Essentially what the world is facing now is a crisis of confidence. Banks are not trusting each other's balance sheets and reluctant to lend. Cash are horded and liquidity is frozen. As one banking professional said of the balance sheet, "What is left is not right, and what is right has none left" People are forced to take a hard look at the realistic value of assets that they are holding.
In the absence of trust, even further rate cuts will not flow down to interbank lending rates. With the demise of Lehman, and crippling of AIG, banks are jittery to part with cash not knowing what to expect next.
In order to revive the banking system, trust must be restored. How can trust be restored? Government has to come in temporarily to buy up ill investments and insure deposits. This will serve as a soft landing for banks while they painstakingly revamp their balance sheets to reflect the realistic values of their assets. All over the world as well, governments are infusing money into the capital markets to prevent a worldwide financial meltdown.
- The Australian government under Kevin Rudd has proposed to guarantee deposits in full for the next three years.
- US has passed a bill for 700 billion dollars
- Germany tied up a rescue package worth 480 billion euros
- Britain is nationalising banks by investing 37 billion pounds
- France provides 360 billion euros of bank guarantees
And the number continues to tick...
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