Unstable Governor
One of the main functions of a central bank like the is to provide liquidity - or funds - to banks to ensure the smooth running of the financial system and the economy.
It鈥檚 a bit like a water company - no one really notices its existence until there is difficulty getting stuff out of the taps.
Well, on August 9, the equivalent of the mains system in the banking market seized up.
Banks became reluctant to lend to each other and would only do so at relatively high interest rates.
Think of it as turning on a tap at home and only finding a trickle.
However, the Bank of England consistently said that its system for providing liquidity didn't need overhauling.
It claimed that to do so would be to bail out banks which had lent or invested in an injudicious way - and it had no intention of doing that.
It has now changed its mind.
The Bank has agreed to accept mortgages from banks as collateral against three month loans.
Baffled?
It's the equivalent of opening up a whole new reservoir in the water system.
But here's the humiliation for the Bank.
If it had done this three weeks ago when banks were clamouring, might never have feared that it was running out of money.
So it would not have had to approach the Bank of England for emergency support.
And there would never have been that on Northern Rock - the first run on a British bank for 140 years.
The possibility that the flight of capital from Northern Rock could have been avoided is seriously embarassing for the Governor of the Bank of England, Mervyn King, one of whose functions is to maintain financial stability.
Right now, stability may not be the correct word to describe his employment prospects.
IMPORTANT UPDATE: 19:59 The Bank of England has now told me that individual banks can only apply for 拢1.5bn each under the 拢10bn facility. It says that Northern Rock would have needed far greater funds - and that if this finance had been provided three weeks ago or so, the liquidity would not have eliminated the Rock's funding difficulties.
It is slightly odd that the Bank should divulge this to me now, because it failed to provide this detail (or any answer at all) when I asked this afternoon whether what it announced today could have provided succour to Northern Rock. So although the Bank of England has changed course in respect of the way it is prepared to tackle the crisis in the money markets, it is sticking to the position that it has no regrets about the way that it provided its initial support to Northern Rock.
I'm 
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There appears to be a concerted effort to make Mr King out to be the bad guy here, when I am not at all sure that that is accurate. Many if not all of the apparent volte-faces in the last few days are surely politically motivated - it was Mr Darling after all who announed the Northern Rock depositor guarantee, not Mr King, and it is pretty easy to imagine what Mr King thought of that decision.
The shocking thing really is that it now seems quite clear that the Bank of England is not independent at all, but is doing the bidding - kicking and screaming - of its political masters.
One thing I do agree with is that Mervyn King's days as Governor are numbered. He will either resign in disgust at the level of political interference, or be sacrificed as the fall guy when the crisis is over.
...humiliation for the Bank of England... This would be a better article if you reminded the reader of your support for the no-bail-out policy and explained either why you think the U-turn was a good idea or why you think the U-turn should not have happened. To point out the U-turn and describe it as a humiliation, without saying where you stand on the decision - having been so forthright with your support for Mervyn's initial policy (as opposed to that of the ECB or the Fed) - comes across as slightly selective.
Mervyn King is fortunate that he didn't leave it too late. After the Government declared that they (us, the taxpayer) would guarantee all Northern Rock's deposits, what would hav happened had there been another run on another bank, and another etc? Would they have guaranteed those too? The BoE have been forced into a humiliating reverse, just days after Mr King's lecture about 'moral hazard'. For the last month or so the ECB & Fed have been pumping liquidity into the money markets while the BoE stood off citing 'moral hazard'. Now they've been forced to face reality. Too late for Northern Rock and too late for Mr King's reputation.
Sure, Mervyn King looks like he changed his mind. But he was getting applause from many for his firm stance.
But as Keynes said, "when the facts change, I change my mind". And King has adapted policy to suit following the recent troubles.
The question perhaps is whether King had a free reign in setting policy or whether our so-called independent Bank of England is taking its orders from HM Treasury.
As almost everyone on the other thread has agreed, I think King's original actions seem reasonable.
If the banks won't lend to each other that suggests that someone is in "solvency" rather than "liquity" trouble. Until this is exposed the government is at severe risk of losing any money it lends out, without secure backing. I would also suggest that mortgages, at this time, are a very risky asset to accept.
However since the government guaranteed customers deposits, it was already going to get lumbered with these if there were trouble anyway, so it might as well take them before the problems start.
The U-turn is obviously a desperate attempt to stop a second bank run, which would destroy most people's confidence in the entire system instead of just the isolated case of NR.
King's actions to try and prevent moral hazard are correct. However without backing from the FSA it is difficult for him to expose those with the actual "solvency" problems.
"Right now, stability may not be the correct word to describe his employment prospects."
Et tu Brutus?
The embarrassment is Northern Rock's, not Mr King's. It was their business model that failed, and propping up poor business models does indeed create a moral hazard. Not doing so was Mr King's judgement as an economist, and doing so was Mr Darling's judgement as a politician. Pretending the standards for economic and political decisions are the same is simply confusing the issue.
"The U-turn is obviously a desperate attempt to stop a second bank run, which would destroy most people's confidence in the entire system instead of just the isolated case of NR."
I fully support you opinion. There is no other valid reason to risk 20bn.
Also it is reasonable to question why taxpayers who do not have any connection to NR (and it is a biggest part of the UK population) have to sponsor poor NR investment policy?
Dear Sir,
I have read the articles and find that I agree fully with the comments expressed by some of the other readers. Mr King did the correct thing. If people make but investment choices it is not the responsibility of the Bank of England nor the Tax payer to bail them out.
I very much regret your article and the signal it sends out. I myself work in the finance sector and I believe in free markets. The bank of England is an independent institution and nor it, nor the tax payer should be asked to bail out people or banks that take the wrong type of investment risks.
