not that i understand what it is saying but looks interesting

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WASHINGTON (Reuters) - The U.S. Federal Reserve and other central banks on Tuesday teamed up to get hundreds of billions in fresh funds to cash-starved credit markets, allowing financial firms to use home mortgages as collateral.

Stocks surged and bonds fell in reaction to the moves, in a sign that the financial markets saw the plan as a viable remedy to the ease a crisis that has threatened world economic growth. The Dow industrials lurched 250-points higher at the start of trading.

In the latest effort to ease a credit contraction that has disrupted finance and rescued the world economy from a credit contraction, the Fed, Bank of Canada, Bank of England, European Central Bank and Swiss National Bank announced a series of aggressive measures to boost liquidity.

"In the near term, the Fed and global central banks have provided the thing everyone needed, and that's cash," said Martin Blum, head of emerging markets research at UniCredit in Vienna. "The actions ... deal with this issue by making it easier for banks to get cash, and that's important."

The Fed expanded its securities lending program, offering up to $200 billion (100 billion pounds) of highly-liquid U.S. Treasury securities to primary dealers, secured for 28 days. The amount of cash the Fed has offered to primary dealers and significantly expands what mortgage securities can be used as collateral. In effect, the plan allows them to replace easy-to-sell securities for the unwanted mortgage notes.

The moves were made after some huge mortgage concerns were receiving demands for more cash as the value of their securities plunged on credit markets. Investors, paralyzed by fears of a market shutdown. have shunned large sectors of the debt market, causing prices to tumble and leaving many offers for sales unfilled.

The action came on the back of an announcement from the Fed on Friday that it would expand auctions of short-term cash to $100 billion in March and launch a series of repurchase agreements expected to be worth $100 billion, bringing the total of recently announced action to a hefty $400 billion.

Stock markets rallied in Europe, and Wall Street opened sharply higher on the news. Prices for U.S. government bonds plunged, while the long-suffering dollar climbed.

As part of the latest effort, the European Central Bank said it would auction up to $15 billion for a term of 28 days, the Swiss National Bank said it would auction $6 billion and the Bank of Canada said it would it provide C$4 billion.

Despite the positive market reaction, some analysts questioned whether the latest round of central bank efforts would have much staying power. Earlier efforts by the Fed and its counterparts were successful in reviving markets for a short time, only to see them unravel again when the next bout of credit turmoil emerged.

"This Fed action is good for a day or two," said Michael Cheah, senior portfolio manager at AIG SunAmerica Asset Management in Jersey City, New Jersey.

"There are three problems in the market. One is the price of money, then liquidity and counterparty risk. The Fed can do all it can in the first two areas by trying to reduce Fed funds and the price of money. However, these moves are not going to mitigate the counterparty risk," he said.

In essence, banks have lost faith in each other after seven months of market unrest, making them reluctant to lend money to one another and driving up borrowing costs for the consumers and companies that power the world economy.

The U.S. central bank said the purpose of its latest action was to "promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally."

The new Fed lending facility will operate through weekly auctions that will start on March 27, the U.S. central bank said. It said it still was consulting primary dealers regarding the specific design of an auction.

The Fed also announced that its policy-setting Federal Open Market Committee has authorized increases in existing swap lines with the ECB and the SNB.

(Additional reporting by Al Yoon in New York; Writing by Emily Kaiser. Editing by Richard Satran)

Central banks move to ease credit crunch
ROMA LUCIW AND HEATHER SCOFFIELD

Globe and Mail Update

March 11, 2008 at 4:39 PM EDT

TORONTO, OTTAWA — The Bank of Canada joined forces with U.S. and European central banks on Tuesday, flooding the market with billions of dollars worth of liquidity in a synchronized bid to help alleviate an ongoing global credit crisis.

Just before equity markets opened in North America, the U.S. Federal Reserve Board unveiled a plan to inject as much as $200-billion (U.S.) into the credit markets and expand its securities lending program. Under its new Term Securities Lending Facility (TSLF), the Fed will make treasury securities available to cash-strapped banks and dealers through weekly auctions for 28 days, as opposed to the traditional overnight period.

The U.S. central bank further pledged to accept a wider range of securities as collateral, including some mortgage-backed securities. The move marks the first time the Fed will allow mortgage-backed securities to be used in this way.

Don Drummond, chief economist at Toronto-Dominion Bank, said the central banks were forced to take action because the debt markets were beginning to freeze up again. “There was just more of that contagion, the roughness we saw from July to September,” he said.


Just before equity markets opened in North America, Canada's central bank said it will inject $4-billion worth of liquidity into the markets. (The Globe and Mail)

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The temporary liquidity boost should help calm some of the turbulence that has been sweeping through markets in the last week, he said. “This is a fair bit of money and it is for 28 days at a low interest rate — it buys the market some time.”

However, Merrill Lynch economist David Rosenberg does not believe the new facility will alleviate the current credit crunch or an economic recession.

