What a difference $3 trillion makes.
Stock exchanges throughout the world, which finished one of the most dismal weeks in history Friday, roared back Monday in the wake of a coordinated international assault on the world liquidity crisis.
The wave of renewed optimism began in Tokyo and marched through Europe, cresting with the largest one-day gain ever posted in the New York Stock Exchange.
The Dow Jones industrial average rose 936.42 points, or 11.08 percent, to 9,387.61 — more than double its previous record one-day gain of 4.93 percent, set March 16, 2000.
To paraphrase the adage, “If you can keep your head when all about you are losing theirs, you probably don’t work on Wall Street.”
Still, Monday’s rebound did justify those cool-headed analysts who last week cited technical indicators that many stocks were undervalued.
But the most immediate cause was clearly the coordinated rescue effort launched over the weekend by the world’s key central banks, acting in concert to restore liquidity to the planet’s frozen credit markets.
As one analyst noted, “Systemic problems require systemic solutions.” Until this weekend, major players weren’t coordinating their efforts. Thus, actions in one country often prompted skittish investors to route huge sums across borders in quest of safe havens, further disrupting the world’s financial markets.
The coordinated rescue effort was led by the U.S. Federal Reserve system with the goal of flooding the financial system with as many dollars as banks want, backing up government efforts to revive confidence and helping to reduce money-market rates. The European Central Bank, the Bank of England and the Swiss National Bank likewise offered European banks unlimited dollar funds at fixed interest rates against “appropriate collateral.”
Previously, the Fed had capped at $380 billion the currency it would swap with the three central banks.
Working hand in hand with their U.S. counterparts, seven European central banks — Britain, Germany, France, the Netherlands, Spain, Portugal and Austria — put $2.3 trillion on the line Monday to protect their continent’s banks, more than triple the Bush administration’s $700 billion rescue program.
“The time of each one for itself is fortunately over,” French President Nicolas Sarkozy said of the unified approach.
The Bank of Japan weighed similar measures Monday.
The weekend’s rescue wasn’t designed to rescue stock markets, nor should it have been. But such markets are a powerful barometer for investor confidence. Stocks may continue trading in the current “bear market” range for months or years, but Monday’s action is a sign that the irrational panic that stalked the world’s financial markets in the last few weeks is beginning to ebb.
Many challenges await the American and world economies in the months ahead. But thanks to the coordinated efforts of the world’s key central banks, routine credit should again begin to lubricate the economy and keep business inventories and payrolls again moving smoothly.
The job ahead will be long and hard, but at least the world can go back to work.
