Not so long ago, the British Bankers Association tried to palm us off with some ad libbed excuse about the “usual”, “seasonal” contraction in interbank lending.
After an unprecedented bout of liquidity-boosting from central banks the world over last week, that obviously doesn’t wash. The state of Libor is indeed, once more, a running theme. (Take a look at this graph - the BBA’s seasonal “spikes” in Libor are tiddlers compared to the current peak)
But central banks look to be fighting an uphill battle - they’re auctioning mountains of money, with little apparent effect. The ECB, in particular. Tuesday’s FT reports:
Emergency help for financial markets entered new territory on Monday as the European Central Bank announced it would on Tuesday offer unlimited funds at below market interest rates in a special operation to head off a year-end liquidity crisis.
The surprise move, which follows last week’s co-ordinated barrage of measures by the world’s central banks to increase market liquidity, suggests the ECB is still frustrated at the failure to ease financial market tensions.
Frustrated and/or panicked. Cue - once more - a timely analysis of the “shadow banking system” and why central banks’ liquidity actions often miss the mark. Economist James Hamilton framed the debate in his speech at Jackson Hole in late August. (Hat tip to Yves Smith.)
