Velshi: Banks' move a coordinated effort to help Europe buy time
The euro symbol is seen in front of the European Central Bank in Germany.
November 30th, 2011
09:38 AM ET

Velshi: Banks' move a coordinated effort to help Europe buy time

Editor's note: The U.S. Federal Reserve, acting with other nations' central banks, took steps Wednesday to support the global financial system with a coordinated plan to lower prices on dollar liquidity swaps beginning on December 5, and extending these swap arrangements to February 1, 2013. CNN's chief business correspondent Ali Velshi takes a look at why they may have made the move and how it can help the struggling European banks temporarily.

This major coordinated global move was undertaken because a global credit freeze - the likes of which we haven't seen since just after the collapse of Lehman Brothers in Sept of 2008 - was looking entirely possible.

By way of background, the cost (or rate) for European banks to borrow dollars from other European banks has skyrocketed since May and, in some cases, banks haven't been able to borrow for short periods (overnight to three months) at all.

Under international banking rules, banks must end each day with a certain reserve. As a matter of course, they lend each other money through a largely automated system on a nightly basis to cover any short-term shortfalls. Increasingly, with fears that over-leveraged banks could have a "run on the bank" and the lending bank might not be repaid, banks are hesitant to make short-term loans to other banks. If they do, it's at a premium rate.

The net follow-on effect is that under-capitalized banks stop offering short-term credit facilities to their clients. (Think of how clothing purchases are financed: Retailers don't pay cash to suppliers - a bank pays the suppliers, then gets cash from the retailer as sales are made.) As clients find it more difficult to raise much-needed daily operating cash from banks, they need to immediately slash cash expenditures. Generally, the easiest way to do that is to lay people off.

In an attempt to stave off the consequences of a global credit freeze, the Federal Reserve, in coordination with major central banks, has created a credit line available to those central banks, whereby they can borrow dollars at reduced interest rates for periods of three months. The central banks, in turn, can lend to commercial banks in their respective countries. This is meant to reduce the cost of short-term borrowing for troubled European banks and to give them immediate access to dollars.

This was done immediately after the collapse of Lehman Brothers as well, to alleviate the consequences of banks being largely unwilling to lend to other banks, even for short periods, for fear that the borrowing banks could fail.

This is a serious development that doesn't solve an underlying problem of bank instability. It buys time for banks to try to find solid footing for themselves.

Quest: Banks' move helps but doesn't address fundamental eurozone problems

And, in case you were wondering, it is an instance of the creation of "moral hazard" - a term in economic theory for a situation where there's an incentive to share a risk - as the central banks have jointly decided that some shaky European banks may be "too big to fail."

soundoff (108 Responses)
  1. Marine5484

    Another win for that cursed Obama, the heartless swine!!!

    November 30, 2011 at 9:57 am | Report abuse |
    • DivaMom

      Please refrain from spreading victious lies about our president and Commander in Chief. His name wasn't even mentioned in the article. No president has "control" over the Fed or the decisions it makes. I understand the frustration but use that frustration in an intelligent way not a childish way. Be informed, be accurate and vote!!

      November 30, 2011 at 10:29 am | Report abuse |
  2. Handofdoom

    Looks like the Anti-Christ is moving faster now. Time for a full Protest in Washington !

    November 30, 2011 at 10:09 am | Report abuse |
    • rtkarran

      The Hindu believe that Lord Shiva (God) took the form of a Monkey (Hanuman) and leaped over the Indian Ocean in 1 bound. Christians believe that Jesus was the son of God, walked on water, fed thousands from 1 basket of fish, and raised a man from the dead while dying and raising from the dead himself. How can we believe these things and not believe on ourselves enough and making significant change?

      November 30, 2011 at 10:58 am | Report abuse |
  3. johnny

    Yet another move to molest the price of money. This is the primary reason why resource misallocation occurred to a great degree in the past decade and these arrogant central bankers are engaging in the same mistake again. Socializing the consequences of undisciplined fiscal policy isn't going to fix this.

