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. shawn

    So now American tax payers are backing these risky banks that might go bankrupt. All through the fed reserve without congressional approval. And did I stress foreign banks. Brilliant!

    November 30, 2011 at 1:22 pm | Report abuse |
    • Options Trading Tutorial

      Honestly though, you have to remember that US banks and businesses which employ millions of people also have direct and or indirect ties to these foreign banks the ECB (via the Fed) is helping. Another Lehman debacle is simply not an option.

      November 30, 2011 at 2:16 pm | Report abuse |
    • conrad

      And what happens in 3 months when the "commercial banks in their respective countries" can't pay off what they borrowed?

      American taxpayer funded default.

      We need meaningful regulation badly. Why are central banks unable to meet their minimum reserve requirements? Shouldn't it be illegal to meet those requirements with 'borrowed' money ... how is that even reserve?

      We also need to dump the Fed. Why should any agency be able to operate in this manner without a vote from the people?

      November 30, 2011 at 2:45 pm | Report abuse |
    • Aletheya

      It's d@mned if you do and d@mned if you don't. If we let Europe seize up, so goes the world economy and ours too. There is no such thing as a separate American economy any more – all national economies are intricately interlinked globally. So pick your poison. We either help them out, or we accept a replay of 2008, except this time it will certainly plunge us into a depression worse than the 1930's depression.

      November 30, 2011 at 3:20 pm | Report abuse |
    • zlholmz

      @ Conrad: Bc the Fed and these other 'central' banks are all linked together in a global banking dynasty that has taken control of country after country around the globe over the course of about the last thousands years(i guess) by either crippling, then bailing out countries, thereby "owning" them or by other thug tactics and the buying of our so called 'representatives'. The people in power have no country, they have no allegiances, they cannot be accused of treason or unethical actions. they own countries, their power and actions transcend centuries. Their warped, unsustainable, destructive, and grosely greedy ways decide our conditions, our futures, our interests, dreams, and aspirations. and for what, do they for the aliens or someone else higher than they or are they just psycho sickos?

      November 30, 2011 at 4:24 pm | Report abuse |
  2. JTexas

    Thanks Europe for running this welfare state experiment and showing us it doesn't work. At least we didn't have to find that out ourselves..... oh wait, we see that it doesn't work but we still keep heading towards it. Isn't that the sign of someone or some orgianization that has gone "crazy"?

    November 30, 2011 at 1:31 pm | Report abuse |
    • Sarah

      Hm, ok so who do you think payed for all the "serious" business that US banks did in 2008??? Foreign banks and their tax payers. This is so typical american. As long as others can pay for what US banks did, that is fine. But as soon as it is the other way the blaming and crying starts.
      Additional to that, the current financial crisis doesn't have anything to do with socialism in each of those countries. That is what you like to believe so you can start crying and whining again. Who finances the Fire Department or your public library?? US Tax Payers.... hm I think that is called socialism. Dang, we have socialism in the US..... But do you want to live without a Fire Department?? Don't think so

      November 30, 2011 at 2:44 pm | Report abuse |
    • Badgerbreath

      I wouldnt make too many assumptions about welfare state failures there lad. Ours has worked and is still working just fine here in Canada thank you very much. All of our problems are directly related to external economic pressures and the selling off of most of our manufacturing jobs to the east via diminishing trade barriers. We are all boneheads (and that includes both Canucks and Yanks) for allowing that move to happen.

      November 30, 2011 at 3:50 pm | Report abuse |
    • Minnie Ovens

      Sorry about that JTexas but as you inflicted us with all those packages of sub prime debt, we have concocted our retaliation and inflicted this on you.
      In fact in both cases it wasn't us,the people, it was the completely corrupt and greedy bankers in cohort with governments appeasing them that has inflicte this on all of us.
      The people of both the US and Europe are now meant to repay the debts of their governments and banking systems.
      Which makes us fools being led by powerful and corrupt fools.

      November 30, 2011 at 3:53 pm | Report abuse |
  3. logic for the fourth party

    So wait, we did this after Lehman collapsed, and it did nothing if I'm not mistaken, and now we're doing the same. What will change? We really need to wake up.

    November 30, 2011 at 1:38 pm | Report abuse |
    • Aletheya

      Don't be ridiculous, it prevented a total collapse of the world economy. If you've already forgotten the events of 2008, you need to go read through the timeline again and refresh your memory. We came within 72 hours of having no financial system, and no economy, at all. You complainers have no idea how close we came to the abyss. No money. No trade. No food in the grocery story. No gas in the pumps. No electrical supply. No heat. No air conditioning. No jobs. It would have been life as it was in 1800, except no one today is prepared to live that way. Wake up, man.

      November 30, 2011 at 3:25 pm | Report abuse |
    • bebob

      @ Aletheya, do you always believe what the government tells you. Create/fabricate a crisis in order to do something that would be unthinkable if people were thinking and not driven into a panic. You are being manipulated and don't even know it.

      November 30, 2011 at 3:37 pm | Report abuse |
    • JoeSeattle

      Alythea –

      What makes you think it prevented anything?

      November 30, 2011 at 3:40 pm | Report abuse |
    • Logic for the fourth party

      @ aletheya. What you're referring to us that the fed "all of a sudden" noticed a serious down draw oniony market accounts in the USA to the tune of 550 billion. In turn the treasury started to pump money into the USA banks to stave the losses which would have lead to an economic meltdown. What I'm referring to is one country that has no money giving money to another country that has no money to lend to other people that have no money. I fail to see a positive outcome in such move.

