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on money - northern crock Some background: Following a credit crunch generated by the sudden loss of confidence in the US mortgage market, the UK bank Northern Rock is having problems. NR has called in the UK central bank, the Bank of England, for cash support. Meanwhile, Northern Rock customers have so far withdrawn £2 billion of deposits, and are queuing to withdraw more. Out there are bundles of sub-prime mortgages, tied up in shiny tinsel paper, that once looked rather cheap. They were. Would you buy a used car, nicely polished, from Arthur Daley? No-one is quite sure who is holding the dodgy bundles, and the bundles are difficult to value. Putting all your eggs in one basket There is no clear evidence of that Northern Rock’s problems arose because of events that occurred in US sub-prime market lending. Further, anyone buying packages of American sub-prime mortgages had a duty to assess their value. Both purchasers of such packages, and funders of dodgy (say 125% equity) mortgages like Northern Rock, had relied on the mortgage customers continuing to make their monthly mortgage payments - many have not. The method of financing by borrowing funds from the wholesale money markets may have worked well enough for some years, but conditions change, money tightened and the music stopped. And if you are asleep, you cannot find a chair - Northern Crock were asleep. Easy money, they thought, only there is no such thing. Why was their market share was exploding? It was because they offered cut-rate prices which wiser bankers did not, and would not. Now Northern Rock is paying for their foolishness. This was a lack of prudence in the pursuit of profits, this was gambling. The Bank of England [BOE] in charge of regulating the UK banking system, are following, strictly, Brown the Clown’s orders. So far, Governor Mervyn King is acting rationally. But what will prime minister Brown do now his ducks are coming home to roost? Ah yes, he’ll come out and say nothing is happening. Then he’ll say it’s not his fault. Then he’ll find someone to blame. The Clown set up the casino years ago. This mess is entirely of the Clown’s making. There will always be Northern Crocks who gamble. the wall of money You cannot stop bubbles. They are part of human nature and crowd psychology. To try to stop them is foolishness. The place of a central banker is to react appropriately when they burst. Alan Greenspan, former US Fedral Bank Reserve Governor, reacted impeccably to the bubbles, but he was not tied to a fool’s monetary policy allowed to exist by an incompetent Clown. Each time, after feeding in liquidity, the Fed. went back to its steady strong dollar policy, which has long been US government policy. Thus far, Mervyn King of the BOE is acting well, though I am nervous that he will be forced into foolishness by the idiot in no.10 Downing Street. And Brown the Clown is already meddling, in that he has guaranteed the deposits of Northern Rock. But he is increasingly in a bind from his past behaviour.
Out there is a pool, or even an ocean of money. It has to go somewhere. So this year, it’s tulip bulbs, next year it’s dot.coms, then it’s houses. In between keeping the system running through the latest bubble bursting, you put on the brakes. Gordon Brown has been running the UK economy for years with very little in the way of brakes. He even broke the brakes when he moved to less rigorous ‘inflation’ target, and for good measure changed its label from CPI to RPI. Now that once long forgotten far distant wall called the CPI is finally appearing over the hill, what will Brown do? Move the goalposts again? I would not trust Gordon Brown with an old fag carton. The European Union has no realistic brakes. The US Federal Reserve does have brakes. If the house market falls, the money still has to go somewhere. What next, back to tulip bulbs? related material |
