Hard to know what we're facing, exactly...but it is large, and bears striking similarities to an earlier event. With some different responses to consequences. The Fed is offering huge secret loans to banks to launder their soiled mortgage-backed securities. I was looking for a quid pro quo bankers got in return for temporarily freezing home loan rates. Here it is. Fed Chairman Ben Bernanke pins the blame for the Great Depression on John Maynard Keynes, the gent he says was not aggressive enough in creating "credit channels" (printing money) for banks. That may be, but there's a "pick your poison" issue Bernanke seems to overlook, and loss of confidence in a currency may construct no better course. Via a Telegraph UK article, "World Bankers Resort to Firebreak:"
"This is a drastic action. The central banks want to place a fire-break to stop credit tensions spilling over into the broader markets and becoming the catalyst for a global economic crunch," said Ian Stannard, an economist at BNP Paribas.
While yesterday's joint move was sketched at the G20 a month ago, and fine-tuned in encrypted telephoned calls over the past month, the final trigger seems to have been the spike in the crucial three-month money rates that lubricate finance. Dollar and sterling Libor spreads have vaulted in recent days. Euribor spreads reached an all-time high of 99 yesterday morning.
"A co-ordinated move like this has the 'wow factor'," said Paul Mackel, currency strategist at HSBC. "But there's a lot of scepticism over whether this will be enough medicine to end the credit crisis. Is it already too late?"
Ben Bernanke, chairman of the US Federal Reserve, made his academic name studying the "credit channel" causes of depressions. He must have watched with growing alarm as the debt markets limped from one mini-crisis to another, failing to recover from their August heart attack despite three emergency rate cuts.
The asset-backed commercial paper market in the US has now shrunk for 17 weeks in a row, shedding almost $400bn (£196bn). Lenders are refusing to roll over short-term loans as they fall due, leaving borrowers desperately searching for other sources of money.
The crucial elements in the Fed's move yesterday is not so much the sum of money on offer - $20bn next week, $20bn the week after - but that all depository banks in America can draw from the tap anonymously, without the risk of being found out.
"People looked at what happened to Northern Rock in Britain and said we're not going to risk that, so hardly anybody has been using the Fed facilities," said Bernard Connolly, global strategist at Banque AIG.
The Fed is now spreading the net wider by allowing all US banks to use the Term Auction Facility, which offers secrecy and allows them to hand in a much wider set of investments as collateral to raise money, including mortgage securities. Perhaps some credit will at last reach those in urgent need.