October 9, 2008
Yesterday’s decision, announced simultaneously by six important central banks (including the ECB, US Fed and Bank of England), to lower their interest rates by 0.5%, was a welcome and indeed historic exercise in international cooperation. Long may the cooperation last!
Despite a number of bold steps by national governments to increase liquidity in the banking system, the markets are reacting in a disappointing manner and we are left with a feeling that we still know too little – and that includes the experts.
This is not surprising, however. Just to cite three reasons:
- The difficulty in distinguishing between illiquidity and insolvency, when asset values have become so subjective.
- Psychological factors, including panic.
- Big speculators seeking to maintain a ‘bear’ market.