The United States Federal Reserve have announced that they will give a $200 billion dollar cash injection to ease the tensions in the credit market that are threatening to stall the wider US economy. They will buy mortgage backed security in return for cash and that will hopefully free up the credit markets and lending. Does that mean the Fed is taking on the risk the banks created? In a nutshell, yes, it does mean that, they are going to accept mortgage backed bonds from banks that were finding it hard to raise cash through the normal channels. So these institutions are not good enough for the market but they’ll do for the Fed.
The banks and financial institutions have taken a beating due to the credit crunch but it seems now that the fed is willing to stand up and be hit on behalf of the banks, so its like a guy who steps in to break up a fight and he turns out to be the one who gets kicked up and down the road. The fed is also talking of a rate cut of a further 75 basis points, it is likely that we will see a US base rate of c.2% going forward for some time.
The ECB (European Central Bank) does have the ability to cut rates, but in a market where your options are to raise,lower, leave rates as they are its really just a game with three choices at any time. the ECB doesn’t need to be market run as much as the fed, the fed typically gets called in to bail out the US market, the ECB doesn’t have that mandate. If you look at Germany in the 1920’s during the hyper inflation period it shows that controlling inflation is probably the more prudent path, the thought of burning money for heat because it would be cheaper than buying fuel is totally alien to virtually every living generation. Especially given that the increase of non-cash purchasing tools (e.g.: credit cards) means most of us couldn’t boil enough water for a cup of tea on the cash we physically hold. inter European trade hasn’t been affected, just euro-us trade because of the weakened dollar, on the bright side though commodities and underlying costs should come down as so many things are traded in the now weak dollar.
The French aren’t happy but then again, their economy is no model for success, the French output has to rise by more than other countries to see a GDP result because of its over-socialist public services model. Unemployment in France is also 8.8%, that means that more than one in twelve people of working age are waking up each day with no job to do to and likely not much to do, if anything welfare reform may serve France better than any movements of the Euro. Germany managed to have a successful exports year despite a stronger Euro and that goes to show that perhaps German work ethic and business acumen count for more than French saber rattling.
ECB is faced with a difficult task because Europe is still very much about different countries with vastly different economies, the US is basically one cohesive nation but the EU is not, Americans are American first and from their individual state second. In the EU we are from our nation first and then there is a vague sense of being European. The same thing happens with economic markets, Germany had a good year, France didn’t, Spain is facing a reducing GDP and unemployment there is almost 9%, in Ireland we are facing a reduced GDP but employment seems to be doing alright. The UK on the other hand seems to have reaped at least some benefit from self determination in terms of currency, the Bank of England rose rates even to the chagrin of the wider business community there in order to reign in an economy that was spiraling towards a bubble, granted things have not turned out totally perfect there but a base rate of 4% would have allowed the British economy to go to further dizzy heights and thus an even more fantastic dizzy fall.
The British government is also able to do things because of this that we can’t due to Euro membership. they deferred a petrol levy of c. 2p per litre and this was done because it would only be punitive to British business, Ireland doesn’t have this option as decisions are made in Brussels and their decisions often (naturally) have to consider the wider euro-zone and not our humble island. High oil prices are something that affects every facet of the market, even the food we eat, it had to be transported from somewhere and assuming it wasn’t via horse and trap then there was oil used to get it to the shelf and therefore there is an oil cost to virtually every imaginable thing, a piece of paper, an orange, or a potted plant. The move to defer a petrol levy was an inspired governmental decision, and governments are not generally known for inspired decisions when it comes to things that affect the private sector.
This is the nature of the euro-zone and one of the reasons that there is a political monetary risk to smaller economies such as our own. However because of the increase in inter euro trade and the movement of international headquarters or specialist units (such as fund administration to our IFSC) euro membership definitely gives more than it takes.