James Saft is a Reuters columnist. The opinions expressed are his own.
To judge by equity markets, central banks have all the credibility in the world, but their reputation just may exceed their actual power.
Markets rallied furiously on Wednesday after six leading central banks acted to give banks access to easy money, a coordinated bid to unblock funding markets which threatened to seize up due to fears over European debts.
The group — the Federal Reserve, the European Central Bank and the central banks of Japan, Britain, Canada and Switzerland — agreed to offer dollar swap lines at a half a percent less interest than previously and pledged to keep these lines in place until early 2013.
In some ways the jubilant market reaction makes sense, though we should be careful about concluding that the outcome of the European crisis has improved by 4 percent simply because shares went up by about that much. Over the long term, central banks have a very hard time affecting the value of anything, though they are excellent at changing the price of things.
What the moves — which are similar to steps taken in 2008 after the collapse of Lehman Brothers — do accomplish is to lessen the chances that a bank gets caught short and collapses because it can’t access dollar funding. The very understandable unwillingness of U.S. banks and money market funds to provide dollars to European banks, many of which are full to the gills with now doubtful European government bonds, had raised this as a real possibility, and a move to mitigate that is welcome. The very existence of the central bank backstop will somewhat ease funding markets, though the days of money market funds lending money cheaply to European banks may well have ended.