Central banks act to stem debt crisis, stocks soar

Specialist Michael McDonnell, right, works with traders on the floor of the New York Stock Exchange Wednesday, Nov. 30, 2011. Stocks soared in morning trading Wednesday after major central banks acted together to support the global financial system by cutting short-term borrowing rates.
AP Photo/Richard Drew

COMMENTARY The Dow closed 490 points higher after the Federal Reserve, the European Central Bank, Bank of Japan, the Bank of Canada, the Bank of England and the Swiss National Bank took coordinated action to fight the spread of Europe's debt crisis contagion.

Central bankers have taken action "to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity," according to a Federal Reserve statement.

Investors gave a big thumbs-up to the plan, propelling U.S. stocks higher by over 4 percent. The Dow spiked 490 points and closed at 12,045, above the psychologically-important 12,000 level.

Fed decoder ring translation: While the knuckleheads in Europe keep banging their heads together seeking a cure to the debt contagion, we need to keep money flowing across the globe. To do so, the banks will introduce liquidity swap arrangements, where one central bank essentially swaps its currency for another. At the end of the day, the plan allows the ECB and European banks to borrow U.S. dollars, which takes short-term liquidity pressure down a notch.

Banks need dollars to fund their daily operations. Their access has dried up as U.S. money market funds reduced their lending to European banks. Just a day after Standard & Poor's downgraded the big U.S. banks, they were among the top gainers on the stock market. JPMorgan Chase & Co. jumped 8.4 percent; Morgan Stanley 11.1 percent, Citigroup Inc. 8.9 percent and Bank of America 7.3 percent.

Here's what you need to know about the central bank intervention: It treats a symptom of the European illness, not the illness itself. The illness requires a coordinated effort among the 17 euro zone countries, one which admits that the survival of the EU requires the stronger economies to bail out the weaker ones - sorry Germany! It will also require debts to be restructured and as a result, big banks will take it on the chin. Unfortunately, the suffering will also extend to taxpayers, most of whom had little to do with creating the crisis.

As Angela Merkel and Nicolas Sarkozy lecture their EU counter-parts ("see, this is what happens when you borrow and spend too much!",) the appropriate response might be that while indeed the PIIGS may have borrowed irresponsibly, the Northern European banks and investors lent just as irresponsibly.

As we learned during the U.S. financial crisis and its aftermath, it takes a lot of willing and irresponsible players to create a financial crisis -- it will take just as many to clean it up. Today's action is a start, but we still have a long way to go.

People are taking comfort that it's globally coordinated," Peter Tchir, who runs the hedge fund TF Market Advisors, told the Associated Press. "In itself it does nothing, but the bulls are anticipating that this is just the beginning of central bank and other actions" to ease market pressures.

A successful action would be expected to reduce borrowing costs for Italy and other nations, Tchir said. Italy's borrowing costs edged lower Wednesday, but the nation was still paying more than 7 percent interest for 10-year borrowing -- a dangerously high level.

The Associated Press contributed to this article.

  • Jill Schlesinger On Twitter»

    View all articles by Jill Schlesinger on CBS MoneyWatch »
    Jill Schlesinger, CFP®, is the Emmy-nominated, Business Analyst for CBS News. She covers the economy, markets, investing and anything else with a dollar sign on TV, radio (including her nationally syndicated radio show), the web and her blog, "Jill on Money." Prior to her second career at CBS, Jill spent 14 years as the co-owner and Chief Investment Officer for an independent investment advisory firm. She began her career as a self-employed options trader on the Commodities Exchange of New York, following her graduation from Brown University.