Defeat From The Jaws Of Victory ? ? ?

[dude wheres my house]

http://www.bloomberg.com/apps/news?pid=206...&refer=home

March 23 (Bloomberg) -- Bank of England Governor Mervyn King made a ``tacit agreement'' at a meeting last week with British lenders to provide bigger liquidity injections and accept a wider range of collateral to back loans, the Sunday Times said, without saying where it got the information.

King gave no precise commitments to U.K. banking executives when they met last week, the newspaper reported. He also didn't satisfy lenders' demands for an overhaul of the way the Bank of England provides emergency funding, the Sunday Times said. A spokesman for the Bank of England, who wouldn't be named, declined to comment on the report when contacted by Bloomberg.

King promised to try to limit the stigma attached to borrowing from the Bank of England, the newspaper said.

The governor also made it clear that while he has a duty to protect the financial system, his role does not stretch to propping up banks' profitability, the newspaper reported.

The Bank of England said yesterday it is ``not among'' central banks that the Financial Times said were contemplating the purchase of mortgage-backed securities to smooth lending to consumers after a worldwide surge in borrowing costs. The Federal Reserve also denied it was in discussions to buy such debt.

To contact the reporter on this story: Neil Unmack in London at nunmack@bloomberg.net

Edited March 23, 2008 by dude wheres my house

[narco]

The Weimar Republic path has been chosen.

[dude wheres my house]

original story

http://business.timesonline.co.uk/tol/busi...icle3602070.ece

David Smith, Economics Editor

BRITAIN’s banks believe they have secured a deal under which the Bank of England will provide the kind of support America’s Federal Reserve has given to its beleaguered financial institutions in recent months.

Though no precise commitments were given when senior bank executives met Mervyn King, the Bank’s governor, last week, it is understood that there was tacit agreement that the central bank would step in to provide bigger injections of liquidity into the markets when needed, and accept a wider range of collateral against such support.

The Bank also promised to try to limit any stigma attached to such assistance, though officials concede this will be difficult.

King fell short of meeting all the bank chiefs’ demands, including requests for an overhaul of the entire system under which emergency funding is provided. The Bank’s new money-market arrangements only came into effect last year. The new help will be given on an ad hoc basis.

Related Links

* Can Mervyn King's billions shore up the banks?

* Financial workers braced for redundancies

* Bosses who left with millions

The governor is also said to have made clear that while he had an obligation to protect the financial system, his remit did not stretch to propping up the banks’ profitability, a sign that not all the rancour that characterised the relationship between King and the banks last summer has disappeared.

One senior banker said: “The governor doesn’t realise that bank profitability and stability of the system go hand in hand. The banks’ reserves have been eroded. They will not be able to lend freely until their capital is built up again. If he cut rates at the front end of the curve, as the Fed has done, then banks would be able to very gradually restabilise over the next two to three years, which would give them much more confidence to continue lending.”

Bankers say, however, that there is a new determination on the part of both King and the banks to work together to get through the crisis following the scare generated by the slump in the share price of Halifax Bank of Scotland (HBOS) last week. The test will come with what happens to money-market interest rates in the coming days, with three-month Libor currently near 6%.

“Banks are not worried that other banks will go bust,” said one senior banker. “It’s just that they think they will need all their money for themselves, to meet customers’ demands. Why lend money when you think you will need it all yourself?”

Senior bankers have been openly critical of the Bank governor, though a truce has been agreed. They believe that while America’s banks have made all the mistakes, British banks are being penalised for the huge financial losses that have been racked up on Wall Street.

“It may have escaped King’s attention that the big retail banks made huge profits in the reporting season that has just ended, said one. “This should be a time when we are taking advantage of the opportunity, but the Bank of England does not seem to understand that. It is essential that we are given an equal footing to that enjoyed by American banks and by continental banks that have been supported by the European Central Bank.”

Bankers at Barclays, Royal Bank of Scotland and HSBC have also been impressed by the way that Hank Paulson, the US Treasury secretary, has been in contact to gauge their opinion and pledge that the Fed will do anything in its power to keep the financial system afloat.

Last week’s events and a relatively dovish set of minutes from the meeting of the Bank of England’s monetary policy committee (MPC) earlier this month have shortened the odds on a cut in interest rates next month, analysts say.