I 100% agree with Bryan Collins comments. This U turn smacks of political interference by Gordon Brown in an attempt to keep his "economic miracle" on the rails.
This infusion of liquidity may provide a short term fix, probably until after the anticipated early general election, but it will not solve the problems inherent in the system and will only encourage more reckless gambling by the banks.
Welcome back to the 1970s - high inflation is on its way.
I think the Bank of England should avoid unwriting the lending mistakes of banks, but should protect consumer's savings / mortgages and the economy as a whole.
The shareholders and directors of Northern Rock knew or should have known the risks their company was taking and had clearly spent a long time profiting from them.
If a bank's share value hits zero this is their problem.
They should not expect to be propped by the taxpayer and should risk having their assets sold to the highest bidder.
Post #8.
We are not out of the woods yet on this one... the danger is that the BoE will get left holding the baby as the sub-prime problems in the US multiply and the UK loan defaults start to rise.
20bn sounds like a lot, but not when compared to the possible figures being talked about in sub-prime defaults...
It also begs the question. If the BoE does take a bath on this one, how will it be funded (spending cuts or tax rises ?).
Deag
when the banks make record profits, do they offer to pay more than the minimum back to the tax payer?
When the banks struggle, as a result of some silliness in the global investment market that means banks are nervous lending to each other right now, the tax payer has to step up and carry the can?
I imagine that King sees that contradiction right now - and I wonder did he really want to make the u-turn; or was he pushed by his political masters?
One of the London free papers tonight suggested that NR may want to pay 拢60M cash back to shareholders shortly: if true and it happens, that really is galling... tax payers money supporting the shareholders when the NR management are to blame
Politicians will always try to find a non-politician to take the heat when there's trouble around. This government is a past master at passing the buck to civil servants, policemen, and anyone else who is conveniently to hand. Isn't that what's going on now with Mervyn King?
The question.. does anyone think that Mr King will loose his postion as Governor of the bank?...that is a high possibility of course...someone will be blamed for the debacle and its not going to be the government.8 billion for bonus' to the city stockbrokers is scandalous and if that is not addressed then the world will starve.Of course I am not in the banking sector so I am just giving my opinion as an onlooker....excuse me if this is tripe and in my naivit茅, forgive me for having any involvement in this discourse!
I think Mr King's actions have more to do with saving Gordon Brown's, and the goverments, bacon than with sound economic judgements. His initial stand of not bailing out banks who had made irresponsible lending decisions was correct from a moral point of view. However, faced with pressure from the goverment and the city, he had little option but to bail them all out of a situation they had created. Two things are now very clear, the Bank of England is not independant and anyone in the financial markets can be as neglgent as they like and the goverment will bail them out when it all goes wrong
Seeing as the Bank of England has already shown a willingness to bail out banks when their greedy and flawed lending policy goes awry, will the same condideration be shown to individuals who've over extended themselves in the property market? Would it not be better to help the individuals concerned directly, cause indirectly, the Bank of England will still be moping up the banks smelly droppings. When it's all said and done, it's coming out of the tax-payers pocket.
There are two tests of solvency ;
1. Inability to pay debts as they become due.
2. Insufficient assets to cover liabilities.
Northern Rock borrows money wholesale and lends it to people to buy houses. Due to the interbank rate now exceeding Base Rate by over 1 % their sums increasingly last week didn't add up. Loans are due for repayment and cannot be replaced. They are insolvent.QED
In UK law, the people who decide that a company is solvent / insolvent are the Directors. When they judge themselves insolvent they are obliged by Company Law, to undertake certain legally prescribed steps, which effectively places control of the company out of their hands - into those of receivers, administrators.
The Money jugglers of the City have shrewdly put (switched) the onus for judging insolvency upon the FSA - who are hopelessly ill -equipped to make such judgements - and of course rely totally upon the information the Directors provide them with.
If the BOE hadn't stumped up, the Directors would have had to file for Administrators to be called in. Period.
If the BOE hadn't stumped up, the Directors could not continue in business as they had lost their ability (and confidence of lenders) to raise capital to continue to fund their loans. Period.
That is the simple, clear, transparent unvarnished TRUTH.
King's stance was initially correct (as prescribed by Walter Bagehot in "Lombard Street"), the politicans took over and he caved in. He would be regarded more highly if he had resigned.
This mess will take even longer to be resolved and the shareholders of NR can evidently go hang. So much for the claim of the FSA on their website .."Promoting efficient, orderly and fair markets;"
Think you know about money, how it works and how it is created? I bet you don't, even though you think you do! The BoE, like the US Federal Reserve, is privately owned. Watch the documentary The Money Masters: How International Bankers Gained Control Of America. I guarantee it will change your life.
Also watch the documentary Money As Debt. Take it from me, you will never see the world in the same light...
Incidentally, despite the fact that the BoE was supposedly nationalised in 1949 this was nothing more than a paper exercise to make it look legitimate. The Government had no money at the time to pay off the BoE's shareholders (it is suggested by some researchers that the British govt. has been officially bankrupt since 1933, although they will not publicise the bankruptcy declarations - in the USA it is actually written into the Congressional Record), so they issued Govt. bonds. So even though the BoE is officially owned by the Treasury, the reality is that the Treasury is owned by the original shareholders of the BoE. Do some research into the subject, it's not as simple as most people think. Incidentally, avoid Wikipedia - you will learn nothing but lies and distortions!! ;-)
It is worth reading the full statement at which suggests a series of auctions at weekly intervals - the first with 拢10bn and then three more (value TBC).
I find the very last paragaph of the BoE statement most bizarre ... (you need to look at the BoE site to understand what I mean !).