      November 30, 2011 at 4:17 pm | Report abuse |
    • zlholmz

      @ Aletheya, hell yea i'd go back to 1800. we all would be better off. No federal reserve running the debt thru the roof, plenty of jobs, and most people were property owners and people had rights. the right to assemble, to bear arms, freedom of the press and an honest open pursuit of democracy.

      November 30, 2011 at 4:45 pm | Report abuse |
  4. velshijoker

    Velshi loves the sound of his own voice !! and is always so sure he is right.
    Mostly he is not.
    he is just "toe the line" for the govt.
    Buying time is 'band aid" and not more.
    all of it will explode.

    November 30, 2011 at 1:40 pm | Report abuse |
  5. Ted Peters

    I admit that I really don't understand how all this high finance stuff works... but it seems to me that I keep hearing the sound of the same can getting kicked down the same road and someone whistling something from a graveyard about in the long run we will all be dead.

    November 30, 2011 at 1:46 pm | Report abuse |
  6. CTL

    @jtexas: if the banks are the problem, that means the CAPITALIST state is at fault, not the welfare state. try to use common sense instead of neo-conservative talking points

    November 30, 2011 at 1:46 pm | Report abuse |
    • JoeSeattle

      Sorry, that's just plain dumb. Central banks are not capitalist by definition. Centralization is the antethesis of capitalism, and prevention of icentralization is the most vital role of an effective gov't. Promoting it is fascism.

      November 30, 2011 at 3:44 pm | Report abuse |
  7. JTexas

    @ CTL neo-conservative... lol.... the banks are part of the problem so I will conced that point and acknowlege the need for reform, but underlying it all is the fact that the citizens of these countries have come to demand that the governments provide for every need and want. This is bankrupting and straining the entire system. We have all come to the point to where we and they can't simply take care of ourselves and that isn't a NEO CONSERVATIVE view.

    As far as common sense goes, thats such digressive agrumentative term. Lets talk points and counter points, not name calling and fingerpointing....

    November 30, 2011 at 1:56 pm | Report abuse |
  8. earlerich

    Apparently the U.S. government as expanded the definition of " American Interests" – you know, the interest we send our young people to die for and our treasury to pay for. Before, that definition included large international corporations; the American banking system, big oil corporations, the industrial military complex and the Israel lobby. Now it, also, includes foreign banks.

    November 30, 2011 at 2:07 pm | Report abuse |
  9. BradKT

    Ain't globalization wonderful?

    November 30, 2011 at 2:27 pm | Report abuse |
  10. Deryk Houston

    The seeds for World war three have just been planted. All hell is going to break loose when things unravel... as they must.... using this shortsighted economic logic.

    November 30, 2011 at 2:28 pm | Report abuse |
    • zlholmz

      probably right. it is on its way that is for sure. this is at least openly presenting the aims and interests of the NWO, its here....

      November 30, 2011 at 4:48 pm | Report abuse |
  11. Bud Sachs

    We really need to do this more often. After all, there's no cost to injecting all this liquidity, right?

    November 30, 2011 at 2:39 pm | Report abuse |
  12. Velshi-wrong-again

    Ali Velshi, a religion major, toes the big government line every chance he gets. The Fed is always "wise", government policy makers act in the "public interest," etc., etc. His "experts" are Wall Street types or establishment economists. Always wrong! Let banks fail. Let companies fail. Let governments fail. Get out of the way and let the market work.

    November 30, 2011 at 2:59 pm | Report abuse |
  13. David

    Just a question for everyone? What would you rather have? The central banks coming to the rescue, I use that term loosely, or let the banks fail?

    The credit squeeze was coming and still may hit the banks and we may see some failures like we did in 08. I was shorting the banks and was about to make a good chunk of change but then the central banks stepped in provided more liquidity. Is that free maket capitalize? No, but do despise it, I can't honestly say cause the alternative maybe far worse.

    November 30, 2011 at 4:18 pm | Report abuse |
  14. Brad

    It's laughable to watch the gullible liberals see this as a great move by the Fed. This is nothing more than a delay tactic that will do nothing in the long run to offset the failed socialist policies of Europe. But will the American liberal learn from this? Of course not! They seem to think that they just haven't done enough yet! Never mind that their mindless policies are bankrupting nations around the globe! The rich just need to "pay their fair share". It's always the same....someone ELSE needs to pay more.....not them.

    November 30, 2011 at 7:02 pm | Report abuse |
  15. I can read - can you

    Amazing....With a Republican administration in office and in conjunction with the same Federal Reserve tactics, policies that devalues savings and paychecks and rewards the big banks and Wall Street, Democrats would likely be upset. But now they cheer these same policy results because they are supported by a Democrat administration. The only conclusion is it’s not the policies that matter but rather the party in charge that makes them right or wrong……..Freaking Fools.
    I already hear cheers coming from Democrats when Obama signs the bill reducing the corporate Tax rates and gutting Social Security. And don’t forget that he is currently championing and defending the use of warrantless GPS tracking devices before the supreme court…………..hurray…..I mean boo….I mean I am confused!!

    November 30, 2011 at 7:36 pm | Report abuse |
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