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The unprecedented destruction of global wealth has stirred the central bankers of the industrialized world into action. In a bold move yesterday, central banks from North America to Asia moved in unison, cutting lending rates in order to get money flowing again.
We have not seen emergency, co-ordinated rate cuts, since immediately after the attacks of Sept. 11, 2001. That may be the best context in which to put the arcane financial crisis that until now has largely been described to the public as a liquidity problem arising from the U.S. subprime mortgage fiasco. This has become a global assault on the economic health of nations and individuals. The International Monetary Fund yesterday called it “the most dangerous financial shock” on markets since the Great Depression.
Canada, the U.S., Britain, the European Union, Sweden, Switzerland and China cut central bank lending rates. This countering of the tightening of credit, where even banks are reluctant to lend to each other, is a good step. But much more is needed from the international community, and quickly. Millions of retirees who invested cautiously have just seen their savings gutted. They don't have the income, or time, to replenish them.
Tomorrow, the Group of Seven finance ministers and central bank governors meet in Washington. It will be harder for the finance ministers in this group to deliver. Central banks are independent, and cutting rates as inflationary pressures ease is the easy step. Politicians worry how skeptical voters will react. The public is right to worry about how their tax dollars will be spent.
Governments need to lead together, guaranteeing bank deposits, to quash the public's worst fears. Ireland moved first to do so, but without international co-ordination, money suddenly poured out of unsecured accounts from other countries.
Leaders also need to find the best way to let banks remove near-worthless assets from their balance sheets. The U.S. has already implemented a $700-billion debt-purchase plan. European nations are struggling to develop their own plans, which mix aid with oversight. Then there is the need to pump capital back into the banks, so they start lending again. Britain has moved to partly nationalize some of its banks, but these steps are piecemeal.
For a brief period after 9/11, most nations joined to support the U.S, a collaboration that waned because of nationalism.
Let's hope that governments have learned since then of the need to collaborate effectively, to combat global threats.
