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. SwilliamP

    Liquidity is a problem but lack of demand is a bigger one. The bottom line is that the majority of Americans (still the world's largest economy) have seen real incomes fall, asset values fall (homes are the #1 asset for most) and are unemployed, underemployed or fearful of losing their jobs. This heartwarming (sarcasm intended) liquidity fix does nothing for these issues. Wall Street may think it can live divorced from the average US citizen. They will learn otherwise.

    November 30, 2011 at 11:08 am | Report abuse |
  2. Alan MacDonald

    Crossing the Global Rubicon:

    It is being broadly reported, as we speak, that the Obama administration will NOT allow more US taxpayer money to be used to bail-out European banks, as reported in this very USA Today article:

    "And despite Obama's promise to "do our part," Carney said no U.S. taxpayers' funds are needed, even if the International Monetary Fund is called on to help in any bailout."

    And YET, this key NYT front-business-page article this morning, says that the US FED WILL contribute millions/billions in 'no interest' money from the US FED window to European Banks:

    Soooooo, "what we have here is a failure to communicate" ... OBAMA's BIG LIE.

    Here's my comment to the NYT and USA Today:

    Obama promised just yesterday that U.S. citizens could be sure that he would not allow any American funds (that might further peonize them) to be diverted to Europe.

    Oh well, another Obama promise made AND BROKEN, but this time in real-time - so fast was the lie that it makes one's head spin.

    Best luck and love to Occupy Empire.

    Liberty, democracy, justice, and equality

    Alan MacDonald

    PS. Oh, I know what the confusion is in Obama's apparent bold-faced lie to American citizens. He's actually speaking honestly, but as the faux-Emperor of the world, rather than just the president of our former country -- since what we still consider 'our' country is now the nominal HQ of the disguised corporate/financial/militarist Global EMPIRE, which hides behind the facade of its modernized TWO-Party 'Vichy' sham of faux-democratic and totally illegitimate government - just as an earlier Nazi Empire tried to hide behind its crude and single-party 'Vichy' regime in France c. 1940.

    It is now necessary for the global corporatist media to clearly articulate anything Obama says as either coming from the nominal president of the country previously called America, or from the mouth of the First faux-Emperor of the 21st century Global Empire - the real and accomplished Fourth Reich.

    November 30, 2011 at 11:12 am | Report abuse |
    • Bugmenot

      You gonna continue to babble all over yourself with this dross verbiage or are you going to attempt to speak quasi-intelligibly?

      November 30, 2011 at 11:37 am | Report abuse |
  3. azezel

    Im nervous but its moves like these that show that the treasury and the chairman know what they are doing in this global game of risk. Now, just what they are doing nobody knows because they are keeping their cards close.

    November 30, 2011 at 11:13 am | Report abuse |
  4. banasy©

    Your posts are boring.

    November 30, 2011 at 11:20 am | Report abuse |
  5. Patrick

    Ali – why not peel the onion back and report on what Forbes are claiming was an imminent default by a large French or Italian bank? That's the only reason the Fed and the Central banks rushed through this new policy at 3AM this morning.

    November 30, 2011 at 11:28 am | Report abuse |
  6. Jonathen

    This doesn't buy time for Europe. This is like giving a loan shark $50 when you owe them $400

    November 30, 2011 at 11:41 am | Report abuse |
  7. JB

    Move buys time? That's a guaranteed losing investment. If you buy Wednesday, then Thursday you have neither Wednesday nor your money. You don't need to be concerned with time, you need to be more concerned about a failed banking system and work to replace it.

    November 30, 2011 at 11:42 am | Report abuse |
  8. george lewis

    My hat is off to GOD, the queen, and Alan! snicker**. Gloom and doom and the new Vichy Hitler Anti-Christ!!!! Life goes on, this new technology allows us to know what's happening on the other side of the world in the speed of light. Be positive instead of acting like CHICKEN LITTLE!!

