If overnight interest rates do not fall as a result of the Fed's guarantee for commercial paper and related efforts to create incentives for banks to lend, the leaders of world's central banks and treasury departments may have to try a more creative approach to end the financial crisis: a global distressed asset summit.

As economist David H. Wang told BloggingStocks Wednesday, the major economies may have to hold a global 'out & price' summit to get distressed and bad assets -- the source of so many of the defaults and resultant fear among banks -- out of the financial system.

The problem, Wang said, is not just that the subprime and Alt-A mortgage backed securities represent distressed and bad debt, it's that "banks and other financial institutions can't determine the value or price of many of these securities."

Unknowns about toxic assets driving fear

Wang believes that "lack of certainty about price is the biggest factor in banks' unwillingness to lend."

"Banks can't determine the price of these assets, it represents a big uncertainty, therefore because they're uncertain regarding what their competitor banks hold, they aren't lending, and they're charging higher rates for short-term loans," Wang said. "Both are restricting commerce and will continue to slow economies all over the world if the problem is not addressed."

Overnight interest rate continued to rise Wednesday, despite a decision by the major central banks to cut interest rates, as banks continued to hoard cash and charge very high interest for short-term loans on fears the global financial crisis will worsen.

The London interbank offered rate, or LIBOR -- the rate banks charge each other for overnight dollar loans -- increased 144 basis points to 5.38% early Wednesday morning -- a very high rate for short-term cash. It was the second straight day the LIBOR had risen more than 100 basis points.

Overnight rates are key sources of cash for corporations and other larger institutions that use the cash to pay suppliers, make payroll, roll over debt, etc. Hence, a very high overnight rate will discourage corporations from conducting business, restricting commerce, and thus slow the economy, so says economist Richard Felson.

"We have to force overnight rates lower and encourage banks to lend. High overnight interest rates will discourage companies from conducting typical business and will slow the economy. We've got to stop this bad momentum, eliminate fear, and get the ball rolling in the other direction or GDP will contract more," Felson said.

The U.S Federal Reserve and its companion, major central banks around the world again Monday took actions to keep financial markets liquid amid a credit crunch that has made private banks reluctant to lend critical, short-term funds to each other, and that threatens to slow global growth to a crawl.

The Fed said it increased the size of its dollar swap arrangements to $620 billion from the previously-announced $290 billion. The Fed also increased the size of its liquidity auctions and announced two forward auctions to provide funding over the year-end period.

"These steps are being undertaken to mitigate pressures evident in the term funding markets in the United States and abroad," the Fed said.

"By committing to provide a very large quantity of term funding, the Fed actions should reassure financial market participants that financing will be available against good collateral, lessening concerns about funding and rollover risk," the Fed said.

The nine banks participating in the swap lines are: the European Central Bank, Bank of England, Bank of Japan, Bank of Canada, National Bank of Denmark, Bank of Norway, Reserve Bank of Australia, Bank of Sweden, and the Swiss National Bank.

Economist backs Fed's moves

Economist Richard Felson applauded the Fed's move, given "the unchartered waters the Fed is in, and the political pressure it faces."

"It's liquidity front-and-center, while simultaneously determining with the [U.S.] Treasury which institutions have to be saved, which it can let the private sector dissolve, and at the same time begin the process of buying distressed debt," Felson said. "One goal is lowering the LIBOR spread, and this should help."

Libor-OIS rose 219 basis points Monday, Felson said, "a clear sign banks remain reluctant to lend to each other."

The U.S. Federal Reserve has agreed to channel $30 billion into the global financial system by establishing temporary reciprocal currency arrangements, also called swap lines, with four more central banks, the Fed announced Wednesday.

The Fed said it established the currency exchange to address "elevated pressures" in dollar funding in the markets. The lines were established with the Reserve Bank of Australia, the Sveriges Riksbank (Sweden), the Danmarks Nationalbank (Denmark), and the Norges Bank (Norway).

The Fed's action occurs after overnight interest rates rose on concern the U.S. Treasury's proposed $700 billion bailout of the financial system will likely encounter revisions and a vote delay in the U.S. Congress.

Economist Richard Felson said he approved of the Fed and other central banks' effort to maintain both liquidity and an adequate flow of dollars in international markets.

"The swap lines will help maintain liquidity and address pressures building in the Asia Pacific region," Felson said. "Among other benefits, this will increase the amount of dollars available for money markets."

Felson added that the Fed and other central banks' goal is to maintain liquidity and "keep the credit creation process in motion." Bank concern about the ability of fellow banks to repay money has periodically led to decreased bank-to-bank lending during the financial crisis. If that tactic continues, it could eliminate a source of credit companies and others need to conduct business, restricting commercial activity.