A survey by Ideaglobal.com, the financial research company, shows that analysts put a 40% probability on a reduction from 5.25% to 5% coming next month, though a May cut is marginally favoured.

The median expectation for the low point in America’s Fed Funds rate is 1.75%, from 2.25% now.

Despite a relatively upbeat picture from manufacturers, the CBI is expected to revise down its growth forecasts this week.

With both the International Monetary Fund and the Paris-based OECD saying the US economy is either in or close to recession, the next big policy focus for the credit crisis will come with the IMF’s spring meetings in Washington on April 12-13.

There, G7 finance ministers and central bankers, including chancellor Alistair Darling, King, Paulson and Fed chief Ben Bernanke, will discuss further action to limit the economic damage from the crisis.

The chancellor will be pushing efforts to step up cross-border surveillance. It has also emerged that central banks in America and Europe, including the Bank of England, are studying the possibility of bulk purchases of mortgage-backed securities. This would be a dramatic move to ease the credit crisis, but the talks are at a very preliminary stage.

Financial markets continue to be stunned by the number of big banks in America and Europe that are still owning up to problems, seven months after the crisis first started. Last week Credit Suisse, the Swiss banking giant, warned that it could suffer a first-quarter loss due to its exposure to America’s sub-prime crisis.

The bank also admitted some of its losses were caused by traders hiding figures to protect bonuses. The Financial Services Authority has now launched an investigation into the bank’s internal reporting controls.

[Brian Potter]

No choice in my view.

[huw]

http://www.bloomberg.com/apps/news?pid=206...&refer=home

Moral hazard can work in two directions. Plainly the BoE has the ability to drive bank shares up and down, surely a way can be found for the taxpayer to recoup some of the upcoming costs before various banks end up nationalised?

[Errol]

Predictable. Everything will be bailed out. Massive monetisation of debt. Huge inflation incoming.

[BoomBoom]

People should be out on the streets rioting over this. So basically banks will be allowed massive liquidity injections based on IOU's written on the back of fag packets.

[Brian Potter]

Predictable. Everything will be bailed out. Massive monetisation of debt. Huge inflation incoming.

or a crash of the financial system, mass unemployment, crime rife, total breakdown of society, Hooverville in Manchester.

Shite choice really but I'd rather the fomer.

[Errol]

The former will, ultimately, lead to the situation you described.

[BoomBoom]

or a crash of the financial system, mass unemployment, crime rife, total breakdown of society, Hooverville in Manchester.

Shite choice really but I'd rather the fomer.

That is the inevitable endgame anyway. All this will do is make the fallout worse in exchange for a marginal delay in its onset. GB Plc is broke, bankrupt, Larry Flint, brassic and has no productive industry capable of digging itself out of the mire.

[Errol]

This is what the central banks appear not to have realised yet. There is no way to stop the inevitable reckoning.

[BoomBoom]

This is what the central banks appear not to have realised yet. There is no way to stop the inevitable reckoning.

Well Merv is putting his finger in the Dyke (no lewd jokes please) and obviously thinks that will be enough to stop the leak.

[narco]

Many investors are currently fearing bank failures and deflation.

Once they realise what is actually happening, the exodus out of treasuries into hard assets will be spectacular.

[BoomBoom]

Many investors are currently fearing bank failures and deflation.

Once they realise what is actually happening, the exodus out of treasuries into hard assets will be spectacular.

I would suggest investing in oil companies with exclusive drilling rights in areas with good proven reserves.

[Brian Potter]

The former will, ultimately, lead to the situation you described.

Nobody actually knows what will happen. But the model for no intervention led to the 30's depression.

Ben at the Fed has researched this all his life and believes this is the only/best way. I recon you have to try.

So far the fed has been much more decisive in these matters than the BoE.

Ultimately, no one knows what will happen - even people on here!

If it does - WGAF about house prices.

[narco]

I would suggest investing in oil companies with exclusive drilling rights in areas with good proven reserves.

For sure.

[BoomBoom]

Nobody actually knows what will happen. But the model for no intervention led to the 30's depression.

Ben at the Fed has researched this all his life and believes this is the only/best way. I recon you have to try.

So far the fed has been much more decisive in these matters than the BoE.

