yesterday europe loaned banks billions and it looks like today it is spreading to asia and australia.
http://www.ft.com/cms/s/5a7a5fe6-46f2-11dc-a3be-0000779fd2ac.htmlAsia seeks to calm markets with extra cash
By Reuters August 10 04:29 BST
Central banks from Tokyo to Sydney injected extra cash into banking systems or pledged to do so on Friday, as Asia joined a global campaign by monetary authorities to calm panicky credit markets.
“What the central banks are doing is a concerted effort to inject liquidity. And the worrying thing is that they do that when the system is not functioning the way it should,” said Jimmy Koh of United Overseas Bank.
The moves came after the European Central Bank injected record amounts of cash to prevent a financial system seizure after European banks essentially stopped providing short-term funds to one another on Thursday. The US Federal Reserve also injected cash on a smaller scale.
The trigger was news that France’s biggest listed bank, BNP Paribas, had frozen $2.2bn worth of funds hit by US subprime mortgage woes, further increasing fears the subprime problems would squeeze credit markets worldwide.
In Asia, the Bank of Japan said it injected funds at its regular money market operation on Friday due to a slight rise in the benchmark overnight call rate.
The bank for the world’s second-largest economy offered to supply Y1,000bn ($8.45bn) in funds. Traders said the amount was at the higher end of market expectations, but was not a major surprise.
The Reserve Bank of Australia on Friday added more than twice the usual amount of money into the banking system, injecting A$4.95bn ($4.19bn) in its regular morning money market operation.
While no reports had surfaced in Asia of a drying up of credit markets on par with the problems in Europe, financial markets took a battering.
Asian stocks slumped across the board and the yen extended its gains as investors dumped riskier assets following a rout in global markets sparked by a flare-up in credit jitters.
more at link
and this from PAUL KRUGMAN: Very Scary Things
http://freedemocracy.blogspot.com/2007/08/paul-krugman-very-scary-things.htmlWhen liquidity dries up, as I said, it can produce a chain reaction of defaults. Financial institution A can’t sell its mortgage-backed securities, so it can’t raise enough cash to make the payment it owes to institution B, which then doesn’t have the cash to pay institution C — and those who do have cash sit on it, because they don’t trust anyone else to repay a loan, which makes things even worse.
And here’s the truly scary thing about liquidity crises: it’s very hard for policy makers to do anything about them.
The Fed normally responds to economic problems by cutting interest rates — and as of yesterday morning the futures markets put the probability of a rate cut by the Fed before the end of next month at almost 100 percent. It can also lend money to banks that are short of cash: yesterday the European Central Bank, the Fed’s trans-Atlantic counterpart, lent banks $130 billion, saying that it would provide unlimited cash if necessary, and the Fed pumped in $24 billion.
But when liquidity dries up, the normal tools of policy lose much of their effectiveness. Reducing the cost of money doesn’t do much for borrowers if nobody is willing to make loans. Ensuring that banks have plenty of cash doesn’t do much if the cash stays in the banks’ vaults.
There are other, more exotic things the Fed and, more important, the executive branch of the U.S. government could do to contain the crisis if the standard policies don’t work. But for a variety of reasons, not least the current administration’s record of incompetence, we’d really rather not go there.
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