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. Mike

    Ron Paul will stop this nonsense.

    November 30, 2011 at 8:00 pm | Report abuse |
    • Fred

      I hope so. This latest ponzi scam will leave the US taxpayers on the hook for bailing out Europe.

      November 30, 2011 at 8:09 pm | Report abuse |
    • escher7@shaw.ca

      Who is Ron Paul?

      November 30, 2011 at 8:23 pm | Report abuse |
    • Realist

      Ron Paul is a disaster waiting to happen

      November 30, 2011 at 8:49 pm | Report abuse |
    • ddblah

      He probably would if he gets his way.

      That's why he should never gets his way.

      November 30, 2011 at 9:09 pm | Report abuse |
    • ddblah

      By the way, does Ron Paul know what is central bank? No, not the bank located at the center of his home.

      November 30, 2011 at 9:12 pm | Report abuse |
    • r

      thats what you think huh. theyll wash him like everybody else.

      November 30, 2011 at 9:50 pm | Report abuse |
    • r

      the reason this is happening is cause you people didnt care about crap through the 80's 90's '10's. now its like.....
      .....9 th inning citizen time. bit late buddy multies allowed 50 millions hispanics in here. the globies cut like 200 treaties.
      and the quick borrowed like 50 trillion. whats a citizen gonna do.....?..... nada sit there and watch it.

      you had to open your freeking mouths...................when we had 1 million hispanics here.....and we had like maybe 15 trade treaties......and like 600 billion in debt.

      this was 1985 or 86. To late bucko.......just sit there and watch it go down...

      November 30, 2011 at 9:54 pm | Report abuse |
    • r

      come on man we need a little truth from all sides us included. starts with us in the gov defense these issues didnt start yesterday. you can trace these things back to 85. in 85 we had 1 million illegals 500 billion in debt and maybe 15 or 20 trade treaties. we couldnt put these things out like a match.

      but they grew .........................and now.....theres no stopping them. i remember in 1985. Not even 30 people were for nafta. you couldnt find 500 people who supported illegals. and if millions made noise about the defecit it would of been gone. but what you people did party....live your lives etc,.,.,.

      these issues have been stareing you in the face your entire life times.....for you people to act like it just happened today. is really false of all of you. All you people are allowed to say......is today your acive about it. correct

      but these issues would have been put out like a match when they were in there craddle so to speak.

      but you !!!! freeking people through your ambivulance.......let it grow......cause deep down......all you wanted it to work....

      so to an extent you were all on board who you kidding.

      i can at least say. that i never for any of it .

      November 30, 2011 at 10:01 pm | Report abuse |
    • r

      i from day 1 in 1985 have never changed my position. i say rip up nafta. evict these third worlders off our land. discard all these treaties. nullify the visa program. send all these students home revoke all working visas. and put an end to all non european globalisim. tell anyone who is not european descent to leave. and thats it just basically clean this place.
      and restore our sovriegnty. day by day. to we get back too what we were pre 90's. a country which was largely european.

      with trade relations with west only. and 5 or 10 third world crap holes to care for. and larger domestic than foriegn
      commerce. and thats it. whats so hard about that to understand. i mean it worked perfect.

      what is it about this dam globalisim. that people are just hell beant dam the torpedos to make it work.?

      when it dosnt...... for nobody born here has anything after 1985 benefetid anyone in any way.

      and if you find one instance hwere it has ill find you at least 20 where it hasnt.

      dude like pat riely said definition of insanity is doing same thing over and over.

      well lets drop this. and restore and re stand a sovriegn nation.

      November 30, 2011 at 10:09 pm | Report abuse |
    • Pinche Vato

      Ron Paul will not have say; he can't even beat Gingrich.

      December 1, 2011 at 1:21 am | Report abuse |
  2. escher7@shaw.ca

    You want to talk about the economy. Feds just seized 32 tons of marijuana in California. That's enough for every man, woman and child in the US to smoke a joint or two. Solve the worrying and contribute to the economy at the same time.

    November 30, 2011 at 8:36 pm | Report abuse |
    • Amazombie

      man! why is there no LIKE button to like this post.. lol.. thanks for lightening up the mood here !

      December 1, 2011 at 12:51 am | Report abuse |
  3. Alan

    When the European Banks fail...................and they will..............America will be broke and Revolution will quickly follow.

    November 30, 2011 at 9:13 pm | Report abuse |
    • Mike

      I totally agree with you something big (not in a good way) is coming down the pipline, and i think you are not witnessing the downfall of all currencies and about ready too enter the "One World Currency" and i dont care what America and Europe do too prevent this both countries are about too be destroyed. Maybe that's what we need something different!

      December 1, 2011 at 12:59 am | Report abuse |
  4. Eric

    I was hoping that after the 2008 near world-wide financial meltdown, we'd be out of the woods now. This just tells me that we are still "toes over the cliff." No wonder gold prices have stayed high and world governments are the biggest buyers of gold. Even governments are hedging against a world-wide currency collapse. Yikes.

