Thursday, August 11, 2011

Global Equity Markets Meltdown: Global Central Banks Gropes For A Fix

Central bankers are racing to shield their economies from fiscal tightening and lopsided currency swings that threaten a new global recession.

In the 72 hours after a Group of Seven conference call on Aug. 7, the Federal Reserve pledged to keep interest rates near zero through at least mid-2013, the European Central Bank intervened in bond markets and the Bank of England indicated it’s ready to add more stimulus if needed. Japan signaled renewed concern about the yen and Switzerland yesterday stepped up its fight to curb an “overvalued” franc…

Today, the Bank of Korea kept interest rates unchanged for a second month and government officials planned a 2 p.m. local time media briefing in Seoul on the stock market rout. The MSCI Asia Pacific Index sank 1.1 percent as of 9:42 a.m. in Tokyo.

Finance ministers and central bankers from the G-7 nations, which include the U.S., U.K. and Germany, said in a statement Aug. 7 that they will “take all necessary measures to support financial stability and growth in a spirit of close cooperation and confidence.”

That’s from Bloomberg.

The insufficiency of current measures applied by central banks is likely to be the main source of the market’s recent violent reaction, as I recently said.

Remember, the global financial markets has been propped up and has been habituated to inflationism. Today they crave for more.

A comment from Wall Street celebrity echoes this sentiment. From the same Bloomberg article

“Central banks are trying to get their act together,” said Mohamed El-Erian, chief executive officer at Pacific Investment Management Co., the world’s largest manager of bond funds.

“But we have to recognize that what they do is necessary but not sufficient,” El-Erian said yesterday on Bloomberg Television’s “In the Loop” with Betty Liu. “We need other agencies, whether in the U.S. or in Europe, to get their act together.”

The same set of remedy has been applied to the same set of problems, which appear to be worsening.

Problems of which essentially signifies as unintended consequences to prior central bank actions.

From the same article,

In the U.S., Fed Chairman Ben S. Bernanke signaled that the central bank may consider a third round of large-scale asset purchases, even after the first two rounds totaling $2.3 trillion failed to secure sufficient job growth and sustain the two-year-old recovery. This week’s decision to leave its benchmark interest rate near zero through at least mid-2013 provoked three dissents from policy makers, the most opposition since Bernanke took office in 2006.

At the end of the day, central banks don’t know how and what to do to solve these problem, except to apply age old solution of inflationism.

From the same article,

Even as they take action, central bankers “don’t know the panacea” and have disagreement within their ranks, Deutsche Bank’s Schneider said. “It’s increasingly unclear who can stop this spiral.”

Well if the ECB and the FED’s latest move hasn’t been enough, then we should expect more of the same therapy to be applied, but at a vastly larger scale. The result will be the same--speculative excess, moral hazard, malinvestments, crony capitalism, corruption, capital consumption and boom bust cycles.

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