Wednesday, October 1, 2008

A Report From the Money Markets

In several places, I have written about the crisis in the money markets.

Today’s Financial Times had an article on this subject under the heading “Triple blow spurs central banks”. As usual, there was no mention of the cause of the “blows”, only reporting of the facts. I thought two paragraphs in particular might be of interest to the readers of this blog. [Italics added for emphasis].

The first paragraph was about the result of an auction:
Yesterday morning in Europe the ECB offered $30bn of overnight money and found banks scrambling for the cash, willing to bid vastly over the 2 per cent policy rate of the Federal Reserve. The money was ultimately lent at a rate of 11 per cent.
To the best of my knowledge, this rate differential is unprecedented in any dealing of the Western banks with a Western central bank.

The second paragraph is about freeze in the “wholesale” money markets which I described in the previous entry:
The lack of any business in wholesale money markets was demonstrated by the enormous use of the European Central Bank’s standing lending and borrowing facilities. Some European banks parked €44bn overnight at the ECB on its penalty 3.25 per cent rate on Monday night while others borrowed €15.4bn at its 5.25 per cent penalty rate.

They did not deal with each other, as they would normally.
The end-of-quarter funding requirements no doubt exacerbated the money famine. But even accounting for the technical distortions, what we are witnessing is a deep crisis in the financial system whose real causes remain hidden from the view of virtually all experts and policymakers.