What the G-7 Did in 72 Hours to Avoid an Exact Repeat of the 2008 Market Crash

In the 72 hours following a Group of Seven conference call on August 7, the U.S. Federal Reserve announced its intention to keep interest rates low for another two years, the European Central Bank began buying government bonds, and the Bank of England (NYSE:EWU) indicated its preparedness should it need to add more stimulus. Though not a G-7 nation, Switzerland also recently renewed efforts to curb the rising value of the Swiss franc (NYSE:FXF).

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While confidence in lawmakers’ abilities to combat the economic problems being faced around the world has been crumbling, central banks have been stepping up, and have “so far been the tower of strength,” according to Stefan Schneider, chief international economist at Deutsche Bank AG (NYSE:DB) in Frankfurt.

In a statement issued August 7, finance ministers and central bankers from G-7 nations said thy will “take all necessary measures to support financial stability and growth in a spirit of close cooperation and confidence.” On August 8, the European Central bank, which is based in Germany (NYSE:EWG), a G-7 nation, renewed its bond-purchasing program after 18 weeks, widening its focus this time around to include Italy (NYSE:EWI) and Spain (NYSE:EWP), which after Germany and France (NYSE:EWQ) are the euro zone’s third- and fourth-largest economies.

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On August 9, the Fed announced that it would keep its interest rates at a record low until mid-2013. On August 10, Bank of England governor Mervyn King told reporters that officials are prepared to expand stimulus should the need arise. Yesterday, Switzerland’s central bank said it will increase the supply of francs in order to lower the currency’s “massive overvaluation”.

While banks’ efforts aren’t as coordinated this time around, the last 72 hours have been the biggest, broadest push by central banks to combat economic problems since the Fed, ECB, and four other central banks cut interest rates in October 2008 after Lehman Brothers collapsed. While he says that central banks have been getting their act together, Mohamed El-Erian, chief executive officer at Pacific Investment Management Co., says that “we have to recognize that what they do is necessary but not sufficient…We need other agencies, whether in the U.S. or in Europe, to get their act together.”