Saturday, October 04, 2008

Global Central Bank Coordinated action

Central banks globally need to step into the money markets and act as counterparty to all transactions to get the money flowing again. If money markets don't unfreeze in the next 7 days, I think we will see multiple bankruptcies beginning this month. It needs to happen this weekend. A globally coordinated interest rate cut might help too, but I am not sure that will really unblock the money markets. The issue is counterparty solvency, not liquidity. An interest rate cut cannot solve the counterparty solvency issue.

The problem with this action is - if some bank fails, its central bank, and by extension its govt, will be on hook for billions. So this is a fiscal decision, which a govt should take, not a central bank.But considering that the Treasury now has $700 bn, it can surely spend some money here.

We need some luck now to avert a catastrophe. Otherwise, there is nationalization of a host of industries on the horizon.

Is it that there is a supercycle of regulation-deregulation, capitalism-socialism that overlays the smaller business cycle?

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