Deag
Why the public panic? The answer lies not in the Bank of England handling, but simply in the inability of Northern Rock's website to allow so many people access to their money all at once - they panicked - and that turned into queues that fed the panic.
That was then fed by poor management - never addressing the issue of the internet access publicly - or indeed resolving that bottleneck! That is what worries me now about the Bank of England move - was it incompetance of Northern Rock management? or is there a really bigger problem inside that bank?
It is dangerous for this to now be turned into a process of undermining a key and important institution/confidence!
King should have stuck to his guns. This situation is far too complex to use the crass over simplification of the water in taps analogy. The best analogy is one of NR 'over trading' and exposing itself by so doing to higher levels of risk. Who is responsible for that not happening? First and formost it has to be NR bearing in mind their duty to share holders, Beyond that, in this case, it is both the FSA and the B of E who should have taken responsibility to constrain NR and its operations. As for bailing out financially no no no - its amazing that the government seek with a vengence to cut benefits and on the one hand yet with a wave of the other kiss good bye to tax payers money as if they have an inexhaustible supply (hospitals, schools, transport - they don't stand a chance). To sum it up as to who should be in the dock - the whole lot of them but I have no doubt Gordon will allow Mervyn the honour of being hung out to dry whilst having full confidence in him all the way.
It is interesting to see a bank screaming for a change. I think Mr King made the right decision to not bail out Northern Rock. Banks are usually not prepared to bail out individual customers when they hit rockbottom.
Banks should learn from this lesson that greed is okay but excessive greed may be like biting off more than you can chew. It would also be a good idea to see sense brought back into the current customer credit situation. Banks are all too willing to dole out loans without checking if individuals can afford the repayments or not. It is about time both banks and their customers took a reality check and bring the rampant credit society into check.
Smash and Grab at the Bank of England?
"Northern Rock Issues $10 Billion of BOE-Eligible Debt" reads the article on Bloomberg.
Does this mean that NR has effectively repackaged the rescue deal and is now able to issue AAA debt? Not bad for a firm in trouble; it is now gilt edged.
The taps are open again, stock markets up, house prices up.
If all our assets are worth more it's because our money is worth less.
The pound is down against all currencies. Gold creaping up. The reward for savers is to have their money erroded by inflation.
The BOE and FED looked the financial world in the eye and blinked first. The house of cards gets taller because we can't face reality.
It's our kids who will suffer in the end as home owners and the banks sit back on their interest payments.
Forget the banks this is a government caught in panic. Gordon Brown's economic illusion is crumbling around them.
Of course this is political interference, exactly the sort of interference that saw the baffling rate cut of Aug '05, mostly at the hands of external members of the MPC.
What sickens me is how King is now being lined up as the bad guy. His only mistake... to take a principled and well thought out stance and stick to it. He'd never make it in politics.
My final parting shot is this money has obviously been lent to save some other bank from having to get an emergency loan, who it is well we probably know don't we.
Of course the Bank is accepting mortgages as collateral.
The housing crisis is solved in one fell swoop by re-instituting the council house!
(The Government ends up owning all those repossessed houses).
Repeat after me:
If the banks won't lend to each other, that suggests that someone is in "solvency" rather than "liquity" trouble.
If the banks won't lend to each other, that suggests that someone is in "solvency" rather than "liquity" trouble.
If the banks won't lend to each other, that suggests that someone is in "solvency" rather than "liquity" trouble.
If the banks won't lend to each other, that suggests that someone is in "solvency" rather than "liquity" trouble.
If the banks won't lend to each other, that suggests that someone is in "solvency" rather than "liquity" trouble.
Toxic sub-prime worthless CDO's are the tip of the iceberg.
There is a greater quantity of non mortgage related toxic securities, equally potentially valuless on the open market yet to be discovered by the oh so slow main stream media.
Listen to Mervin, not "Crash" Gordon or his stooge.
Sensible comments - and really an absurd article by the previously respected Mr Peston.
Presumably the primary policy of the government is not to hurt their electoral prospects.
But it is no mistake to let Northern Rock suffer and then protect confidence in the system.
In fact it is essential that Northern Rock is allowed to cease-to-be as an independent company. Only once the
bank managers are terrfyied of going the same way is it safe for the BoE to defend general confidence with hard cash.
Special pleading from Northern Rock and confused politicians should not be confused with something that actually matters. Shame on you Robert.
I think Mr. King is doing the right thing as the governor of BOE. His job is to protect the common man on the street , not the man on the wall street / LSE. Mr King has said on many occassions that controlling inflation was his top priority. However, the recent Fed interest cut will make things more difficult, as easy money will start flowing again which will fuel inflation and asset bubble. I hope Mr King will take notice of that and take steps to control inflation and spiralling asset prices.
What I don't understand is why news of the 'lender of last resort' facility granted to Northern Rock should have been leaked to the press, whether the esteemed Peston or others. Surely it was in the public interest that this should have been treated as a matter of commercial confidence. It would not have shown on the BoE balance sheet unless the facility had been drawn against. If it has been treated as a matter of commercial confidence there would have been no queues outside NR offices, and, because of the facility, NR depositers' balances would have been perfectly safe. The God-given right of the press to know everything sometimes works AGAINST the public interest.
I think the original stance by Mervyn King was correct. Why should the BoE bail out lenders who can't manage their own business?
For Alistair Darling to come out and guarantee the deposits at NR was an absolute joke. He wanted to use the tax that I (and you) pay to prop up a business with a model that fell foul of any proper management.
Before Mervyn King resigns, where are the resignations from NR??
My marks out of 10 for Alistair Darling.......0.
It's always so predicatable whether the foot & mouth crisis or the Northern Rock crisis,find someone to smear in the hope that it deflects blame from the government.
