto loan or have a long-standing loan for their small business suddenly curtailed by their lender. They “see” problems when they can’t get funding to add to inventory for the Holiday season. They “see” problems when the required down payment or documentation for a home loan is much more challenging than before.
Credit markets are all about confidence…confidence that if you lend or invest money with the investment bank across the street or “across the pond” you will get your money back…confidence that if you put money into a money market fund or other short-term investment that you will be able to get your money back…confidence that if you buy a bond issued by a major corporation or government entity that you will be able to sell that investment later should you choose to in a viable and liquid marketplace…
…It is that lack of confidence that is a grave and major threat to the global community today.
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