The credit market thaw continues.

Interest rates for three-month loans in dollars fell again early Wednesday, after three major central banks offered lenders unlimited dollars for the first time.

The London three-month rate for dollars decreased 9 basis points to 4.55%, Bloomberg News reported Wednesday. Meanwhile, a comparable euro rate dipped 5 basis points to 5.18% and the London interbank overnight rate, or LIBOR, fell 4 basis points to 2.14%.

The European Central Bank, Bank of England, and Swiss National Bank all offered lenders unlimited dollars for the first time, Bloomberg News reported.

Short-term rates, including overnight rates, are key sources of cash for corporations and other large institutions, which use the cash to pay suppliers, make payroll, roll over debt etc. Hence, very high overnight and short-term rates will discourage corporations from conducting business, restricting commerce and slowing the economy, economists say.

Coordinated dollar offering helps

Economist Peter Dawson told BloggingStocks Wednesday the coordinated dollar offering, combined with Tuesday's $250 billion U.S. bank recapitalization by the U.S. Treasury, should keep short-term interest rates heading in the right direction: lower.

A debate on 'How much money does the Fed have?' is premature, several economists told BloggingStocks Monday.

Instead Fed policymakers, in conjunction with the U.S. Treasury, and major central banks in industrialized economies, should and will focus on the huge task at hand: using traditional and new tools to stabilize the financial system. Investors/traders should concentrate on that, as well, the economists say.

'Fight the fire, now; worry about water costs, later'

"Questions regarding the ultimate size of the Fed's resources are not appropriate at this juncture, in my view," Economist David H. Wang said. "The immediate task is to prevent a panic, a panic that could cause this financial crisis to turn into a financial calamity."

"The Fed, ECB [European Central Bank], Bank of England, Bank of Japan, and others must fight the fire that's pretty big right now, and determine the water costs later," Wang added. "They have to maintain liquidity and create new tools and mechanisms that keep overnight credit available to banks, companies and institutions, Otherwise commerce is going to slow down like a car with an oil leak."

Economist Richard Felson agreed with Wang, adding that the Fed and or the U.S Treasury have to make sure corporations and other key institutions - - including state governments - - have adequate overnight and related short-term capital. "They have to prevent the financial crisis from choking off credit to sound companies and of course to the states. The crisis can not be allowed to prevent companies from conducting typical business or states from paying suppliers, making payroll, rolling over debt etc. or the economy will contract further," Felson said. "We've got to stop the momentum and get the ball rolling in the other direction."

BNP Paribas, which helped signal the global credit crisis that started one year ago this week, has emerged from the credit crunch as France's healthiest bank, Bloomberg News reported Monday.

BNP Paribas will announce Q2 financial results this week. While earnings are expected to be lower year-over-year, they will probably be better than those of its rivals, Societe Generale SA and Credit Agricole SA, according to Bloomberg. BNP Paribas fell 1.76 euros to 59.77 euros in Monday afternoon trading in Paris.

About a year ago, on August 9, 2007, BNP Paribas halted withdrawals from three funds that invested in subprime mortgage debt. The bank's announcement proved to be the first of dozens credit-loss and write-down announcements by banks, mortgage lenders and other institutional investors, as subprime assets went bad, due to defaults by subprime mortgage payers.

The losses and resulting credit crunch compelled the intervention by the world's major central banks. The U.S. Federal Reserve, European Central Bank, Bank of England, Swiss National Bank and Bank of Canada made hundreds of billions of dollars available in specialized loans through conventional monetary policy tools and via new, special 'facilities,' in an effort to maintain credit market liquidity and prevent bad bank/mortgage lender business models from undermining healthy sectors and the broader economies in the United States and the European Union.

Economic growth is the major concern today

London-based economist Mark Chandler told BloggingStocks Monday that concern about credit markets freezing up again has diminished, but concern about the impact of the housing sector's slowdown on broader economies has not.

The U.S. Federal Reserve Friday announced an increase in the amounts auctioned to eligible depository institutions under its biweekly Term Auction Facility (TAF) from $50 billion to $75 billion, starting with the auction on May 5.

The action brings the amounts outstanding under the TAF to $150 billion, the Fed said.

In addition, the Fed also authorized further increases in its existing temporary reciprocal currency arrangements with the European Central Bank and the Swiss National Bank. The arrangements will now provide dollars in amounts of up to $50 billion and $12 billion to the ECB and the SNB, respectively, representing increases of $20 billion and $6 billion. The Federal Open Market Committee (FOMC) extended the term of these reciprocal currency arrangements through January 30, 2009.

