Home  News International News Interest rates fall
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Written by Dr. Garth A. Rose
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Sunday, 12 October 2008 |
With America’s credit market, and those internationally, faced with an escalating crisis on Wednesday the Federal Reserve, along with five central banks in other countries, made emergency decision to cut is federal funds interest rate by .5 percent from 2 to 1.5 percent. The Fed in a statement said the move was necessary because of the worsening crisis in global financial markets. The Bank of England and the European Central Bank also lowered their interest rates by .5 percent. The cuts theoretically will make it less expensive for banks to lend and borrow money from each other, thus passing on cheaper credit to their customers and easing the current pressure on the credit market.
Over the past few days credit markets froze because banks were weary of taking the risks in making loans, creating severe problems for their customers, especially businesses who quickly experienced problems securing cash to meet operating expenses like payroll. In an earlier move to free up credit the Federal Reserve had on Tuesday announced a new program to purchase commercial paper, which translates as offering funding to businesses to assist them in meeting operational expenses. But this move did not soothe the market as the same day the price of government bonds rose, and more significantly, the London Interbank Rate (Libor), the rate at which banks make loans to each other, rose to 5.38 percent from 3.94 percent, a sign that international credit was still frozen.
Though it is still uncertain whether the US financial markets will realize sustained growth after the rate cut, U.S. stock futures soared on the news of the rate cuts, after five days that saw the Dow Jones industrial average plunge more than 1,400 points.
Like the decision made by the U.S. government to bail out ailing financial institutions, the British Treasury announced it would be investing up to 50 billion pounds (US$87.5 billion) in exchange for stakes in the country's largest banks and building societies, as well as guaranteeing some 250 billion pounds (US437.5 billion) worth of loans.
Other evidence of the growing international crisis was that on Wednesday Europe's stock exchanges opened sharply lower, following the worst performance of the Japanese stock market since 1987. In Paris, France the CAC-40 index temporarily suspended updates as there were too many sell orders. In Moscow, Russia, the largest stock exchange, the MICEX, opened with huge losses on Wednesday, falling more than 14 percent in the first half-hour of trading and announced it was closing until Friday.
France’s finance minister, Christine Lagarde, placed responsibility for the international financial crisis on U.S. Treasury Secretary Hank Paulson for allowing the investment bank Lehman Brothers to collapse. She said the failure of a bank like Lehman was certain to create a domino effect risking the collapse of entire international interlocking financial system.
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