Here Comes the Cavalry… Again

As the world financial markets continue spinning out of control, the world’s major central banks, including our very own Bank of Canada, have decided to come to the rescue. The goal: calming the pressures in the short-term lending markets. The cavalry: The Bank of Canada, the U.S. Federal Reserve, the European Central Bank, the Bank of England, and Swiss central bank. Naturally, the world stock markets soared following the announcement.

And while the long-term problems, such as the U.S. housing plunge, do not appear to have been addressed, for the time being, it appears that central banks at least want to minimize the risk of the credit crisis pushing global economies into a worldwide recession.

The Bank of Canada has committed to pumping more money into the overnight lending market, the target of which is twofold: defending Canada’s target interest rate and narrowing the overnight credit spreads. Canada’s central bank has also committed to expand the list of collateral that financial institutions can use when knocking on doors and asking for credit.

These measures are also indicative of something much more sinister. Namely, the Bank of Canada has committed to do things it has resisted doing before, which can only mean that the venerable institution has grown truly afraid of what is going on in the financial and credit markets. Moreover, considering that the Bank of Canada is not the only one joining the cavalry, it is obvious that some of the world’s brightest financial minds have finally realized how widespread and powerful the credit crisis has become.

While I believe it is a good idea to have major central banks working together on issues of alleviating global credit, default and liquidity risks, I’m still left with the feeling that all of this is simply another short-sighted bailout of credit-challenged investors, greedy hedge funds, conceited derivatives traders, and lenders without any risk management perspective whatsoever.

Huge mistakes have been made, from both a regulatory point of view and a risk management practices point of view. This sorry state of affairs had been left unattended for too long, resulting in a mess that now seems beyond repair.

Perhaps I am too much of a pessimist, but I believe North American economies have tried this route before when the tech bubble burst in 2000. I will have to agree that, at the time, immediate recessionary consequences were for the most part avoided. However, such overly aggressive expansionary fiscal and monetary policies have also set the stage for today’s disastrous path, on which we seem to have now gained terminal velocity.

It deeply troubles me that still all anyone can do is to put out fires as they come up. Worse yet, could the lack of a long-term solution mean there actually isn’t one? But this is the point where I usually take off my “thinking hat” and turn in for the night.