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Published on Oct 9, 2008
Thursday 9 October 2008 - A plan to save the world
Presented by Paul Donovan
+ This is the beginning of the end of the financial crisis. The UK injected capital systemically into its banking system, and rates were cut. That satisfies all of the key conditions of the UBS plan to save the world. We are moving in the right direction.
+ US Treasury Sec Paulson has indicated he is contemplating injecting capital into the banking sector, and that the TARP gives him the authority he needs to do so. This too meets the UBS plan. We still need more rate cuts, but we will probably get them.
+ The actions yesterday can not stop a significant economic downturn. Capital injections and rate cuts will shorten the duration of the downturn, but a prolonged period of economic weakness (and disinflation) now lies ahead. Financial markets need to price for that.
+ Asian central banks have joined in the general process of easing interest rates. The BoJ has not, but it does not need to (there is limited deleveraging to take place in Japan). The BoJ has indicated that it may join the Fed, and every other major central bank, and pay interest on reserves.