    November 30, 2011 at 10:16 am | Report abuse |
  4. aaron

    Anti-Christ, really? I'm glad here in Europe we are not influenced by religion like you crazy people in the US.

    November 30, 2011 at 10:18 am | Report abuse |
    • ckelley116

      Aaron, we're not all crazy. Please believe that. Some of us actually have the ability to use logic and rationale...unfortunately, it's the religious crazies that get the attention.

      November 30, 2011 at 10:32 am | Report abuse |
    • AmericanSam

      Yeah, we really aren't all crazy. Many of us do think for ourselves. I live in a very, very conservative place and I don't buy into this stuff at all.

      November 30, 2011 at 10:47 am | Report abuse |
    • velshijoker

      that is why in Europe you are in the crapper but so are we.........: – ))

      November 30, 2011 at 1:45 pm | Report abuse |
  5. Nolongermiddleclass

    An idiot and a moron respond. Do either of you have a life?

    November 30, 2011 at 10:19 am | Report abuse |
  6. ivan

    To little too late. It like a cracked glass table top that some are keeping from shattering using hot glue. You know soon or later that glue ain't going to hold.

    November 30, 2011 at 10:25 am | Report abuse |
  7. dan

    Some estimates are that there are 600 trillion dollars in credit default swaps and derivatives in the world that were creatively fabricated, inflated, and packaged by global financial speculators from assumptions and projections of a fraction of that in real assets. And now, Global Bankers want to transfer this speculative debt onto countries and their inhabitants. Word is, all the assets in the world don't even approach the amount of derivative debt bankers have amassed against us. This can only lead to one outcome: everyone will be a slave to the Global Bankers ... if you buy into their fractured system based upon power and greed.

    November 30, 2011 at 10:28 am | Report abuse |
    • Stop derivatives now!

      Derivatives are utter bullshlt from start to finish and should be banned completely!

      November 30, 2011 at 10:53 am | Report abuse |
  8. eric

    not all of us let religion in our politics. just the crazy ones.

    November 30, 2011 at 10:31 am | Report abuse |
  9. Bob

    WHAT A JOKE, EUROPE IS IN THE TOILET AND THE DOW IS UP 400, WHAT BS. THIS TOO WILL PASS.

    November 30, 2011 at 10:34 am | Report abuse |
    • Char646

      I agree, with the turmoil the world is in the Dow has managed to not only sustain its numbers but even increase at times. The system clearly can be manipulated and artificially propped up by those in power, it's only a matter of time now....

      November 30, 2011 at 10:59 am | Report abuse |
  10. jerry

    Seculatism is a religion.

    November 30, 2011 at 10:35 am | Report abuse |
  11. ibrahim

    i want to know 3000 ds how much euro

    November 30, 2011 at 10:39 am | Report abuse |
  12. Raul

    Hey Ali,
    Great analysis, but why don't you give us the whole picture?

    November 30, 2011 at 10:44 am | Report abuse |
  13. rtkarran

    The Hindu believe that Lord Shiva (God) took the form of a Money (Hanuman) and leaped over the Indian Ocean in 1 bound. Christians believe that Jesus was the son of God, walked on water, fed thousands from 1 basket of fish, and raised a man from the dead while dying and raising from the dead himself. How can we believe these things and not believe on ourselves enough and making significant change?

    November 30, 2011 at 10:59 am | Report abuse |
  14. Joshl

    To you people who are very oddly demonizing Obama for this, not only does the FED make their own decisions but also, did you not read the part "This was done immediately after the collapse of Lehman Brothers as well" and was that not in 2008 under BUSH?

    November 30, 2011 at 11:03 am | Report abuse |
    • velshijoker

      So who said bush is smarter than obama???????????/
      Both are idiots.
      And you are nothing but a typical Lemming from India blindly following the democrats !

      November 30, 2011 at 2:00 pm | Report abuse |
  15. Franxizco

    GO, CHINA, GO

    November 30, 2011 at 11:04 am | Report abuse |
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