Coordinated central bank action can it work?

The Fed is increasing swap lines to major central banks around the globe to provide more credit to the global capital markets. It seems like as fast as the market delevers, the central bank is willing to add liquidity. Unfortunately, the speed of delevering is faster than the addition of credit. The addition of credit also has to find its way to those firms that need it most which are the ones that have the highest credit risk.

The real problem is lending uncertainty. How do you distinguish between a good firm or a bad firm. Goldman Sachs and Morgan Stanley, for example, have good capital ratios and have tried to deal with their credit problem, bu if you are not sure about the environment is it worth providing these firms credit at spreads that will not cover a default. When in doubt, buy Treasuries. Until this uncertainty is resolved coordinated action will not eliminate the crisis.

The finds are necessary as the lender of last resort because the Fed funds market is telling everyone that there is a shortage of cash. The target rate is 2% but the Fed funds market has been trading at 100 bps over the target. Banks are unwilling to give other banks funds. The Fed, if it wants to hit its policy targets has no choice. Given that the banks who are in the greatest demand for fund are also global, there is a need to make there is help from other central banks.