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BrownField

Ft Alphaville: Buiter: Northern Rock Bail Out Was Wrong; The Boe Is A ‘paper Tiger’

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http://ftalphaville.ft.com/blog/2007/09/14...-a-paper-tiger/

He’s an LSE professor, former chief economist at the EBRD and a former member of the Bank of England’s monetary policy committee. So we should take Willem Buiter seriously.

On his Maverecon blog he also describes himself as “citizen of the world and member of the human race.” So when he declares that Northern Rock should have been allowed to fail - wiping out shareholders, jobs, and a portion of depositors money - we must assume he means it.

Northern Rock’s shareholders would, of course, lose everything and the remaining creditors (including depositors with balances in excess of the deposit insurance limit) would have to wait to see how much the realisation of the assets generates. Top management would lose its jobs. All this is as it should be.

Buiter’s beef with the Bank of England’s decision to throw Northern Rock a lifeline is that the mortgage bank’s crisis just didn’t meet the Bank’s own bailout criteria. He cites paragraph 14 of the memorandum of understanding between the Bank, the Treasury and the FSA:

...

In the event, moral hazard has received a boost and the Bank looks all the weaker for it:

Following the bail out of Northern Rock, I can only conclude that the Bank of England is a paper tiger. It talks the ‘no bail out’ talk, but it does not walk the talk. It does not matter whether the decision to bail out Northern Rock was initiated and/or actively supported by the Bank, or whether the Bank was bullied into it by the Treasury and the FSA…

We will all pay the price in the years to come, when the next wave of reckless lending washes over us. Let’s hope that the collateral requirements and penalty rate charged on the credit line will be tough enough to limit the damage.

Edited by BrownField

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Somone posted somwherer that Alistair, darling, said he had "authorised the Bank..." to do something or other... was that it?

For authorised read... told them to rip up their policy on bail outs and get stuck in.

As an aside, I bet he was cursing BlackAdder 4...

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Probably doesnt matter. Just go to the ecb instead :lol:

http://uk.reuters.com/article/domesticNews...14?pageNumber=3

"he Financial Times Deutschland said on Friday, without identifying its sources, that some large British lenders were borrowing cash from the ECB via subsidiaries because of the Banks reluctance to lend."

The pound falls a bit and the penalty they are borrowin at looks like a drop in the ocean.

They really are retarded people who would rather be baking cakes.

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Somone posted somwherer that Alistair, darling, said he had "authorised the Bank..." to do something or other... was that it?

now let's get this absolutely crystal clear.

The bloke with the dodgy eyebrow(s) authorised themselves...as part of her majesty's government,to underwrite all the financial misdemeanours of feckwit lenders with taxpayers money.

huh?? :o:o:o:o:o

at least merv has some balls,we need more like him on the MPC.

...those who lend/borrow irresponsibly SHOULD be punished.

and the same applies to the government.

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now let's get this absolutely crystal clear.

The bloke with the dodgy eyebrow(s) authorised themselves...as part of her majesty's government,to underwrite all the financial misdemeanours of feckwit lenders with taxpayers money.

huh?? :o:o:o:o:o

It is beyond comprehension to me as a priced out taxpayer, why my money is bailing BTL grand central out of the s##t.?

Everything is sh##e under nu-lab.

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It is beyond comprehension to me as a priced out taxpayer, why my money is bailing BTL grand central out of the s##t.?

Everything is sh##e under nu-lab.

Not just BTL - The BOE are bailing out the shareholders of Northern Crock as well.

Now I guess all is well as long as Northern Crock can pay back the borrowed money - never mind that the BOE seem to have broken their own guidelines.

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Buiter is on Channel 4 news just now. He's suggesting there may have been "political arm twisting" behind the BoE's extension of funding to Northern Rock.

:blink:

Bearish

Edited by Ash4781

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For those of us without television, what's going on?

The first 20 minutes of the programme were devoted to the Northern Rock situation, but they went into the wider context of it too.

In a nutshell it was the core HPC bear case:

- economy built on HPI, including the admission by Eddie George that it was done on purpose and was unsustainable

- lenders like NR, B&B, A&L rely on the money markets to get their funding

- a reassesment of risk has made their business model unviable

- mortgage rates are going to head higher

The question of what this means for house prices wasn't raised, but the dots weren't hard to join!

Probably the most bearish report I've heard in the mainstream media!

It might be available at channel4.com, or maybe youtube at some point.

Some seem to think the credit cruch will somehow blow over and everything will return to normal. As far as I can see things are returning to normal. The old attitude to risk is surely gone for a very long time now. The subprime crisis in the US is goung to worsen as more and more mortgage resets happen, and we'll start to see people in the UK unable to remortgage on affordable terms too. This isn't a technical blip, it reflects some fundamental truths.

Edited by Ted D. Bear

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Some seem to think the credit cruch will somehow blow over and everything will return to normal. As far as I can see things are returning to normal. The old attitude to risk is surely gone for a very long time now. The subprime crisis in the US is goung to worsen as more and more mortgage resets happen, and we'll start to see people in the UK unable to remortgage on affordable terms too. This isn't a technical blip, it reflects some fundamental truths.

Sweet, thanks for the summary! I don't see it being easy to get a cheap high income multiple mortgage again, let's just hope it doesn't all go Japanese.

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Is this thread seriously suggesting that the 'independent' Bank of England has been told what to do by the government.

Well i never heard such things.......

If it was any more clear you would see Gordon Brown removing his hand from Merv's A$$. I wonder what next weeks puppet show will be.

Edited by sortofsilver

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