Central banks join forces against credit crunch

The world’s five largest central banks, including the European Central Bank (ECB) and the US Federal Reserve, have together decided to inject billions of fresh money into the global banking system in an attempt to alleviate the credit crisis and stimulate the world economy. 

The European Central Bank (ECB) together with the US Federal Reserve (Fed), the Bank of England, the Bank of Canada and the Swiss National Bank announced, on 12 December 2007, joint measures to ease the recent pressures in short-term lending markets. 

The banks decided to make billions available for private banks and other lending institutions in order to make borrowing money easier and stimulate the world economy.

The last time world banks made such a large collective effort dates back to the September 11 terrorist attacks in 2001.

The move follows economists’ concerns over a potential recession in the US causing repercussions in the rest of the world if banks continue to be reluctant to lend money after the subprime mortage crisis hit the US over the summer.

However, critical voices argue that large injections of money are not a solution to the current ‘credit crunch’ as banks do not necessarily refuse to lend money because they do not have any, but because they fear that the state of the US housing market is worse than previously thought and also because the British housing market has shown signs of slowing down. 

Last week, ECB President Jean-Claude Trichet said that “in the area of monetary policy, transatlantic relations are now written in the broader context of the interactions between the Eurosystem and the Federal Reserve System.” 

“It is worth pursuing and extending this relationship” because, he argued, the euro area and the US share similar external environments and the same degree of internal diversity within such large economic areas.

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