Uncharted Territory

February 12, 2009

What’s wrong with money markets?

Filed under: Credit crisis, Economics, Media, Northern Rock — Tim Joslin @ 11:15 am

I’m sure I’ve ranted before about the inadequacies of some of the mainstream media blogs.  Well, I wanted to comment this morning on a piece by Adrian Hamilton in the Independent. The Indy has also run commentaries by Jeremy Warner and by Hamish McRae questioning the wisdom of scapegoating the banks.  There’s still some sanity out there!

Infuriatingly, when I tried to respond to Hamilton’s wise words, I kept getting a “Unicode error” from the Indy’s new interface from LiveJournal.  This happened on IE as well as Firefox.  LJ’s FAQ’s suggested cut and paste text may trigger the problem (Jesus wept! – didn’t they test this?), so I typed my whole effing response in again, risking RSI.  No juice.  What a waste of time.  I recognise I have a very low tolerance for organisational incompetence.  IMHO, Government should in general be ensuring I receive financial compensation for the external costs arising from cost-cutting – particularly on software testing, where I happen to have a modicum of experience. Nevertheless, if the Indy is trying to attract people to their site, perhaps they should tell LJ to sort this, pronto.

Anyway, here’s what I wanted to say:

“Too right. The authorities need to admit their mistakes. Trouble is, unlike at the banks, the culprits are still in situ, so this is difficult. In particular, Mervyn King was arguably negligent in not providing liquidity (cf the ECB) at the start of the crisis – the time of the Northern Rock affair. You write:

You’re right, if we are going to carry on with this counterproductive blame game, we need the Government and authorities to admit the mistakes they made early on in this crisis, such as with Northern Rock right at the outset.”

“And you’re certainly not going to be able to restart it [a functioning market for international financial flows] with a mantra of banks returning to a deposit-loans base that politicians here keep chanting.”

Quite so. It’s daft to insist that direct deposits are a “better” (even morally superior) kind of money (especially as the trade deficit means there can never be enough UK deposits to match UK borrowings!).

Part of the problem is that in order to justify the PR screw-up (why is Peston still a free man?) that led to the run on the Rock, the bank itself has had to take all the blame. Even this week I’ve heard Darling spouting on about NR’s “reckless” business model. The strange thing is, I could have sworn I saw the bank being destroyed by queues of panicking depositors withdrawing their money.

In fact, it was obvious even at the time that if the money markets didn’t recover quickly more banks would fail. The ECB provided liquidity much sooner than did the Bank of England.

The truly scary episode of this crisis was the Icelandic bank collapse. Depositors, such as my local Council, have lost access to large sums of money and may eventually recover only pence in the £. Giving what is in effect a competitive advantage to overseas banks that may refuse to lend (or worse) in the next crisis is rather unfortunate, to say the least. The present strategy to save ourselves relies on the Government being able to dictate to the large UK banks, sorry, make agreements for them to increase lending, in return for certain services. We may not be able to do this twice:


Allowing the Rock to fail also set a precedent that shareholders would be wiped out, making it much more difficult for other banks to raise more private capital.

It took us far too long to arrive at the correct strategy of putting the system on life-support by providing unlimited liquidity and, in return, ordering the banks to recapitalise to restore market confidence in the institutions themselves, and the interbank markets.


You’re right, if we are going to carry on with this counterproductive blame game, we need the Government and authorities to admit the mistakes they made early on in this crisis, such as with Northern Rock right at the outset.”

Damn, forgot WordPress’ blockquote facility doesn’t seem to work properly.  Maybe it has something to do with the huge amounts of HTML that came in when I copy pasted from the Indy’s comment box – it looks rather like Word copy text.



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