Central banks around the world have been pouring money into the global financial system in an effort to stave off what was likely to become the largest crisis of capital since 1929.
The global credit crunch induced by the subprime mortgage crisis in the United States, in the second half of last year, created a major shift in the way central banks perceived themselves and their role in the banking and financial system.
The collusion between major world central banks was a direct reaction to the failure of their more conventional instruments - lending rates and the controlling of cash - to stave off the crash.
Repeated and steep cuts in official cash rates failed to halt the crisis. Central banks are relatively new inventions.
Author Sam Vaknin writes in his book Malignant Self Love that central banks are bizarre hybrids.
Some of their functions are identical to those of regular commercial banks. Other tasks are unique to the central bank. On certain functions, they have an absolute monopoly.
Central banks take deposits from other banks and, in certain cases, from foreign governments which deposit their foreign exchanges and gold reserves for safekeeping.
The bank invests the foreign-exchange reserves of its country while trying to maintain an investment portfolio similar to the trade composition of its client, the State.
Central banks also hold on to the gold reserves of the country. Most central banks had until recently tried to get rid of their gold, due to ever declining prices.
Since the gold is registered in their books in historical values, they have recently shown a handsome profit on this sideline. However, all of those are secondary functions.
Their main function is the monitoring and regulation of interest rates in the economy. The central bank does that by changing the interest rates it charges on money it lends to the banking system through its "discount windows".
Interest rates are supposed to influence the level of economic activity in the economy.
Higher interest rates lead to lower economic activity and lower inflation by lowering the amount of discretionary spending households have for "luxury purchases" such as new cars and electronic goods.
Lower interest rates encourage people to spend more on their lifestyle and assets because mortgage rates are lower, leaving more money in their pockets.
Even 0.25% movements are sufficient to send stock exchanges tumbling, together with bond markets.
Many in New Zealand are contemplating that the Reserve Bank might cut its interest-driving official cash rate (OCR) before its next meeting on October 23.
The world is suffering from a lack of liquidity because of the combination of failing financial institutions and the banking sector's unwillingness to accept counterpart risk of any description because of massive uncertainty as to the stability of any individual entity.
While this is extraordinarily worrying, there is no evidence lowering interest rates will have any impact on what is a liquidity issue.
