Central Banks Join To Battle Credit Crisis, Stocks Surge | WAMU 88.5 - American University Radio

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Central Banks Join To Battle Credit Crisis, Stocks Surge

The Federal Reserve and five of the world's other major central banks just announced "coordinated actions ... to ease strains in financial markets" and make more credit available to consumers and businesses by pumping money into the global financial system.

In a statement released at 8 a.m. ET, the Fed says:

"The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity."

Translation, according to The Associated Press: The central banks are making it easier for financial institutions to get cash, especially dollars, that they can lend — hopefully at lower interest rates. The central banks are doing that, in part, by lowering the cost of "existing dollar swap lines by 50 basis points," Reuters adds.

The AP says: "Stocks surged following the news. Germany's DAX was trading 4 percent higher as were Dow futures in New York. The financial system has been showing signs of entering another credit crunch as Europe's debt crisis has shown alarming signs of spreading."

Update at 11:15 a.m. ET. Markets Continue To Rally; Why The Banks Acted; And Why The Dollar Is The Best Looking Horse In The Glue Factory:

The S&P 500 remains about 3.3 percent above Tuesday's close and the Dow Jones industrial average is up about 3.6 percent.

Meanwhile, Paul Brown of the NPR Newscast team spoke with Nariman Behravesh, chief economist at IHS Global Insights, who said the central banks took this action because "a lot of investors and banks in Europe are beginning to dump euros, as it were, and buy dollars and buy dollar-denominated assets." And that's created a shortage of dollars in Europe. So the goal of today's move by the central banks, he said, is to inject dollars into the European financial system so that commercial banks there will have them to lend.

And why is the U.S. dollar still a safe haven, given that the American economy has problems too?

In part, there's just so much fear about a possible break-up of the eurozone and that some countries will dump the euro and return to their own currencies that the dollar looks great in comparison, Behravesh said.

"The good news is that the dollar and dollar-denominated assets are [still] safe havens," he told Paul. "I often joke and say 'you know, we have problems, but the problems in Europe and other parts of the world are even worse.' Or, another way of saying it is 'the dollar is the best looking horse in the glue factory.' "

Update at 9:55 a.m. ET: Stocks are indeed rallying. The Dow Jones industrial average is up about 390 points (3.4 percent) and the S&P 500 is up about 40 points (3.3 percent).

Copyright 2011 National Public Radio. To see more, visit http://www.npr.org/.

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