Central bank dollar intervention

Tuesday, September 2, 2008, 6:39 AM

U.S., Europe, Japan Devised Plan to Prop Up Dollar, Nikkei Says (August 27 – Bloomberg)

Aug. 27 (Bloomberg) -- Finance officials from
the U.S., Japan and Europe in mid-March drew up plans to strengthen the
U.S. dollar following troubles at Bear Stearns Cos., Nikkei English
News reported, citing unnamed sources.

The intervention
designed by the U.S. Treasury Department, Japan's Finance Ministry and
the European Central Bank called for the central banks to purchase
dollars and sell euros and yen, with Japan providing the yen needed for
the currency swap if the greenback's value dropped significantly, the
news service said.

The three groups, which considered making an
emergency statement through the Group of Seven industrial nations, did
not stipulate a specific exchange rate for the potential intervention,
nor did they detail the amount of money to be used, Nikkei said.

ECB spokeswoman Eszter Miltenyi and Treasury spokeswoman Brookly McLaughlin declined to comment on the report.

So, assuming
this rumor is true, what we have here is a case where the world's
central bankers, the same ones that looked the other way while the most
obvious and largest of all crises developed, have decided that they are
the right ones to set a price on the dollar.

It bears noting
that this crisis has its roots in the imbalances that these same
central banks not only failed to prevent, but fostered. There is no
larger imbalance than the vast imbalance that exists between the number
of dollars flowing out of this country to buy things and the foreign
currencies that flow the other way.

The honest way to correct
this, and one that the US has used while practicing ‘tough love’ with
numerous other smaller countries countless times in the past, would be
to allow the currency to fall until the currency flows reversed.

But, in their inestimable wisdom, the world’s central banks have decided that “not right now” is the best course of action, and have opted for “later” as a better time. I can only ask, “What are they waiting for?”

When is a better time, and how will we know when we get there? My suspicion is that the answer is “We don’t really know, just not now,” and that makes me all the more cautious.

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