There are now dangers and risks (i.e., sowing the seeds of more severe economic recessions or even depressions in the future) in rushing to decrease the fed funds rate and bailing out a failed bank without prior, simultaneous, or timely implementation of monitoring and regulatory measures on the securitization businesses and due diligence processes of investment banks and ratings agencies, and commercial banks, which originally originated sub prime loans (although Laws that would give new authority to two US banking regulators to police unfair and deceptive lending practices are reported today to have been approved in the US by the House Financial Service Committee).
One of the best solutions from the beginning of the credit crunch and liquidity problems could have been to require the financial institutions to publicly disclose their positions or exposures(in principal amounts rather than in market value amounts as the current market conditions make the market values doubtful, and should also include exposures of their subsidiaries and vehicles)in structured credit and mortgage products such as Collateralized Debt Obligations(CDOs), CDO squared, Collateralized Loans Obligations(CLOs), Mortgage-backed Securities(MBSs), and Asset-backed Securities (ABSs) including their identification numbers in order to make uncertainties and worries among the financial institutions about the financial health of each other institution disappear as soon as possible.
Before getting engaged in an excited blame game the 成人快手 could be aware the current credit bubble follows the same emotional trajectory as all others: excitement at some fantastic new idea, domination of the market by the excitement, then jitters, panic and blame.
The origin of the credit problem origin is not with the Bank of England, which has been warning unheeded for months, but with excited lending to sub-prime borrowers with the true risk 鈥渕ade鈥 invisible. The 鈥渟afe鈥 assembly of high-risk loans into complex investment vehicles could only appear to eliminate risk because of the peculiar state of mind in which participants in financial markets often find themselves. In fact the 鈥渂rave new world鈥 of 21st-century finance (like the 鈥渘ew economy鈥 of the 1990s) works as a cover story so long as those involved fail to consider the essentially uncertain nature of such activity.
Calls for the Bank or the government to take responsibility for the crisis demonstrate that there is a problem learning form experience. The solution to financial crises won鈥檛 easily be found in increased regulation or more transparent information. Rather, it lies in taking emotion more seriously as a driver of financial markets and understanding how certain financial products generate states of mind that lead to investors refusing to say 鈥渘o鈥 or 鈥渆nough鈥. Perhaps journalistic excitement at moments like this tends to follow much the same pattern.
It's obviously time to start increasing the reserve ratios on the UK and US banks, replacing the currency removed from circulation by fiat currency.
The interest rate manipulations of the central banks are clearly causing the boom/bust cycles we're seeing and the bankers certainly don't have control over them. They are causing the problem, they are not the solution.
A 3% reserve ratio in the UK and 10% in the US is simply leading to additional instability in the economy. 30%, 50% perhaps more would act as ballast and smooth problems out.
Just a word on NR's strategy - much has been made of their reliance on wholesale funding.
What, may I ask, is so clever about the traditional building society model of borrowing short term from retail and lending long? Completely reliant on short-term consumer confidence, I'd say. We now know how fickle that is.
NR should be applauded (and was) for seeking to match and offload large parts of the portfolio through securitisation. Mistake to leave so much funding to short-term wholesale deposits. They're just as fickle as retail, it seems (shame on the interbank lenders).
We'll never rid ourselves of the risk of a run on banks while we don' try to match fund...
Andrew
No-one doubts NR business model looks unworkable going forward but surely this wasn't a secret. Annual accounts make it obvious to those analysts the basis on which it was doing business. In good times 拢12/share, in bad times 拢2. The difference - supply and demand. The current crisis is of NR making if it had borrowed at higher LIBOR rates in the short term then would any of this have happened? Adam "bloody hurrah" Applegarth has no future and if he goes then maybe NR can survive as an independent niche lender. It seems to have a good reputation in Newcastle and maybe it needs to retrench to its roots.
I have read with interest most of the press over the past week and agree that a non story has been sensationalised by both the 成人快手 and other news organisations. This is the shame of modern journalistic standards. There is a wider, fundemental problem with the current banking sector but to villify one organisation without any thought to the implications of said actions is, in my humble opinion, irresponsible and reckless.
I pretty much agree with the above 10 posts. King has acted wisely, ensuring that a reckless strategy was punished by the markets whilst protecting depositors. In these exceptional times measures need to evolve, but it would be a catastrophe if big risks taken by banks ended up in the shareholders and directors being bailed out by the taxpayer. As for the apparent "government guarantee of all deposits in British Banks" let us hope it has no legal substance (as it appears, indeed it seems to be illegal under EU law).
Dear Robert,
It is with regret that I have to say that this is (almost) the worst post I have ever read from such an incisive and unbiased business mind.
Have you publicly declared surrender to the 'establishment'?...
Were you not previously and publicly a supporter of MKs' for the 'no-bail-out policy'?
Have you changed your mind (U-turn style)?
What has occurred over the past few days is shocking but will ultimately (despite our politicians 'interference') result in the market correction which cannot be postponed indefinately nor curtailed for political expedience.
We will ALL suffer now for the easing of the 'pain' of a 'flawed business model', and a precedent once set is never simple to deny even if it is easily justified (ask a barrister).
I have no savings or investments in NR - but I too would have written myself a cheque (or CHAPS'd/transferred) the full amount of my deposits and sold ALL my shares (at whatever cost) the minute I heard that our government had 'guaranteed' my savings in a private bank by using me to basically underwrite them...
The waters have been soothed, even some inter-bank lending may have begun but the banks are still playing 'pass the parcel' and at some point that parcel will have to opened and NO-ONE knows the exact contents!
We are ALL in severe danger of being mugged by that ever present threat 'moral hazard' and I cannot understand your change in standpoint!
