Baseball91's Weblog

November 30, 2011

Dancing In The Dark

Filed under: China,European Union — baseball91 @ 3:53 PM
Tags: , , ,

The Federal Reserve moved Wednesday with other major central banks in a co-ordinated dance affecting world monetary policy. In the co-ordinated move with the Chinese Central Bank, the Bank of Japan, the European Central Bank, and the central banks of Britain, Canada and Switzerland, the United States Federal Reserve shared in a new version of QE2, easing the liquidity requirements to to the Euroepan Central Bank for European banks as a whole. Apparently to avoid, in times of dependency, world-wide runs on all banks. Just as European banks are dumping European government debt.

The Chinese government on Wednesday evening unexpectedly reversed its year-long move toward tighter monetary policy which had been aimed at curbing inflation which still persists. Weakening economic growth has now replaced inflation as the top worry in China, with the dramatic fall in exports to Europe announced within the past thirty days. The Chinese announcement to buttress the financial system, a particular surprise because the central bank usually announces moves on Friday evenings, came after the Shanghai stock market had slumped 3.3 percent on worries that the government might not act. The reduction in the so-called reserve requirement ratio – an important step to encourage banks to resume lending – came after the central bank had in 2011 increased interest rates three times, and raised the reserve requirement ratio six times.

In a speech in San Francisco Fed’s vice chair, Janet Yellen, on Tuesday underscored “the urgency of strengthened international policy cooperation”. She said that “the global economy is facing critical challenges.” The Federal Reserve then acted Wednesday morning with other major central banks to increase the availability of dollars outside the United States, reflecting a growing concern about the fallout of the European debt crisis. Banks outside the euro zone have been cutting their lines of credit to those inside the zone, as the United States was about to embark on a new stress test of its lenders which includes contingency planning against further disruptions in Europe. It would not be be surprising if the planned new stress testing would provoke American banks to cut their exposure to their euro counterparts, further exacerbating European funding problems.

It’s a wonderful life. As QE2 sails to Europe, on the back of the Federal Reserve Bank. The terms of the revised agreement announced by the Federal Reserve Wednesday reduces to 0.5 percentage points an existing premium of one percentage point, cutting the cost nearly in half. A most recent loan to the Euroepan Central Bank which had carried an interest rate of 1.08 percent, now would cost 0.58 percent.

Xia Bin is a member of the Chinese Central Bank who had said one year ago that U.S. quantitative easing amounted to “uncontrolled” money printing. The academic member of the Chinese central bank, Xia Bin had been quoted this week as saying a crucial part of China’s fine-tuning of monetary policy is to differentiate reserve requirements between banks. He is probably not as well tuned in as Janet Yellin, at least concerning reductions in the reserve requirement ratio.

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