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The fourth source of weakness is the expenditure that country has taken upon itself by acting as the global policeman. The US is incurring huge expenditures in wars in Iraq and Afghanistan. There seems to be no end to these in sight.

Global Responses

On September 15, 2008, China cut its interest rate for the first time since 2002. Indonesia reduced its overnight repo rate, by two percentage points to 10.25 percent. The Reserve Bank of Australia injected nearly $ 1.5 Billion into the banking system, nearly three times as much as the market's estimated requirement. The Reserve Bank of India added almost $ 1.32 Billion, through a re-finance operation, its biggest in at least a month.

In Taiwan, the Central Bank on September 16, 2008, said it would cut its required reserve ratios for the first time in eight years. The Central Bank added $ 3.59 Billion into the foreign-currency interbank market the same day. Bank of Japan pumped $ 29.3 Billion into the financial system on September 17, 2008, and the Reserve Bank of Australia added $ 3.45 Billion the same day. The European Central Bank injected $ 99.8 Billion in a one-day money-market auction. The Bank of England pumped in $ 36 Billion. Altogether, central banks throughout the world added more than $ 200 Billion from the beginning of the week to September 17, 2008.

US Responses

The Federal Reserve, Treasury, and Securities and Exchange Commission took several steps on September 19 to intervene in the crisis. To stop the potential run on money market mutual funds, the Treasury also announced on September 19 a new $ 50 Billion program to insure the investments, similar to the Federal Deposit Insurance Corporation (FDIC) program. Part of the announcements included temporary exceptions to Section 23A and 23B (Regulation W), allowing financial groups to more easily share funds within their group. The exceptions would expire on January 30, 2009, unless extended by the Federal Reserve Board. The Securities and Exchange Commission announced termination of short-selling of 799 financial stocks, as well as action against naked short selling, as part of its reaction to the mortgage crisis.

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* Contributed by: -
Sunil Kumar Panda,
PGDBM, 1st Semester,
Fortune Institute of International Business, New Delhi.
Article posted on Fenruary 14, 2009.