Central Banks Launch Massive Global Intervention; Financial Markets Rally

The world’s major central banks unveiled a new strategy Wednesday morning to create a wall of money that could prevent Europe’s financial woes from undermining the stability of the global banking system.

The Federal Reserve, European Central Bank and central banks in Canada, Britain, Switzerland and Japan said in a joint announcement that they will extend the timing of and lower the interest rate paid on “swaps,” arrangements that have been used intermittently since late 2007 to funnel dollars to the banking systems of countries where there is need.

The action recalls the fall of 2008, when the global central bankers took a series of coordinated actions to try to combat a worldwide financial panic. However, the impact of the latest measure may be more symbolic than substantive. The Fed already had made available unlimited dollars to other leading central banks, and $2.4 billion of such lending was outstanding as of last week (that number may increase now that the loans are offered at a lower interest rate).

The policy does nothing to address the fundamental problems in Europe-namely a loss of confidence in the ability of Italy and other nations to repay their debts and fears that this could cause the euro currency area to break apart. It could, however, help European banks avoid any cash shortage. And more broadly, the new move was aimed at showing a sense of common purpose and deep resolve among the world's central bankers at a time of widespread fears, even if the substantive impact on the crisis is slight.

Separately, China’s central bank eased a key regulation to allow banks to lend more money as concerns mount about a possible slowdown in the world’s second largest economy. In cutting bank reserve requirements for the first time since December 2008, the People’s Bank of China signaled that its focus is shifting from inflation to maintaining growth. And a report from payrolls company ADP showed improved job creation in the United States in November.

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