    November 30, 2011 at 9:21 pm | Report abuse |
    • Dandy

      Yep, they are just kicking the can down the street so the future generations can deal with this disaster.
      I am afraid that Depression II is looming...

      December 1, 2011 at 12:54 am | Report abuse |
  5. r

    veleshi

    why dont you

    and the rest of you multi cultural global swines say the truth....and if were going bank rupt we can at least live with truth.......

    say the truth
    that this generations glorious attempt at globalizing the economy , culture races, is an utter maniacle catastrophe....

    but im sure as a globalist multi cultural enthusiast that you will waiste every last dollar there is before you admit it.

    We were far better off in the pre 90's before gloablisim. far and away multiplied by 2 .

    we have gained nothing from these last 30 years utterly nothing. except a mountain of debt third worlders , and wars.

    ...but

    that wont stop the likes of you.

    You have bought this or into this dead farm

    and you ll be dammed if a seed wont grow.....

    my fellow americans. They have had there chance. i say re claim your sovriegnty. And jettison gloablisim. And begin

    the process of repatriotizing these nationals back to there stinken countries ,

    and start nullifying treaties....

    and begin to domesticate our economy.

    before its to late.

    and these gloablists take us too or over the deep end. And if they do everyone of you will have a hand in it. for your apathy and lack of courage.

    November 30, 2011 at 9:42 pm | Report abuse |
  6. marty

    This is the start of something big. Imagine the desperation. Now the whole world is playing "kick the dollar can" down the road. Like a world cup soccer game

    November 30, 2011 at 9:44 pm | Report abuse |
  7. s

    R, learn to spell and read some real books. In the mean time, go back to whatever hole you crawl out from! You have some MAJOR issues!

    November 30, 2011 at 10:27 pm | Report abuse |
  8. Steve

    Step right up and get your free cash here!

    November 30, 2011 at 11:00 pm | Report abuse |
  9. Steve

    It is a good time to have a huge mortgage. It will be like getting a free house when a loaf of bread is at $500,000.

    November 30, 2011 at 11:01 pm | Report abuse |
  10. mark o. david

    1985,I remember it well.Ronny Raygun was really in the grip of the multi nat. corps. dereg. fever.Thank the GOP for this mess.They started it.

    November 30, 2011 at 11:06 pm | Report abuse |
  11. Diogenes

    1. Mr Velshi – please take a step back and forget what you have been "taught" in economics and business, and imagine
    you are straightforward simple man for a second.
    It would seem to a simple outsider that the rule about how much money a bank has in reserve are for some purpose.
    Doesn't it seem – well, sketchy or possibly just wrong – that they skirt this rule by borrowing money "overnight".
    Is that really satisfying the intent of the original rules of reserve? If so, why have the rule at all?
    Don't reply with some specious argument like "well – that's what everyone does now".

    2. "Moral hazard" I do not think this means what you think it means.
    Wikipedia has a pretty good summation: something like: A scenario where the person deciding a risky proposition will not suffer the cost if it fails. Most telling example: a 2007 mortgage broker who executes a mortgage on a vastly overpriced home – he gets a commission, but suffers nothing if the mortgage fails.
    I think your example could be stretched to fit this, at best if you are saying that the banks in danger had been in the scenario of moral hazard _already_ when they made their poor investments, knowing _then_ that they would bailed out.

    November 30, 2011 at 11:08 pm | Report abuse |
    • Amazombie

      kudos. You got it right.. this joker will tell you it's buy time.. but he will NOT tell you when it's sell time.. what a moron.. what was he doing last tuesday.. when he should have been shouting buy.. lol

      December 1, 2011 at 12:52 am | Report abuse |
  12. jerry carreon

    THE Disaster is here ! be real !

    December 1, 2011 at 12:23 am | Report abuse |
  13. Pinche Vato

    Still, the article does not state what the underlying, fundamental problems are.

    December 1, 2011 at 1:20 am | Report abuse |
  14. SF

    Here we go again... Bailing out the fat bankers. See, the problem is that the fat bankers get fat because of fat politicians. They take our hard earned money via taxes and bank deposits, misuse, ponzi, mismanage, steal, overpay themselves and their secretaries, them when they get in trouble, they just take some more! This is insane!

    December 1, 2011 at 3:05 am | Report abuse |
    • ned

      you left out the bankers back door payments to the politicians...

      December 1, 2011 at 5:46 am | Report abuse |
  15. Jagmeister

    R,
    You are an uneducated hick. Please don't breed,or if you do go to Europe where your ancestors are from. Otherwise cool off your racist rant, you truly sound like an idiot.

    December 1, 2011 at 4:38 am | Report abuse |
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