Furthermore, the Fed also authorized an expansion of the collateral that can be pledged in the Federal Reserve's Schedule 2 Term Securities Lending Facility (TSLF) auctions. Primary dealers can now pledge AAA/Aaa-rated asset-backed securities, in addition to already eligible residential- and commercial mortgage backed securities and agency collateralized mortgage obligations, beginning with the TSLF auction on May 7, 2008.

Although confidence that market forces will be the only factors determining currency rates is decreasing, there's little indication the world's major central banks are about to initiate a coordinated action to support the dollar.

The dollar has fallen more than 20% versus the euro and more than 10% versus the British pound since 2006. In the months ahead, monetary officials may face increased pressure to intervene as companies in Europe complain about the higher prices they must charge for their exports to the U.S. to retain purchasing power amid a falling dollar.

"The risks of coordinated intervention are going to increase in the second quarter for sure as the dollar weakens further,'' Mitul Kotecha, head of foreign-exchange research in London at Calyon, told Bloomberg News Monday. The firm is the securities unit of Credit Agricole SA, France's second-biggest bank.

In midday Monday trading, the dollar was mostly higher against the world's other major currencies after U.S. stock markets rose. The dollar gained about one-half cent to $1.5356 versus the euro, about 1 yen to 100.55 versus Japan's yen, and about 1.5 cents to $1.0288 versus the Swiss franc. The dollar was virtually unchanged at $1.9822 versus the British pound.

The dollar fell to a yet another record-low against the euro Friday and plunged against the world's other major currencies, as investors shunned U.S. investments ahead of an almost-certain U.S. recession, with likely further interest rate reductions from the U.S. Federal Reserve.

Friday's trigger event for selling was The Bear Stearns Companies, Inc. (NYSE: BSC) stunning announcement that -- less than 10 days after senior management officials called liquidity-crunch rumors 'absolutely ridiculous' -- it had accepted a 28-day, emergency, secured loan from the U.S. Federal Reserve via JP Morgan Chase & Co. (NYSE: JPM).

The Fed said in a statement that it will ``continue to provide liquidity as necessary to promote the orderly functioning of the financial system,'' repeating reassurances Federal Reserve Chairman Ben Bernanke has made often since credit problems first surfaced in August 2007. The Fed did not state how large their loan is to Bear Stearns.

The ever-incisive FT columnist Martin Wolf offers a stark and sober analysis of the United States' current financial and economic predicament, but it's an analysis well-worth reviewing, if one has the time.

A synopsis is provided here, but first, full warning: read the analysis when you're feeling well and in a good mood, not during other times.

Margin call. Forced sale (liquidation). Stock / asset price decline. Cascading sales. Margin call. Forced sale (liquidation). Stock / asset price decline. Cascading sales. Margin call.

Concerned that current financial market and economic conditions might produce the above - - the dreaded financial vicious cycle? (It's also known as the financial decelerator.)

So is the International Monetary Fund, which is why the organization took the highly unusual step of recommending that governments should be prepared to use public funds to support struggling global credit and financial markets.

The U.S. Federal Reserve announced Tuesday an expansion of its securities lending program.

The actions announced today supplement the measures announced by the Federal Reserve on Friday to boost the size of the Term Auction Facility to $100 billion and to undertake a series of term repurchase transactions that will cumulate to $100 billion.

The Fed added that "since the coordinated actions taken in December 2007, the G-10 central banks have continued to work together closely and to consult regularly on liquidity pressures in funding markets. Pressures in some of these markets have recently increased again." The Fed added that central banks "will all continue to work together and will take appropriate steps to address those liquidity pressures."

"To that end," the Fed said, "today the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are also announcing specific measures."

Fed Analysis: Without question, the Fed is attempting to head-off any building, short-term liquidity crunch banks may face in the weeks and months ahead. This latest increase in the Term Auction Facility, the coordination with the other major central banks indicates monetary, and lengthening of the primary dealers' term to 28 days from overnight will help the Fed and the other central banks achieve that liquidity goal.

ECB President Jean-Claude Trichet said the European Central Bank needs to maintain its inflation-fighting stance, amid a very significant, ongoing market correction, Reuters reported Wednesday.

Trichet said, "In demanding times of significant market correction and turbulences, it is the responsibility of the central bank to solidly anchor inflation expectations to avoid additional volatility in already highly volatile markets," Reuters reported.

Many economists and analysts had hoped that the ECB would modify its inflation-focused stance in the face of mounting evidence of a U.S. economic slowdown and concerns that a prolong U.S. slowdown would slow global growth. Asian and European markets sold off more than 5%, and the U.S.'s Dow Jones Industrial Average plunged more than 400 points Tuesday, before the U.S. Federal Reserve cut key, short-term interest rates by 75 basis points in an emergency meeting.