“The size of the auctions, while sizable in terms of the Fed's balance sheet, are actually fairly small in light of the overall credit situation and in no way does this solve - or is intended to solve - the massive writedowns and losses in the banking sector that are ongoing in this cycle,” Mr. Rosenberg said.

Treasury securities have been in great demand amid all the turmoil in the credit market — they are seen as one of the safest investment vehicles around because they are ultimately backed by the U.S. government.

Canada's central bank joined in Tuesday's co-ordinated action by offering up a more modest $4-billion (Canadian) in short-term securities, to be made in two parts through its Purchase and Resale Agreements. The first injection, worth $2-billion, will be made on March 20, with the securities to be sold back on April 17, while the second $2-billion is scheduled for April 3, to be paid back on May 1.

“In the Canadian money markets, we're not experiencing the same kind of pressure” as other money markets in the world, explained Jeremy Harrison, spokesman for the Bank of Canada. Still, short-term borrowing in Canadian markets remains more expensive than normal, he added.

Tuesday's move marked the third time in recent weeks that the Bank of Canada has made decisive moves to bolster liquidity.

Mr. Drummond said the smaller Canadian injections were proportional to the size of the problem.

“The seizing up of credit in the U.S. is much more the issue than in Canada,” he said. “That [$200-billion] is a powerful and big program, and you only introduce a powerful and big program when you have a perception of a powerful and big problem.”

The European Central Bank, the Bank of England and the Swiss central bank all promised to take the appropriate steps to help address the liquidity issues in their respective markets and ensure the global market continues to operate smoothly.

The Group of 10 central bankers have said in the past that they should act together to address global conditions because money markets around the world are so intertwined.

The same central banks co-ordinated a similar liquidity injection in December to help companies through the year-end, when demands for cash normally spike.

For now, the ECB said it will lend banks in Europe up to $15-billion (U.S.) for 28 days while the Swiss National Bank will hold a similar auction of up to $6-billion. The Bank of England will offer $20-billion of three-month loans on March 18 and hold another auction on April 15.

“Since the co-ordinated actions taken in December, 2007, the G10 central banks have continued to work together closely and to consult regularly on liquidity pressures in funding markets,” the Bank of Canada said in a statement posted on its website. “Pressures in some of these markets have recently increased again. We all continue to work together and will take appropriate steps to address those liquidity pressures.”

Given the recent increase in pressures in some markets, the bank “is of the view that it is constructive to address liquidity pressures affecting funding markets in a co-ordinated way,” Mr. Harrison said.

A string of bad economic and corporate news last week in the United States prompted money market liquidity to dry up rapidly again last week — so rapidly that the Fed didn't have time to organize a co-ordinated action.

In announcing its move, the Fed left the door open to expanding the effort, and also said that it is increasing the amount of money available to European central banks through swap lines. Those agreements allow foreign central banks to borrow dollars from the Fed and then lend the dollars on to their own banks.

Stock markets surged at the central banks' announcements. In New York, stocks had their biggest one-day gain in five years. The Dow Jones industrial average, the S&P 500 index and the Nasdaq composite all jumped rose more than 3.5 per cent, while Toronto's S&P/TSX composite rallied 2.6 per cent or 339.44 points.

Major European indexes, including the FTSE 100 the Dow Jones Euro Stoxx 50 and Germany's Dax, all climbed in the wake of the news.

The sheer size of the Fed's intervention is boosting stocks, said Douglas Porter, deputy chief economist at BMO Nesbitt Burns Inc. in Toronto. “To some extent they're firefighting right now, addressing whatever liquidity constraints are cropping up,” Mr. Porter said of the central banks' action.

“In recent days, there's been some concern about agency-sponsored, mortgage-backed securities,” he said, referring to Freddy Mac and Fannie Mae in the United States. “And the market response seems to suggest it will help, at least over the near term.”

According to BMO's Mr. Porter, Tuesday's move could slightly lessen the pressure on the Fed to cut interest rates “very aggressively” again next week, although he still thinks the U.S. central bank will cut by half a percentage point “at a bare minimum.”

Another economist, who asked not to be named, said there are two ways of interpreting the interventions announced Tuesday.

“One is, you can look at it as reflecting just how deep the concern is among central banks globally about what's happening in the financial sector,” he said. “The other way you can read it is that they are committed to addressing that with more and more unusual and aggressive steps to improve the market's functioning.”

The Fed's measures, in particular, look “more aggressive” than previous steps, he said.

Mr. Rosenberg said that while the Fed's new actions are “positive” and innovative,” the auction is too small to make a real difference. “Again, as with all the Fed's steps to date, this move injects a bit more liquidity into the system, but does not cure the overall credit crunch or credit problems.”

This is basically like trying to stop a bleed stab wound by sticking the knife back in, only deeper.

deeroo wrote:This is basically like trying to stop a bleed stab wound by sticking the knife back in, only deeper.

