Interest Rate Roundup

Monday, February 04, 2008

G-7 gathering -- what's on tap?

Members of the G-7 countries are gathering in Tokyo on February 9 to discuss the global economy. What's likely to be at the top of the agenda? The ongoing credit crunch and ways to combat it.

Bloomberg has an interesting story today about how central bank policy alone likely can't solve the problems we're facing. Some of the folks quoted in the piece suggest that more government intervention is needed -- up to and/or including more government-backed home mortgage lending programs, the purchase of devalued assets from banks, and tax cuts. Why? Because lenders may be reluctant to make new loans -- even if monetary policy is easy -- due to fears of future credit losses and the need to rebuild their balance sheets from souring old loans. Here's an excerpt that sums up the dilemma ...

"King's Bank of England and the Bank of Canada have also lowered borrowing costs, while joining the Fed, European Central Bank and Swiss National Bank in supplying more cash to markets to ease a credit squeeze.

"Such measures, though, don't repair damaged balance sheets or restore value to worthless assets. So lenders faced with mounting losses may keep avoiding risk and refusing to make new loans to companies and households.

"Easing monetary policy in such an environment amounts to ``pushing on a piece of string,'' says Nobel Prize-winning economist Joseph Stiglitz, a professor at Columbia University in New York."


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