    November 30, 2011 at 11:43 am | Report abuse |
  9. rj

    This world market is a casino, plain and simply a place where instability is king. As the article talks of, and not of religion or Obama, the financial system is designed for people with capital to find the best investment. The only problem is that the true value of any underlying asset is distorted by anyone who has access to the media and wishes to cause movement of a certain investment. If you have been paying attention, a general view would show the way instability is reported in the Euro Zone. One day there is hope, the next doom and gloom. This current move with the dollar is just a new way of stimulating the roller coaster ride. Today a gain of 400 plus will be met with a downward move due to pundit criticism, jobs reports, housing construction, etc... If the key to all of this problem was to minimize bank's costs for their own factoring needs, which would have helped businesses with similar factoring needs, it would have been done long ago. The fallacy in the article is that banks don't have enough reserves on hand to meet requirements, but they are making record profits and not lending. So, where is all the money? The money is at the casino because leveraging at levels prior to the 08 collapse are no longer tolerated. If anything this new move with the dollar is another way to reduce cost and increase profit for banks to keep the instability alive. Until structural changes are implemented, the banks will continue to do what all capitalistic values promote, that is taking risks. What better way to satisfy such an urge than to create a system that completely satisfies such an urge, a casino.

    November 30, 2011 at 11:43 am | Report abuse |
  10. Jason

    I am trying to figure this one out: All of these governments, central banks and HUGE banks too big to fail are either indebted and BROKE but they keep lending to each other in order to make money off the interest and avert crisis. So when one fails a new liquidity crisis has to be averted to avoid failure and a deeper crisis. So the Funny Money lending and debt cycle continues. And the taxpayer everywhere is on the hook. Meanwhile, with the Money printing presses full steam ahead inflation keeps rising and governments keep overspending.
    I guess my question is: How can someone (Fed / Gov't A) who is broke lend to another person (Gov't B) who is broke and that 2nd broke person lends to a 3rd person (Foreign Bank) who is broke? That third person needs to charge high interest rates to make money off of a 4th person (Consumer/Taxpayer). Now how can the 4th person who originally went broke first (because Gov't A created an unsustainable asset bubble to recover from a burst asset bubble) be expected to be responsible for all of the debts?

    For simplicity sake, I have omitted a certain foreign debt holder who is establishing/building an unprecedented manufacturing base and enough currency reserves to eventually flush the toilet on your fiat currency.

    November 30, 2011 at 11:45 am | Report abuse |
  11. Robert

    Yes, this is simply an american bail-out of Europe disguised as a loan program. How much do you want to bet that the press just sweeps this under the rug.

    November 30, 2011 at 12:25 pm | Report abuse |
  12. dagnabit

    The Fed has money to lend to Europe, but Americans do not have money to pay for defense, social security or medicare without raising taxes.

    What am I missing?

    November 30, 2011 at 12:28 pm | Report abuse |
    • logic for the fourth party

      My thoughts exactly

      November 30, 2011 at 1:33 pm | Report abuse |
  13. Chinatown

    now European banks are labeled "too big to fail" so the US Fed gives them more credit to fill the leaky holes on the ship......this is getting worse and worse and will inevitably collapse.......An international network of alliances involving Shady Wall St/EU banks and corrupt US/EU govts are trying to stay afloat and will eventually require more taxpayer $ bailouts to save their rotten lying gambling dealings........get ready for more of your tax dollars to go bail out EU banks and Wall St.

    November 30, 2011 at 12:37 pm | Report abuse |
  14. outawork

    I can't wait to get my first billion dollar federal reserve note.

    November 30, 2011 at 12:47 pm | Report abuse |
  15. fred ca

    The policies of obama are feeding the 'need' of this action. The ailure to support a legitimate growth atmosphere, irresponsible spending, using money to payoff donors instead of for legitimate government expenses... No, obama does not 'control' the fed. Just as a thief does not control what a society does in terms of an anti-theft policy. However, the latter is made a requirement because of the former.

    November 30, 2011 at 12:58 pm | Report abuse |
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