Economist and president of a research firm that bears his name, Andrew Smithers (not related to the Smithers of Mr. Burns fame) is saying our on-fire stock market is set to burn itself out. The S&P 500 Index is overvalued by 40%, he believes, and we can expect a plunge thanks to central bankers restraining themselves on the securities purchases that have pushed the markets up so far so fast. Also, banks are going to need to sell more shares to raise capital and pump up their balance sheets.

If the S&P 500 were to take a 40% dive today, it would fall to 647.76 (based on the Friday close), below the low it recorded in March.

For the fourth month in a row, Bank of England interest rates will remain at the record low of 0.5%. In an announcement today, the UK's central bank said it would not expand its quantitative easing of financial markets, much to the surprise of the market. The bank has been buying up assets aggressively, printing cash to finance what is likely to be £125 billion in purchases by the end of this month.

Financial markets expected a much different play, involving an increase in this asset purchase target by another £25 billion (to £150 billion). This move would have let the Bank of England shove even more money into the economy through next month, which is when the bank publishes its latest quarterly economic forecast.

Early estimates of a contraction in the U.K. economy were not enough. First quarter 2009 estimates were revisited, showing a 2.4% fall in gross domestic product from the last quarter of 2008 to 2009. This downward revision made the first three months of the year the worst since people wore skinny ties, hated communism, and bore nicknames like "Buzz."

In the second quarter of 1958, U.K. GDP plummeted 2.6%, though the 2.4% threshold matches the depths hit in 1979. The original 2009 Q1 estimate was -1.9%, according to the Office for National Statistics in London.

This morning, the Bank of England's Monetary Police Committee (BOE) decided to keep its interest rate at the current all-time low of 0.5%, as was expected. The BOE announced that it would continue its 75-billion pound program, which is supposed to increase the money supply in hopes of keeping deflation at bay.

The BOE stated that, "since its previous meeting a total of just over 26 billion pounds of asset purchases had been made and that it would take a further two months to complete that program." Some experts believe the BOE will hold interest rates at 0.5% "well into 2010." Before the bank made its decision, the 10-year yield was hovering around 3.34%.

In the midst of a worldwide recession Britain's CPI (consumer price index) rose 3.2% in February. This is not supposed to happen. In normal circumstances consumer prices usually drop or remain steady during a recession. The Office of National Statistics in Britain said that the increase in the CPI was due to an increase in food prices.

Now all of the pundits are scrambling for an explanation. Mervyn King, governor of the Bank of England, blames it on the depreciation in the British pound. Since the summer of 2007, the pound has fallen 28%. Mr. King tried to soothe investors by saying that he expects inflation to fall to the government's target of 2% later this year.

In a startling move, the Bank of England cut interest rates to .5% and announced plans to buy 75 billion pounds of gilts (the British equivalent of the U.S. Treasury bond). Gilt prices rose sharply, especially longer term maturities.

This had the effect of changing the slope of the yield curve (longer term maturities gained ground over shorter term ones). The Bank of England initiated these moves in an effort to bring down medium- and long-term rates.

Seems Wall Street will not be able to extend Wednesday's gains as U.S. stock futures are quite a bit lower this morning, indicating resumption of the selloff is ahead. If on Wednesday investors hoped China would announce more spending, today they were disappointed when China's premier didn't announce more stimulus. In addition, auditors raised doubts about General Motors (NYSE: GM) viability.

Overseas, European markets dropped Thursday after the previous session's strong rally, as investors await key interest rate decisions later in the day by the European Central Bank and the Bank of England. So far, the BOE has cut the benchmark interest rate to 0.5%, the lowest since the bank was founded in 1694. The ECB is also expected to cut rates.

You read that right. Bloomberg.com has reported that The bank of England has lowered it's benchmark interest rate to it's lowest point since the bank was founded in 1694. How much more proof is needed to make obvious the fact that people and businesses just aren't borrowing money any more?

Even if some stalwart soul had the inclination to borrow some money, are there banks out there which are lending it? In the face of unemployment levels which some say honest calculations put up as high as 16%, banks are becoming adverse to lending money to anyone who might actually need it. Of course I can get you credit card applications all day long, if you're willing to pay upwards of 19% interest on new money.

So you have to wonder, when is it all going to break loose. Honestly folks, if the promise of increased revenue reserves was in any way going to help us, don't you think the contraction would have slowed by now? The only way additional cash will correct anything is if that cash is put directly into the hands of the people who pay the bills. Of course, we all know that will never happen. Our government will continue to drop wads of our yet unpaid tax dollars into the laps of their corporate sponsors. That, for now, is where the buck now stops.

Two major central banks took drastic monetary policy action Thursday to further stimulate their economies. The Bank of England unexpectedly cut it benchmark interest rate by a gargantuan 150 basis points to 3%. Meanwhile, the European Central Bank cuts its key rate, the refinance rate, by 50 basis points to 3.25%.

"There has been a very marked deterioration in the outlook for economic activity at home and abroad," the Bank of England said in a statement.

Economist Richard Felson had expected a 75-basis-point cut by the BOE. "We know that several business surveys in the U.K. are pointing to a pronounced contraction, with consumer spending showing little life. I think those facts, and the tighter credit markets, prompted the decision," Felson said. "Few expected as large a cut, but it was the correct move, and there's likely to be additional rate cuts ahead."

The BOE has now cut interest rates by 200 basis points since October 8.

The ECB also took bold action to stimulate growth, with a 50-basis point cut. Felson said continental Europe is likely to experience the effects of the downturns in consumer and business demand later, but the fact that the hawkish-leaning ECB "is in full accommodation mode" is a sign of the scope of the economic slowdown.