I hope to see an 'improvement' in your judgement very soon - unless ofcourse you really do have a gun to your head... in which case - Good luck!
M
I am confident that the Bank Of England would have (rightly) stuck to its policy and given us vulnerable non-bankers at least some shelter from severe moral hazard, had it not been for Alistair 'new-in-the-job-and-don't-want-any-hiccups-on-my-watch' Darling. The government has applied pressure, and the BoE has fallen back into line.
So be it... provided we all remember who to blame when the next crisis erupts, egged on by the recent fiasco and too big to wallpaper over with cheap money.
The government has well and truly shafted the people, in the ultimately futile quest to continue spinning the Myth of the Everlasting Boom.
This is all a grand farce running us into the next great depression. The money system is broken. period.
The fact that Hank Paulson got involved in this and the government subsequently agreed to underwrite 100% of deposits should tell you that a bank run cannot be seen to happen anywhere in the western world. That's because we have a faith based money system.
Nothing that the clown alchemists in the Bank of England or The Fed do from here on in will save us. I know that it's just not the done thing to call time on civilization, but hey I just did. Banking with infinite credit and bubble creation is a scam and this is the result. In the long run we are all dead... erm well... Keynes is dead and we are still alive to pick up the pieces of allowing governments to create money from nothing in a pact with with the bankers.
The timing of the Northern Rock saga shows that the idiots got a little nervous, but so what? We now have the choice between Weimar hyperinflation or a re-run of the great depression. Whether Merv picks up his P45 is just a pointless sideshow.
Just get yourself some gold and silver and sit back and watch the real spectacle. Clearly inflation is going to get very bad now that governments have chosen bailouts rather than allows voters lose their money. Central bank repos are one thing, but government falling over itself to bail out voters is another.
Next act: All central banks pretend inflation is contained so they can reflate those bubbles. ECB holds. BoE Holds, Fed eases.
Inflation is not a rise in prices. Inflation is an increase in the supply of money. Blowing bubbles is inflation. Doubling house prices are symptom of inflation. The end of the mother of all inflationary credit cycles is nigh and there is zip that can be done. This is a demon of our own design.
So what if we can forestall a recession by dropping interest rates and pumping money? It's not big or clever: the inflationary credit cycle always ends badly and the bigger the bubble the worse the hangover.
What a surprise. Somethings gone very wrong with the government. They look around for someone on whom to pin the blame (in this case Melvyn King) and you and other journalists do the government's pr dirty work for them.
How about coming up with the real reason for The Run - The split in functions of the FSA and the B of E. These two should be working together, instead there's a huge turf war going on.
Who's idea was the dual system of regulation? - Why, it was Gordon Brown's first act when he came to power. He WAS warned that it wouldn't work when the banking system came under stress. Its no good saying it worked for 10 years. The banking system fist came under stress last month and the regulatory regime broke first time.
So stop acting as the government's conduit for the Blame game, do some research and start blaming Gordon.
Try looking for the Cramer rant on U Tube now THAT was good journalism and it helped save the US system. The Fed DID open the discount window.
Some people seem to think that the funding to be provided represents a 拢10Bn cost to the taxpayer. It is nothing of the sort. It is a short-term loan to banks, to be repaid with interest and requiring collateral. The aim is to provide some additional funds for banks to lend between themselves.
It is rather baffling to say the least that the Bank of England: "says that Northern Rock would have needed far greater funds - and that if this finance had been provided three weeks ago or so, the liquidity would not have eliminated the Rock's funding difficulties." The point surely is to try to free up the system so that the banks have confidence to start lending to each other again. The amount NR allegedly needs directly is irrelevant.
The BoE has simply failed "to provide liquidity - or funds - to banks to ensure the smooth running of the financial system and the economy." It seems the BoE was determined to cause some damage in order to make some sort of point. What point is not very clear, since there is as yet no firm reason to suppose NR was lending any less wisely than anyone else. It's taken this debacle to force the Bank to change its policy. If it hadn't been NR, some other "solvent" bank would have been hammered instead before the BoE started providing liquidity in a similar way to what the Fed and the ECB have been doing for some time. Why did they do it? Hubris?
I'm not surprised the Old Lady is getting defensive. King's going to get eaten alive tomorrow.
I believe that providing liquidity to the banking system now (as opposed to a couple of weeks ago) is not an embarrassing u-turn but the BoE properly performing its function based on improving knowledge of the situation - it is rightly keeping watch on an evolving situation and responding as the need arises.
What is potentially embarrassing is that the BoE is now prepared to lend against additional types of collateral that it wasn't prepared to lend against previously - what could potentially have engineered this change of heart? Is it lending based on a sufficient haircut?
Financial system participants who have not been holding sufficient liquid or near-liquid assets (ie discountable securities) should simply not be allowed to benefit from such a change of heart without some serious explaining from the BoE.
If these banks have not been managing their liquidity (& liquidity forecasting) under a crisis scenario (as opposed to normal conditions), are we really confident of the types of assets they have been writing???
What else will come out from under the bonnet when the FSA gets around to checking up on the cowboys?
Whatever blame you may or may not attach to Mervyn King, its fairly clear that the government having to guarantee deposits was a last-resort panic step that shouldn't have been required in the first place. Why do we allow our global well-being to depend so strongly on the imprudent practices of banks and mortgage lenders? If the "fundamentals" are really so strong, as everyone seems to agree they are, then the trauma of the past month is a superb demonstration that the "free" markets are not the intelligent resource management devices that we would like them to be. But the governments can get away with incompetence, because they can simply blame it on the instabilities of the free-market, the fall-guy for any lack of positive action.
