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Central banks around the world take emergency action... here we go again

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I can't wait to find out how many secret deals the US Federal Reserve is dumping into rescuing the banking industry. Many people are saying this emergency action is required to prevent a Bears Stearns-like collapse in the European financial sector. (In particular, at least one person is suggesting a large French bank was on the edge of collapse over the weekend.) The central banks are once again extending cheap (free, really) loans to the banks to help them keep liquidity up so they can continue functioning. It's 2008 all over again.

While this injection of capital by central banks is probably necessary to keep the banks moving, we all know what happened in 2008 when the central banks did this. Taxpayers bailed out the bankers who then used that cash to lobby against reform and mostly stuck to their same old bad habits. Propping up bank accounts makes sense, but until the bankers admit they were wrong and have changed their ways - something they have not been able to do and in fact, still think they are correct and we're ungrateful bastards to even asking - the banks do not deserve being rescued.

Maybe instead of the political class focusing on overblown issues such as union contracts, they ought to be concerned about the contracts for the bankers. How can we possibly be here all over again and not have a clause that specifies, if you take this money, your contracts are null and void immediately? We can't continue to bailout the lifestyles of the rich and famous because the money isn't there. Let the bankers taste real capitalism which does include failure and losing everything. Bailing them out only delays the problem and pushes it out until another day.

So what did the coordinated central bank lending scheme do?

In essence, the US central bank, or Federal Reserve, agreed to provide cheaper dollar funding to the European Central Bank—which can then provide cheaper dollar loans to cash-strapped European banks.

The participation of the central banks of Canada, England, Japan and Switzerland is more of an effort to show that all the central bankers are working together than any expectation that there will be lots of dollar borrowings under their facility.

The goal is to ease the credit crunch in Europe. Lots of European banks make dollar denominated loans, in part because US interest rates are so low. The banks do not usually finance these loans in the way you might think—by lending out the deposits of their retail customers. Instead, the loans are financed by short-term borrowings from other financial institutions.
We are once again deep into a financial crisis that is owned by the banks. The bigger question now is what should the political class do about it besides bail them out? It wasn't sustainable before and this model or rewarding failure is no more responsible now. We need fundamental change and unfortunately the mainstream political class in Europe or the US is probably not able to do this. It's time to quit supporting politicians who talk about change. We need some that deliver real change.

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