Ultimately, no one knows what will happen - even people on here!

If it does - WGAF about house prices.

Oh but we do know what will happen. Anyone with a fleeting familiarity with economics knows what will happen. Inflation will skyrocket and we will resume course into the abyss.

[IP Newcomer]

Well Merv is putting his finger in the Dyke (no lewd jokes please) and obviously thinks that will be enough to stop the leak.

Or could be doing enough so that the independence of the central bank won't get the blame for the inevitable reckoning.

[Brian Potter]

Oh but we do know what will happen. Anyone with a fleeting familiarity with economics knows what will happen. Inflation will skyrocket and we will resume course into the abyss.

You've missed your vocation Basil.

Not saying your wrong obviously printing money uncontrollably to buy yourself out of the problem will result in what you say. I just dont see the alternative to providing liquidity. Bringing the Banking system down would be catastrophic. And guess what - The perpetrators are flame proof. Distasteful but true. The way forward in my view is to make credit available in return for a wide range of assets put up as collateral with the central banks, with a proviso that the money is not hoarded and used to kick start lending. This, I believe, is what the BoE is proposing.

BTW - what ever happened to - Time to Raise the Rents. Some of you old timers may remember him.

[BoomBoom]

You've missed your vocation Basil.

Not saying your wrong obviously printing money uncontrollably to buy yourself out of the problem will result in what you say. I just dont see the alternative to providing liquidity. Bringing the Banking system down would be catastrophic. And guess what - The perpetrators are flame proof. Distasteful but true. The way forward in my view is to make credit available in return for a wide range of assets put up as collateral with the central banks, with a proviso that the money is not hoarded and used to kick start lending. This, I believe, is what the BoE is proposing.

BTW - what ever happened to - Time to Raise the Rents. Some of you old timers may remember him.

I think he vanished when it became clear that rents were static.

[kilroy]

Many investors are currently fearing bank failures and deflation.

Once they realise what is actually happening, the exodus out of treasuries into hard assets will be spectacular.

better buy some houses then....

[R K]

Could someone please point to the statement that the BOE have bought and not lent? I can't find it.

Since when did loan = monetize?

[Errol]

The loans will be rolled over indefinately (i.e into the next lifetime and beyond). Interest payments will be waived.

[narco]

better buy some houses then....

Eventually yes.

When 100 ounces of gold buys the average house.

Edited March 23, 2008 by narco

[huw]

Nobody actually knows what will happen. But the model for no intervention led to the 30's depression.

This is disputable:

Herbert Hoover

Herbert Hoover has been accused of being a do-nothing president who allowed the country to continue to slide into its worst depression ever. Some will grudgingly admit that Hoover did take some action, but that it was too little, too late. But the truth is far more complex. Hoover did intervene after the Stock Market crash, but the acts passed by Congress and signed by Hoover were the worst kind of intervention: they actually exacerbated the problem. The most famous of these interventions was the Smoot-Hawley Tariff Act. Raising tariffs was one of the worst things that could be done. Remember, both free market advocates and Keynesians agree that lowering prices would cure a depression, it's just that the Keynesians believe government intervention is necessary. A tariff does exactly the wrong thing by raising prices. Thus Smoot-Hawley was guaranteed to worsen any depression, not improve it. Other acts passed during Hoover's administration had similar effects of either raising prices or keeping them artificially high when they should have been dropping. Thus, it's not that Hoover was a do-nothing president, it's that he intervened in exactly the wrong way.

FDR

Ironically, FDR, the president who implemented so many government programs himself, was elected on a platform of a balanced budget and economic non-intervention. So what did he do upon getting into office? He promptly expanded on Hoover's programs. Some of these programs, the ones that increased spending, would get approval from Keynesians. Others, however, like the minimum wage and the Davis-Bacon Act, suffered from the same problems that Hoover's programs did: they reduced price flexibility, often setting a minimum and thus continued to exacerbate the Great Depression.

FDR's policies seemed to work at first. The economy began to expand again in 1933 and continued to do so until May of 1937. At that point, a second depression began and lasted until June of 1938.

The strangest 1930s intervention I've heard of was the buying-up and destruction of farm produce (to support prices). Hardly the thing to be doing while people are going hungry...