Maybe the chickens have come home to roost on Mervyn King's shoulders. He was so keen to stamp his mark of authority in July 2003 by supporting an increase in interest rates, only days after getting the Governorship on Sir Edward George's retirement. After taking the two years for the effects to mature long term, there has been a degree of indecisiveness leading to the latest u-turn. He is not of the same callibre as 'steady Eddie', but on the end of someone's strings in the government, destroying the independence policy granted to the Bank of England in 1997. We need Eddie, now Lord George back in the City again.
It seems that King was forced to accept the path of short-term gain for long-term pain.
Northern Rock should have been allowed to crash, EVEN IF THAT MEANT MISERY FOR INNOCENT PEOPLE. Why? Because that's the only way things get changed. Pressure would be brought to bear to end the culture of lax lending, the "heads I win, tails I don't care" attitude of high finance. Bailing out failed banks is like bailing out uncompetitive companies: you might feel sorry for those who lose their employment, but the bailout delays the inevitable while the taxpayer foots the bill, and the company remains uncompetitive. If you live by the free market, you should run the risk of dying by the free market.
I think Mr.King's reputation is probably about "as safe as Houses" even the Houses he's due to see later today..
It looks to me like he has done the right thing in putting the concerns of the savers first. We are living in a risk-averse society and this became clear with the emergence of this "run on" the bank. None of this can be predicted. It just goes to show that in times of uncertainty what "counts" is the goodwill and faith of those concerned. And so it goes on..
Mervyn King should not be the fall guy for this fiasco. The reason I refuse to own a television or pay a licence fee is because it helps pay for your kind to write claptrap
the sight of mass disbelief in both the bank and government assurance as evidenced by pensioners standing vigil outside branches created the need to stop the stampede. Political reality not financial management was the driving force. At the end of the day better to lose a governor than a chancellor, good to see Gordon providing moral support, after the event of course, and the bullets slowed a wee bit.
The recent actions of the Bank of England have Gordon Brown's fingerprints all over them. The Bank is clearly no longer independent, and Mervyn King should resign in protest at this political interference.
Hindsight is marvellous.
Whether Northern Rock's lending policies were too risky is not established - they appear to have been sound.
The mistake was in depending on short term borrowing which, unexpectedly, dried up, because of the US sub-prime crisis, which did not otherwise affect Northern Rock.
The BofE protected depositors, and did so when the problem was seen. It would have been marvellous foresight to have foreseen it weeks earlier.
Much of the problem was created by horror stories, often financially inaccurate, in the popular press. For instance, there is no financial difference between "borrowing" from depositors and borrowing from financial markets - Northern Rock got into trouble, not because their business was bad, but simply because the financial markets stopped lending them money.
The key issue which requires an answer is where has all the money gone? The banks have all our cash and investments and now they are saying we have none left please help us out Mr King. [By the way the farmers have had no such help recently despite their industry being in a worse position].The main concern is that easy money leads to bad management and this has been proved historically. it appears to me that we have another Lloyds Insurance market situation where all the banks have lent paper to each other and obviously at some point [perhaps now is that point] this will have to be unwound. like many people i have always wondered how our economy did so well bearing in mind we are not a goods producer or exporter any more. we have for the past decade lived off printing cash and the strength of our historical position in the world currency market; i suspect the easy money times have ended and we must return to hard work and solid production or at least we will have to hire other Europeans to do that for us as we seem unable to carry out manual work any more but we are good paper pushers! Or perhaps we could just print some more cash for a few more years and make it relly bad when we unwind it!!
I strongly agree with commenter #2.
Robert you should make it clear where you stand on this. The media get to have a changeable opinion on this kind of stuff without ever having to suffer the consequences of someone like Mr King. I think your blog is an enlightening one regardless of if you are seen to be "right" or "wrong" on some of the issues, as the truth will no doubt be somewhere in the middle, but it's important that those of us who were behind Mr Kings actions don't leave him out to dry.
I for one think the right outcome has come about as long as Mr King keeps his job. Because Northern Rock has suffered a mighty lesson for getting itself into a position where there was even a slight chance it might have to borrow from the BoE.
So after teaching NR that lesson, the BoE has stepped into to make sure the lesson taught isn't any harder than need be and for us having to watch another bank suffer the same consequences.
We're all shouting U-turn, and making that sound bad, but really hasn't the right outcome been served? You can't teach a painful lesson without pain, but you can make the lesson too painful. I think the current outcome has achieved that and to hell with banks protecting their egos, they should do that by running their banks appropriately in the first place.
So that's my position, now Robert we'd like to know your position for or against, or other, for Mr King?
I feel sorry for what is now happening to Mervyn King. Every step he took appeared to be the right move, given the pressure and responsibility of his job. Of course, it did not look very professional making a policy U-turn, but I suspect that political pressure played a role in this.
I think, however, for the long-run benefit of the financial system, central banks should stand firm and make it clear that it is not their job to encourage excessive risk-taking behaviour.
This is a bit off topic, but I can't help wondering to what extent the run on NR was fuelled by the inability of online savers to access their funds.
Some might argue that NR deliberately impeded access to these accounts to try to prevent the flow of capital. One thing cautious investors cannot stand is not being able to access their funds, hence the long queues at the branches.
I would like to see a statement from NR stating that the online problem was not engineered, and further regulation put in place to ensure that other internet-only access accounts, such as those of Egg, would not be similarly affected.
Excellent!
The Banks don't trust one another to repay their debts so they ask the taxpayer to bail them out.Are they going to sacrifice some of their profits in return....maybe they could pay some higher taxes on their profits in return for this largesse?
Mr Peston, Mervyn King faced no moral hazard, or choice for that matter, he had to increase liquidity.
