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The debacles at Lehman Brothers and AIG have caused a loss of confidence in the financial markets, creating a credit squeeze under which financial institutions no longer trust each other and are unwilling to lend to one another. The credit squeeze has become so severe that on Thursday the Fed and other global central banks mounted a concerted effort to inject massive liquidity into the financial system to prevent the squeeze from bringing down the global financial system.

The Fed, the European Central Bank (ECB), the Bank of England and others announced coordinated measures designed to address the continued elevated pressures in US dollar short-term funding markets. The Fed made an extra $180 billion available to other major central banks by increasing existing currency swap lines with the ECB and the Swiss National Bank and establishing new lines with the Bank of Japan, the Bank of Canada and the Bank of England. The moves helped ease overnight rates rather significantly. However, the central banks' intervention will be able to relieve credit conditions only in the short term. The financial markets would like to see tougher action from US authorities, with some starting to question the rationale of bailing out the banks and transferring the debt to the balance sheet of the Fed instead.