Central Banks Seek Growth

Central banks are cutting interest rates in hopes of sparking flagging economic growth.The Bank of Canada was first last week,cutting its overnight rate a quarter of a point,from 4.5 to 4.25.As late as July,the BOC was worried about inflation.Now it is concerned about deflation and the prospect of a failing economy.The Bank of England followed suit.It cut its key rate to 5.5 from 5.75.Growth has begun to slow,though the upward risks to inflation still remain.Credit tightening poses a risk to the Gross National Product.Slowing demand growth will ease pressure on capacity.The European Central Bank left rates unchanged.That may amount to a concession,since the ECB has been a hawk on inflation,and might prefer to raise rates.Today at 2:15 PM Eastern,the Federal Reserve will issue its decision on interest rates.It is expected to cut as well.Bill Gross of PIMCO would like to see the Fed cut all the way down to 3%.To restart the near-recessionary economy,we will need that.The Fed needs to reduce steadily and significantly.There has been a breakdown of the modern banking system.The tangled web of subprime loans has created a shadow banking system.The banking system must be shored up.Home prices may fall another 10% over several years.The banking system exhibits a freezing up of liquidity and a reluctance to make loans to the vital part of the economy.The Fed must use all means to provide liquidity.Troubled Swiss bank UBS has written down another 10 billion of subprime securities,following an initial write-down of 3 billion.To cover this,it has sold a stake in itself to the government of Singapore and a secret Middle Eastern investor.Shares of UBS rose on the news.Longterm investors are building positions in such financial stocks,which are trading at a big discount,although they could well drop further before recovery.Similar holdings are HSBC(HBC) and Citigroup(C).