It’s panic time for the world’s central banks.
The only real question is, which of the many dangerous financial situations around the globe caused the US Federal Reserve, the European Central Bank and financial authorities in England, Canada, Japan, Switzerland and China, to act in unison in the wee hours Tuesday morning?
The central banks did basically one thing: They made money cheaper so that financial institutions around the globe could continue to do business.
Nice move! Except that money is already cheap with interest rates at record lows. So the coordinated action led experts to believe there is some hidden danger lurking that we regular folks don’t know about.
The stock market, of course, rejoiced in the central bankers’ move and the Dow Jones industrial average — clobbered over the past three weeks — soared 490.05 points, or 4.24 percent, yesterday. It also helped that yesterday was the final trading session of November and professional money managers were wired to push stocks higher anyway on such a day.
Window dressing. That’s what it’s called on Wall Street. That’s when traders try to get their portfolios up in value so that customers won’t be so disappointed at how badly their investments have performed the other 29 days of the month.
There had been rumors this week in the stock market that some action was coming — but, then again, lately there is always gossip that the Fed or some other central bank would ride to the rescue.
This week the specific stories were that the International Monetary Fund, which is also down on its luck, would soon be coming to the aid of Italy and Spain, the two latest European countries suffering from financial woes.
That rumor turned out to be not true — the IMF wasn’t a member of the overnight rescue party. But the whiff of something happening was in the air for those in the know.
(Bloomberg Businessweek ran a story earlier this week about how Hank Paulson, the former US Treasury Secretary and Goldman Sachs chairman, was leaking important upcoming developments to Wall Street firms.
As my readers know, I broke this story years ago. And I’ll get back to it next week if the current market anxiety calms down.)
So what caused the central banks to panic?
There’s been widespread gossip over the past month that Greece and perhaps some other hard-pressed countries might have to abandon the European Union. And that led to even more dire speculation that the currency itself might not survive for much longer.
That talk got louder last week when Germany — the crème de la crème of European economies — failed to sell all the bonds it was offering, the proceeds of which would be used to fund government operations.
Interest rates in Europe generally have been moving much higher in recent weeks as investors started demanding a premium because of the perceived risk involved in lending money in those countries.
Most of this was already known by the financial markets by the time trading ended Tuesday in the US.
What the financial markets didn’t know (but the central bankers probably were aware of) was that Standard & Poor’s, the US rating agency that downgraded Washington’s debt this summer, was about to lower its opinion on 15 major US banks.
The two most important downgrades were probably Bank of America, which is hobbled by a staggering amount of bad mortgage debt, and JPMorgan Chase, which seems to be under pressure from investments in complicated financial derivatives.
Bank of America’s stock price is now so low that many financial institutions might be prohibited from holding its shares. This could have been one reason for concern.
The S&P downgrade was officially announced after the US financial markets had finished trading on Tuesday. So this move could have tipped the central bankers into panic mode.
Indeed, reports are that the Fed started talking about action as early as Monday. S&P would typically give Washington a heads up that a downgrade was coming.
With that as the glum backdrop, the US financial markets will next be dealing with the Labor Department’s November job report that will be announced tomorrow morning.
Wall Street is expecting job growth of 123,000. In normal times that number would be disappointing. These days the financial markets would gladly take it.
The trouble is, November is one of the months that isn’t helped by favorable statistical assumptions by the Labor Department. In a normal month, the department adds jobs to its tally for small companies it can’t reach by phone that it assumes are hiring.
So much to worry about, so much to panic over — and the central banks seem to have done just that.