Paper losses

Central banks still face a difficult task

From Economist.com

AP

FOR those who stop short of stuffing their mattress with banknotes, money-market funds are meant to be the next best thing. They invest clients’ money in supposedly safe and liquid short-term instruments. But as America’s mortgage malaise has spread with shocking alacrity across the credit markets, even these staid creatures have been sent into spasms. This week they took centre stage, dumping potentially toxic securities and fleeing for the safety of government bills.

As of Thursday August 23rd a note of optimism had begun to creep back into markets, but central bankers were remaining on guard. They have pumped large amounts of liquidity into the system over the past fortnight, and continued to do so this week. The Federal Reserve has cut the discount rate—the charge it makes for emergency lending to banks—from 6.25% to 5.75%, and lengthened the term of these loans to 30 days. It has also urged banks not to be shy in coming forward. To show there is no shame in turning to the Fed, four big banks—Citigroup, JPMorgan Chase, Wachovia and Bank of America—all this week announced they had taken the central bank up on its forceful offer. More...