Europe's major stock exchanges in London, Frankfurt and Paris continued their slide Wednesday, falling about 2% across the board by mid-day, The Financial Times reported.

December's disappointing 18,000 jobs-created statistic has not only increased concerns that the U.S. economy is at very sluggish growth levels -- if it hasn't already fallen into a recession -- it's also raised questions regarding the U.S. Federal Reserve's response.

Economist Steve Affinito told BloggingStocks that debate and questions regarding the Ben Bernanke-led Fed's monetary policy are legitimate and warranted.

"In light of recent data, it's perfectly reasonable to ask 'Has the Fed faltered?' and there's considerable debate in econ circles I travel in on that theme. With all of the contractionary forces acting on the U.S. economy, one can legitimately question the incremental response of the Fed," Affinito said. "So far, the evidence appears to be building that the Fed's interest rate response has not been enough."

The U.S. Federal Reserve announced that $16.5 billion of its first $20 billion in loans under its term auction facility went to institutions in the New York district [subscription required], an area that includes the headquarters of some of the nation's largest banks, The Wall Street Journal reported on Friday. The Fed doesn't disclose loan sizes or borrowers' identities.

Meanwhile, the Fed's Dallas district reported loans of $1.4 billion, while the St. Louis district reported loans of $1 billion.

Earlier this fall, the Fed established the term auction facility as an alternative short-term loan operation because banks were reluctant to access the Fed's traditional short-term window, the discount window. Banks became reluctant to borrow from the discount window because of the stigma attached: doing so can telegraph distress to other banks.

Fed Analysis: So far, the Fed's effort, along with the effort of the European Central Bank and other major central banks, to provide short-term loans to banks appears to be working. Both overnight and two-week liquidity has improved, as measured by yield spreads and transaction conditions. A later announcement by the Fed to maintain the term auction facility "for as long as necessary" further calmed the markets. Still, investors/readers should keep in mind that the housing correction / credit quality issue is young: given the plethora of at-risk subprime loans and related assets, more default declarations are undoubtedly ahead in 2008.

The U.S. Federal Reserve said it will conduct biweekly emergency auctions of loans "for as long as necessary" as part of a coordinated effort among the world's major central banks to provide liquidity to head off a potential, future credit crunch, the Fed announced Friday in a statement.

The Fed said: "The Federal Reserve intends to conduct biweekly Term Auction Facility (TAF) auctions for as long as necessary to address elevated pressures in short-term funding markets. The Board of Governors will announce the sizes of the January 14 and January 28 TAF auctions at noon on January 4."

To date, the Fed, in conjunction with the European Central Bank, has loaned more than $40 billion in 35-day loans in two auctions at interest rates of 4.65% and 4.67% per auction, respectively, Bloomberg News reported Friday.

The European Central Bank late Monday announced that it will offer banks unlimited funds starting Tuesday at below-market interest rates, in a special operation to head-off a year-end liquidity crunch, The Financial Times reported Monday night.

The move, which follows last week's coordinated series of measures by the world's major central banks to increase market liquidity, suggests the ECB is still frustrated at the failure to ease financial market tensions, The Financial Times said.

Agence France-Presse Monday night reported that during the two-week market refinancing operation [MRO], the ECB will allow banks to borrow an unlimited amount of funds and would keep the key short-term rate near 4.21%, below the 4.9% rate for similar operations over the past few days.

Once again, the ever-incisive Financial Times columnist Martin Wolf, an economist, identifies with laser-accuracy what ills the current market. The problem, Wolf argues, is not a lack of solvency but a lack of liquidity (i.e. 'panic').

Wolf does not deny that there have been bad loans (there have been) or that no companies will go out of business (some will). But the circumstance that froze credit markets, that caused quality corporate bonds to fail to price, and that leads to 100-point spreads between the LIBOR rate (what banks charge each other) and the ECB's benchmark interest rate, is rooted more in a lack of confidence, than a lack of sound economic fundamentals or a lack of resources.

A lack of liquidity

And a lack of liquidity or 'panic' is something that central bankers can address. With the above in mind, the U.S. Federal Reserve's plan, in consultation with the European Central Bank, the Bank of England, the Swiss National Bank, and the Bank of Canada, to inject $40 billion via auctions into the financial system is appropriate and prudent. (Further, in addition to reciprocal currency arrangements, the companion central banks will take related actions, including the Bank of England's decision to accept a wider range of collateral on 3-month loans).