Central banks act to head off global credit crisis

By Glenn Somerville and David Milliken

WASHINGTON/FRANKFURT (Reuters) - Central banks around the globe pumped billions of dollars into banking systems on Friday in a concerted effort to beat back a widening credit crisis, and they pledged to do more if needed.

In all, central banks in Europe, Asia and North America have pumped out more than $300 billion over 48 hours in an effort to keep money flowing through the arteries of the global financial system, hoping to prevent a credit market seizure that could imperil economies.

In a rare statement of reassurance that underlined the seriousness with which it views the current bout of market stress, the U.S. Federal Reserve said it would provide cash as needed to ensure markets functioned smoothly. The statement was the first of its kind since September 11, 2001, when terror attacks brought the U.S. financial system to a virtual halt.

"Ben Bernanke must feel like the captain of the Titanic," said Sherry Cooper, chief economist at BMO Capital Markets in Toronto, referring to the Fed chairman. "He knows the ship has hit an iceberg but, through the dark and fog, can't see how bad the damage is."

The Fed conducted three separate operations on Friday, pumping a total of $38 billion into the banking system, the largest amount for any single day since September 19, 2001.

Markets responded positively. The Dow Jones industrial average .DJI ended down 31.14 points at 13,239.54, but in early trade had been off more than 200 points. The Nasdaq Composite Index .IXIC lost 11.60 points -- less than one-half of 1 percent -- to close at 2,544.89.

The U.S. central bank was not alone in its market-bolstering exercise.

The European Central Bank injected 61.05 billion euros ($83.61 billion), less than the record-setting 94.8 billion euros ($130.6 billion) it provided on Thursday but enough to steady panicky euro-zone credit markets.

The Bank of Japan, the Bank of Canada, the Swiss National Bank and the Reserve Bank of Australia also provided funds.

The White House weighed in to say that the Bush administration's top economic officials were on the case and that the economy remained sound notwithstanding market gyrations.

"I can assure you that there are many of the president's advisers who are keeping a very close eye on all of the market activity and making sure that policies are put in place to keep our economy strong and growing," White House spokeswoman Dana Perino said.

EUROPE ON WATCH

Markets have been rocked for weeks by news of problems in banks and funds exposed to risky investments in U.S. mortgage and asset-backed markets. That triggered fears that the cheap credit that has fueled global growth might dry up.

The tremors that jolted global markets began on Thursday in France, when BNP Paribas closed three funds, sending waves of fear through European credit markets that deepening losses tied to rising U.S. mortgage market defaults could undermine the soundness of European investment firms.

Signs that euro-zone money markets were freezing up sparked the ECB's large-scale action on Thursday.