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Total chaos in the financial markets
Translated from Dutch. View the original post
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The #monetairebrandweer is ripped out with large equipment. But the chaos in the financial markets is difficult to stifle. Reducing interest rates is not enough in times of corona.
Bucket of water
The measures taken by the monetary authorities have therefore little effect so far. It's kind of like the fire department threw a bucket of water in the middle of a forest fire. In a fraction of the time that water evaporates again. “The Fed is causing absolute panic with this cut in interest rates,” says Professor of Monetary Economics Casper de Vries of Erasmus University in Rotterdam. “The solution at this stage of the crisis is not monetary policy, but fiscal policy. That can support economies, and central banks cannot do that.”
The measures taken by the monetary authorities have therefore little effect so far. It's kind of like the fire department threw a bucket of water in the middle of a forest fire. In a fraction of the time that water evaporates again. “The Fed is causing absolute panic with this cut in interest rates,” says Professor of Monetary Economics Casper de Vries of Erasmus University in Rotterdam. “The solution at this stage of the crisis is not monetary policy, but fiscal policy. That can support economies, and central banks cannot do that.”
How do you turn mistrust in the financial markets? That was an easy answer question for central bankers over a decade ago: interest rates down. Since 2008, monetary policy has become less unambiguous. Rates down and the money press became the new credo when the markets dried up after the fall of Lehman.
As the world is being raided by the coronavirus, and as the economic and financial paralysis that goes with it swallows up billions in stock market profits, investors are looking again at central banks. And again it turns out: what used to work is now not enough.
The list of measures is now long. In the United States, the Federal Reserve started two weeks ago with a first interest rate reduction of 0.5 percentage points. Australia and Canada soon followed. The Bank of England lowered interest rates just a week ago, followed by Canada, Norway and China again.
In between, the Fed came with 1,000 billions in support for the so-called repo markets, the short-term US government loan market. Last week, the European Central Bank continued to open the counters for favourable long-term loans for banks, announced a broadening of the government and corporate bond buy-back program.
And Sunday evening it was again the turn of the Fed, which reduced interest rates by a full percentage point to between 0 and 0.25 percent and opened the money tap wide for both government bonds ($500 billion) and mortgage bonds ($200 billion).
Read also: Because of the corona crisis, all those debts suddenly seem dangerous
The scale of these measures is reminiscent of the period from the beginning of the financial crisis, in September 2008, when the measures focused on the financial system, which was the cause of the economic problems through the credit crisis itself. Now an external event is the causative agent - the coronavirus.
As the world is being raided by the coronavirus, and as the economic and financial paralysis that goes with it swallows up billions in stock market profits, investors are looking again at central banks. And again it turns out: what used to work is now not enough.
The list of measures is now long. In the United States, the Federal Reserve started two weeks ago with a first interest rate reduction of 0.5 percentage points. Australia and Canada soon followed. The Bank of England lowered interest rates just a week ago, followed by Canada, Norway and China again.
In between, the Fed came with 1,000 billions in support for the so-called repo markets, the short-term US government loan market. Last week, the European Central Bank continued to open the counters for favourable long-term loans for banks, announced a broadening of the government and corporate bond buy-back program.
And Sunday evening it was again the turn of the Fed, which reduced interest rates by a full percentage point to between 0 and 0.25 percent and opened the money tap wide for both government bonds ($500 billion) and mortgage bonds ($200 billion).
Read also: Because of the corona crisis, all those debts suddenly seem dangerous
The scale of these measures is reminiscent of the period from the beginning of the financial crisis, in September 2008, when the measures focused on the financial system, which was the cause of the economic problems through the credit crisis itself. Now an external event is the causative agent - the coronavirus.
Worries for ItalyBenink's main concern is the sustainability of public debts on bank balance sheets, in particular those of Italy. “Italy was already weak. Italian banks have 300 to 400 billion of their own public debt on their balance sheets. If that is going to shift, because confidence in the ECB is lost, you will be back in the euro crisis of 2012.” As far as he is concerned, Lagarde should, above all, bring peace back to the sovereign bond market.
Lagarde plays with fire in the middle of the crisisEuropean Central Bank ECB Chief Christine Lagarde announced far-reaching measures to help banks. But she also sowed new turmoil over Italy. In this way, the Corona crisis can become a euro crisis.
Powell puts the lower limit of stupidity even lower
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