Credit crunch: central banks respond


In an attempt to settle investor nerves the European Central Bank injected some USD 131 billion into the European money markets. The Federal Reserve Bank chipped in with USD 24 billion followed by the Bank of Japan which pumped USD 8.5 billion into the Japanese financial system. According to the BBC the Australian central bank also moved to calm their market.

As with any fall, the further down the markets go the faster the descent. What triggered the current mayhem in the markets? When did markets tip over? In my opinion the wheels came off shortly after the two hedge funds set up by Bear Stearns took a knock from investments in collaterized debt obligations (CDOs). Thereafter ailing funds have stepped forward, one after another, to announce fantastic losses. IKF, the German lender, and more recently BNP Paribas (a huge French bank) added further momentum to the flight of investors away from risky assets.

It is interesting that the Fed injected funds into the markets on the heels of a bullish speech by President George W Bush. Perhaps investors understood the President's rallying speech as a getaway signal. Something just ain't right.

The housing market, possibly the most significant contributor to the credit crisis, has not been spared. The Wall Street Journal reports that "unprecedented disruptions" could affect the financial condition of Countrywide Financials Corp. Meanwhile American Home Mortgage is on the brink of collapse and has filed for bankruptcy under Chapter 11.

Conspicuous by its absence from the current saga is the central bank of China. Despite a history of tending to bad performing loans, Chinese banks have not been affected by the credit crisis. Yet.

Comments

Anonymous said…
Great work.
November 10, 2008 at 1:52 PM
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