The moral hazard of allowing complex financial deals along with borrowing short and lending long, had already been faced and a decision made many years ago.
Ultimately if you regulate a banking industry, and your regulation fails, you have to sort out the problem.
Mervyn King鈥檚 mistake was to fail to appreciate that without a stable banking structure, there is no stability in the country in which it resides. I have business, if the bank fails, how will I pay my employees, how will they pay their bills.
Ultimately the problem rests with the regulators, chosen by the Government, that were elected by the people. In short we鈥檝e got we elected to have.
RE Post 20
Deagle - I assume you are talking about the banks publication of dates for haircuts to be announced - I sugest buying a dictionary of financial terms - or going to a barbers on threadneedle street :o)
RE Post 28
If the banks won't lend to each other, that suggests that someone is in "solvency" rather than "liquity" trouble. - Correct, however the reason no bank is lending to no other bank is twofold. 1 - No bank knows which of the other banks may have solvency problems. 2. Each bank is trying to work out if it has solvency problems. The real reason that the credit market has dried up is because pricing of loans is based on the perceived creditworthyness of the institution being lent to. This is based primarilly on their rating from various agencies (moodys, fitch, S&P being the three biggest and widely used) However recently these guys have been having trouble working out what risk the banks have really taken on. The net effect is no one currently trusts anyone else with their money and no one is certain of their own obligations. The misnomer that the banks wouldn't lend to NR specifically higlight most peoples complete lack of understanding around the issue. In my opinion, the Governor of the BoE was spot on - he refused to provide the liquidity to allow the madness to propogate, while extending the appropriate facilities to individual institutions to allow them to rework their business model away from a dependance on this market. Unfortunately a combination of media whipped hysteria and political posturing have done more to risk the future of the British economy, the independance of the BoE and the reputation of London as one of the most open and prosperous financial centers in the world than any previous bank collapse has ever acheived.
Terrible call Robert.
You've talked some sense recently about the crisis, but to suggest King is the one at fault here is outrageous. The people who should be resigning are the heads of banks who took outrageous risks, the very heads who are now calling for King's head and asking for future risk to be underwritten by taxpayers, and those at the FSA who failed to regulate them effectively.
He's the on who's been let down by the bankers and politicians, not the other way round.
Northern Rock has paid the price for its imprudent balance sheet management. Precipitate action by the Bank of England to protect the Rock from the consequences of its unwise decisions would have jeopardised the future stability of the financial system. King's so called U turn is nothing of the sort: while the market was functioning he stuck to rules - when it was clear that confidence in the overall system was evaporating he took action to restore it. The result is a good one : confidence restored, depositors protected and the wrecked Northern Rock share price a salutary warning to other banks.
Further to my blog yesterday, I agree that there is a converted effort to make Mr King the scapegoat, and unforutunatley this Labour government, which has a complete inability to ever admit it could be wrong, will get their man, which is a huge injustice.
I am convinced that Mr King only caved in due to huge pressure from Mr Brown and if is is anyone who should loose their jobs it is messrs Brown and Darling (both for gross incompetence and negligence.)
Robert, why have you turned on Mervyn? This post makes no sense and harms your otherwise fine reputation on this point.
There is a simple answer to all this and it goes at follows.
Mervyn King turns up at the House of Commons and makes the following statement.
"Gentlemen it is with very great regret that today I feel I have no option but to resign as Governor of the Bank of England.
I have sought to do what I feel is best for the country but over the past few days immense political pressure has been put upon both myself and the Bank of England to the extent that I no longer feel that it can be considered as an independent body."
Cue Gordon Brown needing a change of underwear.
We need to ask ourselves one very simple question who would you trust with your money Mervyn King or Gordon "where's my pension gone" Brown and Alistair "Railtrack" Darling?
I know where I would put my money and it in Threadneedle Street not Downing Street!
Surely what's at issue here is not the Bank of England, but the continued ability of John Humphrys to wind up the British public - didn't Today learn anything from the Dr Kelly affair? Perhaps Today could find some of the people who withdrew their money from Northern Rock, and work out how much money they have lost by being panicked by Today and the rest of the media.
Well, I've never really trusted the banks - I took all my cash out of NR and invested wisely in 6 tons of tulip bulbs and shares in a new South Sea trading company.
"Well, I've never really trusted the banks - I took all my cash out of NR and invested wisely in 6 tons of tulip bulbs and shares in a new South Sea trading company."
... What do you imagine the banks do with your money? ...
All the kings horses and men cant save humpty, the dollar has fallen off the wall.
There is nothing to do. Mr Paulsons visit was because the US and the EU were spooked by people asking for their money back from a bank. Not unreasonable really. But the money at NR wasn鈥檛 kept in the safe, it had been lent to unemployed Ford workers who walk past boarded up houses. They could perhaps be accused of Mortgage laundering.
Gold will start to make a move soon.
Indian women with a gold bracelet are already richer than the Westerners who have debts.
Who bails out broken banks in Euro land? The European bank or individual countries/states? Are German tax payers happy to bail out banks in other countries/states?
If you know the answer to that one you can apply for the top job at a well known bank.
Paulson: "This is far and away the strongest global economy I've seen in my business lifetime.鈥
.
Taken from a newspaper, (my favourite cutting)
The Bank of England deliberately stoked the consumer boom that has led to record house prices and personal debt in order to avert a recession, the former Bank Governor Eddie George admitted yesterday.
Lord George said he and his colleagues on the Monetary Policy Committee " did not have much of a choice" as they battled to prevent the UK being dragged into a worldwide economic slump by slashing interest rates. And he said his legacy to the current MPC was to "sort out" the problems he had caused.
