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Five central banks coordinated major interest rate cuts on Wednesday: the U.S. Federal Reserve, the European Central Bank, the Bank of England, the Bank of Canada and Sweden’s Sveriges Riksbank. The intent is to reduce borrowing costs suddenly and thoroughly so as to give the Western economies a collective shot in the arm and overpower the effect of the credit crunch. Right now the root of the economic crisis is banks’ desire to hoard cash — they want to rebuild their asset sheets to insulate them from the subprime mortgage mess. Dropping rates makes it more likely that borrowers can meet payments, in theory alleviating banks’ fears and encouraging them to accelerate lending.
At the same time, the United States now has on the books a $700 billion bailout program designed to pull dud subprime loans off the books — allowing banks to exchange them for cash. That would, in theory at least, recapitalize the banks and remove the problem assets from the equation. That plus interest rate cuts and some other steps taken by the Federal Reserve and Treasury Department should — again, in theory — succeed in unlocking credit and stimulating economic growth.
The problem now is how to pay for this all in a remotely safe way.
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