Maybe. If it doesn't work then recession is pretty much guaranteed (if it hasn't already happened). The bigger question round here is whether a US recession automatically means a World recession or whether other markets can take up some of the slack. Personally I doubt it. The latest figures show a big drop of in Chinese exports over the last quarter so less jobs in China.

question, does this news mean because the borrowing part of US market is failing due to mortgage crashed, not enough liquid money in the whole banking system, hence asking for money from other central banks of US's brothers?!?!

how does that affect the rest of the world apart from the above banks mentioned?

There will not be a recession. The US will not let that happen. They will just go to war again somewhere. That seems to be the recipe, (and I must say so far it worked) and they made sure that they created more 'potential targets' than ever. It's been like that all the way during the 20th century. Only problem is that in our global economy the economical cycles seem to be getting shorter.

black_bird wrote:question, does this news mean because the borrowing part of US market is failing due to mortgage crashed, not enough liquid money in the whole banking system, hence asking for money from other central banks of US's brothers?!?!

how does that affect the rest of the world apart from the above banks mentioned?

Yes that's pretty much how it all started anyway. But many of the US mortgage debts were packaged up and traded all over the World. The buyers thought they were buying high quality assets which in reality were nothing of the sort. No one really knows how much exposure many banks have to this problem and so there has been a total freeze on interbank lending as the banks want to make sure that they can get their money back. Of course this is making the situation much worse as businesses need liquidity to operate too.

One effect has been to make lending more expensive. It is therefore harder to obtain mortgages for example and this will push house prices down further and make the situation worse. So basically its the fear of recession which will probably cause one.

The core of the problem in the US is that to much is bought with borrowed money. The Asian crisis in 1997 showed us that this concept does not work.

Andreas wrote:There will not be a recession. The US will not let that happen. They will just go to war again somewhere. That seems to be the recipe, (and I must say so far it worked) and they made sure that they created more 'potential targets' than ever. It's been like that all the way during the 20th century. Only problem is that in our global economy the economical cycles seem to be getting shorter.

this all sounds pretty logical but i never get my head around it? because I have heard the oil price has rised after the war?(shouldnt it be falling....) and with war do they really take spending money out from education and health etc and put it on war???

@_@

Yes that's pretty much how it all started anyway. But many of the US mortgage debts were packaged up and traded all over the World. The buyers thought they were buying high quality assets which in reality were nothing of the sort. No one really knows how much exposure many banks have to this problem and so there has been a total freeze on interbank lending as the banks want to make sure that they can get their money back. Of course this is making the situation much worse as businesses need liquidity to operate too.

One effect has been to make lending more expensive. It is therefore harder to obtain mortgages for example and this will push house prices down further and make the situation worse. So basically its the fear of recession which will probably cause one.

thx. r u an economist of some sort? brainy people....

I will differ with Andreas when he says that the US won't go into recession...it's already there. And really that isn't such a bad thing. It's nessessary. Recessions are part of the business cycle.

In layman's terms: It's the part of the business cycle where money that was not allocated efficiently is supposed to be reallocated more efficiently, which will then drive a more prosperous and growing economy.

The problem that the USA has inflicted upon itself is that instead of accepting a recession as a normal part of life, it has tried to institue a Ponce De Leon fountain of youth for the economy.

We are now living in a "bubble" cycle.

The tech bubble of the 90's (along with 9/11) caused a major recession and to "combat" it, the Federal Reserve brough interest rates down to unheard of levels. That brough all of the morgages to the market with the easy credit and lead to the housing bubble which has popped.

We are now in a commodites bubble which at some point will pop as well. And either the US can learn its lesson, stop lowering rates, and let the wound heal, or it can do what it will probably do and make it worse by lowering rates more.

Lower rates are what partially what caused this mess, and to think that lowering them again will solve it is just 10 kg of feces in a 5 kg bag.

Like Hammer said above, the mortgages in the US were packaged and sold around the world and when the US Credit Crunch came to light, it started killing the investments that other countries made in these packages.

And to answer your question about oil. Oil is priced in USD and when the value of the dollar goes down and the demand stays the same, the price goes up. Add in the fact that oil is a commodity is traded and people are betting that the price will continue to rise and you have one of the reasons why the price keeps increasing.

thought recession = negative GDP?!.....

And to answer your question about oil. Oil is priced in USD and when the value of the dollar goes down and the demand stays the same, the price goes up. Add in the fact that oil is a commodity is traded and people are betting that the price will continue to rise and you have one of the reasons why the price keeps increasing.

interesting. thx

black_bird wrote:thought recession = negative GDP?!.....

Technically, it's 2 continuous quarters of negative growth to GDP. But what I said in my post above it more of the microeconomic view.

I don't really understand the concept of a worldwide recession. There's a finite amount of economic resources. What makes it infinite is credit. Confidence in credit is as much psychological as it is economic. If I believed a year ago that the US could pay off its debts, and its in mine and the world's interest to continue this fiction in order to prevent recession, why isn't it possible to just convince everyone that it is in our collective best interest to continue to ignore the reality?