There is a proverbial wall of money coming from central banks. However, the commentating class expects little of that. Do they have a point? In the 1980s, one had the proverbial wall of money from Japan. Actually, despite that country falling into a couple of Lost Decades (which turns out to be not that lost), the wall of Japanese money survived in the form of the famous carry-trade, in which money was borrowed in Japan at very low interest rates and put to speculative uses.
Now that basically the whole Western world enjoys Japanese interest rate, even that carry trade has come to a halt. But there seems to be something coming to replace it.
Yesterday, in a coordinated manner, five central banks (the Fed, the ECB, the Swiss central bank, the BoJ and the Bank of England) engaged in an operation to relieve funding stress, more particular, dollar funding stress of the euro zone banking system.
Many are skeptical whether this proverbial wall of money will provide more than just a temporary relief. For instance, here is an article from Blick Log (alas, it's in German, or here is a useful overview in English), that is quite typical. The article points out that walls of money have gotten little traction in the real economy. That comment is both true, but misguided.
Firstly, the wall of money coming from central banks in 2008 did stabilize the financial system, and thereby kept the real economy from collapsing. One might appreciate just the speed of the collapse of economic variables, which was as dramatic or even more dramatic as after the 1929 crash:
And it's important to realize we're in not dissimilar conditions, with intra-euro bank lending freezing up. These are conditions in which central bank intervention usually can make a big difference, as well as conditions which can have great consequences for the real economy if nothing is done to relief the stress.
Secondly, there is still one area where monetary policy can get instant traction, and that's the eurozone. It's rather ironic that the one area of the developed world where the central bank hasn't engaged in a large scale quantitative easing program is exactly the area where it would get most traction.
Much of the difference in lending rates between eurozone countries and others can't be explained by the state of public finances, but have everything to do with the perceived lack of a lender of last resort. Take, for instance, the difference between Spain and Britain:
This reality is so frustrating that there are commentators suggesting that the Fed should do it for them, such is the frustration in Washington with the ECB. In a way, the coordinated central bank action of Wednesday is a small step in that direction.
Our best guess is that the ECB will, in the end, relent. There are two issues still holding them back. The first is that an alternative route, via the EFSF, probably in combination with the IMF, isn't yet completely dead. The second route is that eurozone politicians, under the impulses of the Germans, are trying to hammer out a deal about a much stricter stability union in which it's much less possible for countries to misbehave with regards to their public finances.
These two initiatives might still offer some relief on their own and the second is likely to be a precondition for a much supped up ECB bond buying program.