Why liquidity is important in the mortgage crisis in progress?

These days, the Federal Reserve, European Central Bank, Bank of Canada, Bank of England and Swiss National Bank have teamed up to auction 110 billion U.S. dollars on the markets of the United States against the money in the world to facilitate the recent liquidity crisis . But what is liquidity? Why should banks auction money to solve this problem? And how does inflation play into this phenomenon?

Well, for starters, liquidity refers to the amount of money available in a given market that can be borrowedfrom one person to another. If the economy is regarded as a machine, with functions of liquidity of thousands of interlocking parts, and then, like oil, keeping all the moving parts lubricated. If growth is not enough liquidity in the market, loans become more expensive and time-and cost is inherently limited, because banks are less willing to give to each other, if they are able to cover their deposits. The Northern Rock bank in England, are a perfect example ofWhat happens when a bank can claim their deposits. In today's globalized economy, banks depend on lighting operations of large sums of money quickly in all regions of the world. If they are reluctant to lend to each other, as recent events have shown, currency supplies start drying up.

In this spirit, the sub-prime crisis in recent months is likely to further restrict growth, especially in the United States. The central bank's decision to add money into the economy is designed to maintainstable cash flows in the markets, I also hope to help strengthen the confidence of investors. Unfortunately, the sub-prime debt still exists, and banks are not likely to reduce lending rates between banks well until all the debt is declared on balance sheets. And 2 million of defaults occurring in May next year, the crisis is far from over. This injection of cash implies that central banks are trying to stop a problem that we recognize as very serious, because they never gotcoordinated and concerted way forward.

But its course without a doubt the impact of concern for the other major central banks must balance liquidity of inflation. These price increases, which make currencies less valuable. If you take morning $ 10 to buy a Big Mac, the dollar has lost about 40 all together, probably the result would have been different. Only time will tell whether the infusion of money will be enough to help banks to cut interest rates againgrowth levels of friendly.

Recommend : casual watches calphalon 12-inch pan lodge logic 5-inch skillet Straw Hat