The Guest Blog

Farr: Central Banks to the Rescue - Will There Be a Hollywood Ending?

What do China, the European Central Bank, the Federal Reserve , Republicans and a super tanker hurtling full-speed into a reef have in common? Choruses of “All engines, Reverse.” But one of the first rules of physics is that objects in motion tend to stay in motion. Movies are filled with nail-biting moments of split-second disaster aversion. We hope that many of the world’s more difficult dilemmas will also be met with similar Hollywood-style happy endings.

China has been tightening monetary policy and reserve requirements for its banks – until today. Today, in a reversal of what has been an established policy trend, China lowered reserve requirements for its banks by one half percent. The ECB, Fed and other central banks coordinated a reduction in dollar funding for European banks from 1% to 0.5% over the established benchmark rate. Congressional Republicans are now discussing extending the payroll tax-cut.

Do you see the trend?

All of today’s actions and discussions facilitate greater liquidity around the world and make important funding available and affordable to European banks in extremis. To boot, in a speech yesterday by Fed Vice Chair Janet Yellen, there were clear indications that important language used in Fed press releases may change to indicate future changes in Fed policy. Markets around the globe exploded with exuberance in response to all this news as share prices leapt significantly higher.

These moves represent good news and bad news. Support and assistance are not offered, nor are they needed, by the strong and fit. The remarkable actions taken today uncover grave opinions that necessitate profound actions. We are encouraged that these global issues are being addressed and believe that this is a good start. However, this may be the beginning rather than the end of the discussion.

Today’s increased liquidity does not address the real problem of troubled European sovereign debt that threatens the solvency of European banks and almost guarantees a European recession. Nor will an extension of the payroll tax cut create the kind of economic growth necessary to replace the 8 million jobs lost in the US during the Great Recession. And finally, a 0.50% reduction in Chinese reserve requirements will not offset the massive export exposure that country has to Europe. Nevertheless, disaster seems to have been once again averted in the final hour, and the world financial markets are grateful.

Today’s magnificent headlines and major events have dwarfed yesterday’s downgrade by Standard & Poor’s, which has become a notorious and consistent late-comer to the party, of most major US banks. As well, today’s action has drowned out the volatile rhetoric coming out of Iran yesterday.

As world events evolve, it is important not to become overly ebullient or fearful. Remember that ignoring the yelling and screaming and paying attention to the price of fish is the best advice in the fish market.

Michael K. Farr is President and majority owner of investment management firm Farr, Miller & Washington, LLC in Washington, D.C.  Mr. Farr is a Contributor for CNBC television, and he is quoted regularly in the Wall Street Journal, Businessweek, USA Today, and many other publications. He has been in the investment business for over twenty years.