You can bring a horse to water but you cannot make it drink. The old saw may well be on the minds of central bankers, notes the FT’s John Authers in Thursday’s Short View column. They can cut interest rates, reducing the price of credit and making the environment more favourable for banks. But they cannot make banks lend if banks do not want to. Put more technically, they can affect the cost of credit, but not its supply.
Ben Bernanke of the Federal Reserve made that point clear this week by asking banks to consider forgiving mortgage debt for those whose mortgages were worth more than their homes. Normally the Fed has more power at its disposal than just to ask banks to change their behaviour.
Indeed some in the market complain that a vicious cycle is developing. Banks are cutting back on their lending, in large part because of the losses they have suffered as a result of the credit crisis. By lending less to hedge funds and other participants in the credit market, they reduce still further the demand for stricken credit instruments, worsening the problems in that market.
In these circumstances, the words of central bankers have less effect than usual – even if implicit admissions of powerlessness can have a nasty effect on confidence.
However, Thursday’s meetings of the Bank of England and the European Central Bank will not be ignored. In the UK, the money market seems to be seizing up once more. The extra spread payable to borrow through the interbank market has increased sharply in recent days. That increases the chance of a cut in the policy rate today.
As for the ECB, the question is whether it will try to talk down the euro, which was at a fresh all-time high against the dollar yesterday. Some ECB officials have suggested that they will. Strong words from the ECB might push the euro back down again.
But then again, you can bring a horse to water . . .