Short-term interest rates continue their downward trek, albeit at a snail's pace.

Overnight interest rates for dollars fell again early Thursday, after central banks provided $254 billion in emergency cash, Bloomberg News reported.

The London interbank overnight rate, or LIBOR, fell 20 basis points to 1.94%, Bloomberg News reported Thursday. The London three-month rate decreased 5 basis points to 4.50%.

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.

Trend indicates liquidity is improving, gradually

Economist Peter Dawson told BloggingStocks Thursday the Bank of England's delay in its closure of emergency borrowing and the European Central Bank's acceptance of lower-rated securities as collateral and its lending of unlimited amounts of euros over the next six months has broadened the credit landscape.

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.

Gosh. Golly. Gee Whiz.

That was the reaction Monday of traders and economists to the European Union's coordinated decision to invest a staggering $2.4 trillion in interbank loan guarantees and bank recapitalizations, ft.com reported, to end the global financial crisis.

(Of course, 'gosh, golly' etc. were not exactly the reactions of traders and economists -- this is a family-appropriate financial blog -- but you get the point.)

Europe's decision sparked a global rally in stocks. The Dow closed up 936.42 points -- the largest one-day point gain in its history -- to 9,387.61.

Europe takes the lead

At minimum, Europe is saying that its economic stake in the current global financial system is so large that it's willing to err on the side of over-committing public funds, economist Peter Dawson said.

"Europe's response is very large, unexpected, and it could prove to be the pivotal move in this crisis," Dawson said. "Europe appears to be saying, 'well the United States is doing what it can do, given its political constraints' now let's do what our political culture allows. Basically, Europe is saying 'the storm of fear starts to lose its strength here.' "

The measures were both sweeping and unprecedented in size and scope, Dawson said. Germany said it offered about $680 billion in loan guarantees and will invest $108 billion in its banking system, ft.com reported. France said it would provide up to $435 billion in loan guarantees and invest as much as $52 billion. The United Kingdom has committed about $70 billion for investment in key banks, along with a guarantee for banks deposits and interbank lending. The Netherlands, Spain, and other nations announced similar plans.

The U.S. Federal Reserve is leading an unprecedented effort by major central banks to push dollars into the global financial system, the Fed announced Monday, backstopping government fiscal policies to restore confidence,

The European Central Bank, Bank of England, and the Swiss Central Bank, will offer unlimited dollar fund auctions with maturities of seven days, 28 days, and 84 days at a fixed interest rate. The Bank of Japan may offer similar measures, the Fed said.

The Fed added that "central banks will continue to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short-term funding markets."

Dollar falls on increased currency supply

The dollar fell early Monday against the world's other major currencies on the news, as traders adjusted positions to the increased supply of dollars. The dollar fell one half cent to $1.3615 versus the euro, 1.5 cents to $1.7286 versus the British pound and one-third yen to 100.37 versus Japan's yen.

Economist Richard Felson told BloggingStocks Monday the major central banks' effort is clear: keep financial markets adequately supplied with dollars amid a world that's hoarding dollars.

"It's one of the paradoxes of this current global financial crisis that despite the fact that the crisis originated in the United States, banks and financial institutions around the world are hoarding dollars. The reason is the dollar is still the world's reserve currency and investors are engaging in a flight to safety. The consequence has been a credit crunch," Felson said. "The central banks' policy should help alleviate that crunch by ensuring that there's adequate dollar liquidity. It's the correct move."

The resources of the central bank of the world's second strongest economy have now been marshaled to address the global financial crisis.

The European Central Bank, led by President Jean-Claude Trichet has shifted policy - - a remarkable, historic change - - and is now working in coordination with its companion major central banks - - the U.S. Federal Reserve, Bank of England, Bank of Japan, and the Bank of China - - and others, to end a credit crisis that threatens to cripple international business and seriously damage economies, worldwide.

A legendary inflation hawk,Trichet, whose ECB lowered its key, short-term interest rate by 50 basis points in conjunction with the other major central banks on Wednesday, declined to rule out further steps to solve the crisis, including additional interest rate cuts, Bloomberg News reported Thursday.

ECB: banks offered unlimited cash at 3.75%

Further, and equally significant, Trichet offered banks unlimited cash at 3.75% to help them cope with tight credit markets, Reuters reported Thursday. Previously, the ECB had offered funds to the highest bidders, a tactic that pushed average rates as high as 4.99% - - almost 75 basis points above the official rate.

In addition, the ECB cut in half the premium it charges for overnight emergency loans and increased the interest rate it pays on deposits, Reuters reported Thursday.

In an unprecedented, emergency, coordinated move, the Fed and other major central banks cut interest rates Wednesday, in an attempt to prevent the global financial crisis from spreading further and damaging economies.

The Fed, European Central Bank, Bank of England, Bank of Canada, Sveriges Riksbank, and the Swiss National Bank each lowered their benchmark rates by 50 basis points. The Bank of Japan was not involved in this round of rate cuts, but said it fully supported the action.

Separately, China's central bank also lowered its one-year lending rate by 0.27 percentage points.

"`The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability,'' the banks said in joint statement. "Some easing of global monetary conditions is therefore warranted."

The action brought the Fed's benchmark rate to 1.5%; the ECB's main rate is now 3.75%; Canada's declined to 2.5%; the U.K.'s rate fell to 4.5%; Sweden's rate declined to 4.25%. China's rate fell to 6.93%.