Lord George, who headed the Bank for a decade from 1993, revealed to MPs on the Treasury Select Committee that he knew the approach was not sustainable. "In the environment of global economic weakness at the beginning of this decade... external demand was declining and related to that, business investment was declining," he said. "We only had two alternative ways of sustaining demand and keeping the economy moving forward - one was public spending and the other was consumption.
"We knew that we were having to stimulate consumer spending. We knew we had pushed it up to levels which couldn't possibly be sustained into the medium and long term. But for the time being, if we had not done that, the UK economy would have gone into recession just as the United States did."
He said he was "very conscious" that stimulating consumer demand could give rise to problems in the future. "My legacy to the MPC, if you like, has been 'sort that out'," he said. Under Lord George's governorship, rates were slashed from 6 per cent in 2001 to 3.5 per cent in 2003, pushing house price inflation above 25 per cent and high street spending growth to its highest since the late-Eighties boom.
鈥︹︹..perhaps Mr Brown knew about it too. Sort it out Mr King.
NR's business model was right for short term gain, it got onthe roller coaster along with all the other lenders in offering 'sub-prime' loans. If it did not get on the ride, it would have lost business. Think about who else got a tiket at the fair and joined NR.
Merv was right, but finding out exactly why he changed is mined will be tough, and I bet ist was Gorden et al ot numero 10.
Post 28, great
past 18, great
There is still o lot of poo to surface about the extent of this financial issue. and one thing is for sure, the powers that be can not afford to have the over inflated housing market to crash, if it does all the loans are worthless, as is the BoE's bail-out!!!
NR's business model was right for short term gain, it got onthe roller coaster along with all the other lenders in offering 'sub-prime' loans. If it did not get on the ride, it would have lost business. Think about who else got a tiket at the fair and joined NR.
Merv was right, but finding out exactly why he changed is mined will be tough, and I bet ist was Gorden et al at numero 10.
Post 28, great
past 18, great
There is still o lot of poo to surface about the extent of this financial issue. and one thing is for sure, the powers that be can not afford to have the over inflated housing market to crash, if it does all the loans are worthless, as is the BoE's bail-out!!!
The man and woman on the street know that Brown & Darling forced this, and that King is the fall guy. People - you must realise that Brown will destroy democracy in this country unless he is ousted some way. Article in the Indy today
indicates he has already stitched up the Labour Party conference in advance.
Gordon Stalin is his real name...
Robert,
I would like to go a little against the tide of some of the comments placed here, I think that Mr King has made this about turn for other reasons, I suspect that he sees something nasty in the woods that is coming this way and wants to head it off. He is a "world class" economist, (and in my opinion) with a safe, if unremarkable, pair of hands.
My suspicion is that if undue pressure was put on him he would go, he wouldnt be "forced" to something he wasnt really prepared to do something (and not HMG) has caused him to re-think. I agree with MK's "Moral Hazard" ... why reward greed and indemnify risk ?.
As to NR, their business model was touted as one of the most efficiant around, I feel an element of sorrow for their account holders, and more for NR employees, but none at all for NR share holders or managers who dreamed up this way of working. They took a risk, recieved handsome profits and bonus's for while and now it's backfired for them. After all Shareholding is risk game.
I have a feeling that this whole situation is the start (or maybe a bit further in) of an unwinding process in regard to the consumer credit boom, it's also shown that Mr Brown is widely disbelieved, the "toxic waste" is still out there, has the music stopped, not quite yet I think, now where did that parcel go I wonder ?.
And there in lies the rub Ian #69
One of the fall-out consequences of the current crisis should be the banks offer morgages that are less generous in their multiples of earnings and lower in their loan to value ratio. Inother words we're back to 3 times earnings and you got to have atleast a 5/10% deposit. For a while, you would suppose, banks will now be going for quality not quantity, a la NR style, in their lending decisions.
With house prices already tip-toeing downwards (outside london atleast)and lending criteria tightening up, it wouldn't take much of a recession to to push the housing market from gentle downward decline to full scale crash.
I am an estate agent.
Scrap the FSA. Bring in draconian legislation to regulate the banks. Don't let them destabilise the economy any more than they have already, with their reckless mortgage lending. Businessmen like me will pay the price for the FSA's 'light touch' and the short-termism of the banks. Keep Mervyn. Punish the real culprits severely.
GovernMENT
That means the Prime Minister leads and takes responsibility.
Brown Hid again!
NR's business model came unstuck, so they needed funding which the Bank supplied. The Bank were NOT responsible for investor panic - NR's internet banking was. Again - NR management failed to address the key issue that people could not access their accounts.
WARNING - all banks should note that! In this internet age, internet sites have to be capable of meeting investor needs!
King's stance was right. What is also clear is that it was not enough to calm investor nerves.
Knocking King and the Bank also knocks investor confidence in sterling - hence exchange rate slippage in the last few days.
But that does not mean the UK economy is fragile - far from it we have the most flexible economy in Europe (thanks largely to Thatcher). Also this hype about house prices - sorry guys you cannot afford your dreams - go out and earn the money and be successful - then you will own a big house and a big car - rather than little talk.
As for London, it has grown in prowess internationally year upon year - no longer is there talk of other EU cities taking its place - it IS the BEST - and along with NY and Tokyo commands respect as such.
Now let's talk of the fun ahead - the Olympics - new technologies - Britain is both competitive and attractive.
I have listened to hype for several decades. After a while, you wake up to the wisdom that it is best to look at the bigger picture sometimes - and be part of the game - and work hard - there is no easy way up!
only history will tell, if this quick fix form Mr king is good for economy or not but for time being a good friend of brown has managed to keep his poll ranking ahead Mr Cameroon -- I wonder, where is he now -- perhaps, he decided not to peak now!