Professor Nouriel Roubini at RGE Monitor has some good information on recent action by the Central banks.
Central banks are obviously getting frustrated and effectively desperate in
dealing with a most severe liquidity crunch that has gotten significantly worse
since August. Even last week’s coordinated announcement of central banks
monetary injections has done little so far in reducing the Libor spreads (at
maturities from two weeks to 3 months) relative to overnite policy rates,
relative to government bonds of matching maturity and relative to the Overnite
Index Swap (OIS) rate. The three month Libor versus policy rate differential is
still 69bps in the US, 95bps in the Eurozone (its highest level in years); and
93bps in the UK....
The ECB just announced a special liquidity operation that will allow financial institutions to borrow for two weeks unlimited amounts at a rate of 4.21% (close to its policy rate of 4%); the two-week euro Libor had been 4.9% before the announcement. So the ECB is providing a temporary monetary policy easing of 70bps for a two week period.
...
At the same time the Fed appears to have started again the stealth Fed Funds easing that it did perform in August and until the September 18th Fed Funds 50bps cut. Indeed, right after the 25bps cut in the Fed Funds rate on December 11th the Fed has started to do open market operations at rates below the new Fed Funds target rate of 4.25%. On Wednesday December 12th the Fed did a $12 billion 8 day repo at an effective rate of 4.066, i.e. 19bps below the Fed Funds rate (with accepted collateral being Treasuries). ... yesterday Monday December 17th the Fed did another overnite repo where the rate on the $7.5 billion backed by Treasuries collateral was 3.95%, i.e 30bps below the overnite Fed Funds rate of 4.25%.
What does this means? Simply that, like in August and September the Fed is now doing stealth reductions in the effective Fed Funds rate as it is lending every day significant amounts of liquidity at rates well below the target Fed Funds rate of 4.25%.
Bank of England Governor, Mervyn King was questioned by the Parliament’s Treasury Select Committee:
“The reason for the rise in spreads is not due to a shortage of cash, as it was in September,” responds King. “The large banks are now awash with cash. The issue is whether they’re willing to lend. What has become evident is that banks are concerned about the capital positions of other banks.”
In the past few weeks, says King, there has been a “more disturbing development” in the reluctance to lend will lead to a downturn in the US and lead to a further downturn in non-financial areas, says King.
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