the ECB and the credit crisis

In beginning of August the ECB had to intervene in the European market for the first time because of the credit crisis which has her origin in the United States reached the European money market. The European central bank made an injection of 150 billion euros to keep the liquidity upright.
Furthermore the ECB has loaned 350 billion euros to avoid a liquidity crisis in the inter-bank market. With this step the ECB accomplished that short-term interest rates didn’t get as high as the long-term rates in the market. With these money injections the ECB tried to prevent a collapse of the stock markets and to minimize the spread of the credit crisis in the European market.
The European central bank 90 billion euros of loans available.
The main concern of the banks was and is that the inflation gets to high and they are trying to keep the rate as low as possible. The main goal of the ECB was to keep the interest rate low. The European central bank has done it with to raising the interest rate higher than 4 %. So the Fed raised the interest rate higher and didn’t give that high priority to the economic growth and this is a difference between the ECB and the Fed. But nevertheless the ECB has to count on changes and the bank tries to ensure the short term stabilization of the market instead of worrying about the medium term forecasts.

The ECB lent money to other banks or people without any limit or penalty the bank also guaranteed unlimited two weeks loans at the fixed rate of 4.21%. Normally the ECB fixed the amount that they are going to lend. And experts are no sure if this was the right respond to the crisis and the Fed thought about lending against mortgages. Even if central banks can produce unlimited amounts of money they are not really able to bring down the differences between the benchmark policy rates and the rates that each bank bills the other for short-term loans.

In January the director of the central bank said that another interest rate increase is possible and the director of the Fed said he would cut the rate because he fears recession. But till this point the ECB kept the rate at 4%.

steps of the federal reserve and the government blog 3

The Federal Reserve, which is the U.S. central banking system and other central banks all over the world took some steps to keep the extent of the crisis as small as possible.
The first step of the Federal Reserve was to keep the market as liquide as possible so they printed more money which led to an inflation which means that there is much more money in the market nur the value of it decreases and the second step was to follow the ambition of the marcoeconomic objectives through monetary policy.
And the during the summer of 2007 different such as the fderal funds rate and the discount rate had been lowered and the federal open market committee feared that the interest are going to go down as well. The Federals Reserve accomplished open market operations which means that Fed controls the national money supply in order to ensure a liquidity in the market.
Furthermore the other banks finally lowered the interest rates on loans which they charged for member banks. To keep a liquidity in the market the Fed also offered short-term loans by using the Term auction facility. This is an auction where the Federal Reserve sell funds to institutions and the Fed announced repurchase agreements.
Furthermore the Fed started to lend money to more institutions and accepted more people to give them a loan. The Federal Reserve took many steps to prevent the worse case senario, a recession the last thing they did was to provide funds and empowered J.P. Mogan to buy Bear Stearns.
The government announced a plan which can be followed voluntarily to freez the mortgages because many homeowners had been afraid that the mortgage rate goes up. So the government collaborates with the private industry to help the people and the plan is called the Hope Now Alliance.
Regulators and legislators also had taken some actions to support the people who are affected by the crisis. For example tax policies, affordable housing, bankruotcy protection, education and the licensing and qualifications of lenders.
Furthermore the government encouraged financial institutions to make less risky decisions. That means the these institutions should not borrow money to buy bonds or to do other investments.
And there are credit rating agencies which informes people about the risks by making other investments. For examples the risks that are involved by mortgage-backed securities.