Recently, the world economy has been having large problems in the credit markets. The sub-prime mortgage crisis in the US real estate market has had grave repercussions in the banking systems in many banking markets. It has affected almost all of the major players in the market including Credit Agricole, HSBC, UBS, Merrill Lynch, and Citigroup. These conditions in the market have made banks much less willing to lend to each other.

The problem is not that the banks lack the money to lend, but rather that they don’t have enough confidence in each other’s assets. BBC Economics Editor Evan Davis says that the situation that we face now is a “crisis of confidence.” This mostly means that there is a general lack of it in the market. Given that credit and banking relies almost exclusively on trust, it is not surprising that this has caused great problems.

In order to fight this problem, many central banks, including the US Federal Reserve and the European Central Bank, are planning to inject billions of dollars into money markets. They are planning to make these funds available in the form of auctions. However, these auctions are being run in a slightly different way than usual. They are making the funds available, in this case $200 billion from the Fed and $15 billion from the ECB, in the form of 28 day auctions instead of the usual overnight auctions.

This gives the banks more time to deal with the issues and bid on the assets. It is not clear exactly what auction style is being implemented. This is also a different kind of auction to many of the ones we talked about in class in that the objects being bid on – the financial assets – are ordained with an intrinsic monetary value. The difference is the amount of risk that the bidding parties associate with them. This is an example of how auctions can be used to give a large number of assets to the specific parties who need them most.