Member Of Mpc Admits 'mistakes Were Made' 2003-5

[interestrateripoff]

http://blogs.ft.com/wolfforum/2007/08/fear-makes-a-wehtml/

“At particular times a great deal of stupid people have a great deal of stupid money. . . At intervals. . . the money of these people – the blind capital, as we call it, of the country – is particularly large and craving; it seeks for someone to devour it, and there is a ‘plethora’; it finds someone, and there is ‘speculation’; it is devoured, and there is ‘panic’.” Walter Bagehot.*

Panic follows mania as night follows day. The great 19th-century economist and journalist, Walter Bagehot, knew this better than anybody. Lombard Street, his masterpiece, is dedicated to the phenomenon. It is devoted, too, to how central banks should deal with its results.

Ours has been a world of the “no income, no job, no assets” 100 per cent mortgage; of the “do what you like with our money, as long as you pay the fees” covenant-light loan; and of the “in go poor credits and out comes a triple A-rated security” financial alchemist. It has been a world of confidence, cleverness and too much cheap credit.

This is not new. It is as old as financial capitalism itself. The late Hyman Minsky, who taught at the University of California, Berkeley, laid down the canonical model. The process starts with “displacement”, some event that changes people’s perceptions of the future. Then come rising prices in the affected sector. The third stage is easy credit and its handmaiden, financial innovation.

The fourth stage is over-trading, when markets depend on a fresh supply of “greater fools”. The fifth stage is euphoria, when the ignorant hope to enjoy the wealth gained by those who came before them. The warnings of those who cry “bubble” are ridiculed, because these Cassandras have been wrong for so long. In the sixth stage comes insider profit-taking. Finally, comes revulsion.

In the latest cycle, displacement began with the huge cuts in interest rates in the early 2000s, which drove up prices in housing. The easy credit was stimulated by innovations that allowed those making the loans to regard their service as somebody else’s problem. Then people started to buy dwellings to resell them, not live in them. Subprime lending was a symptom of euphoria. So, in a different way, was the rush of bankers into hedge funds and of the wealthy and big institutions into financing them. Then came profit-taking, falling prices and, last week, true revulsion.

This was what George Magnus of UBS bank calls a “Minsky moment” . It was the moment when credit dried up even to sound borrowers. Panic had arrived.

The correct policy response is also well known. It was laid down by Bagehot himself from his observation of the evolution of the Bank of England. The central bank must save not specific institutions, but the market itself. It must advance money freely, at a penal rate, on good security.

In providing money to the markets last week and this, the European Central Bank, the Federal Reserve, the Bank of Japan and other central banks have been doing their jobs. Whether the terms on which they have done this were sufficiently penal is another matter.

Financial markets, and particularly the big players within them, need fear. Without it, they go crazy. Moreover, it is impossible for outsiders to regulate a global financial system riddled with conflicts of interest and dominated by huge derivatives markets, massive trading by highly leveraged hedge funds and reliance on abstruse mathematics and questionable statistical models. These markets must regulate themselves. The only thing likely to persuade them to do so is the certainty that the players will be allowed to go bust.

When William Poole, chairman of the St Louis Federal Reserve, said that “the Fed should respond to market upsets only when it has become clear that they threaten to undermine achievement of fundamental objectives of price stability and high employment or when financial market developments threaten market processes themselves”, I gave a cheer.

Not so Jim Cramer, hedge fund manager and television pundit, who declared last Friday that chairman of the Federal Reserve, Ben Bernanke, “is being an academic!…My people have been in this game for 25 years. And they are losing their jobs and these firms are going to go out of business, and he’s nuts! They’re nuts! They know nothing! . . .  The Fed is asleep.”

So capitalism is for poor people and socialism is for capitalists. This view is not just offensive. It is catastrophic.

[interestrateripoff]

http://devilskitchen.me.uk/2008/07/where-w...-come-from.html

When it was made independent, the Bank of England was charged with keeping the inflation rate (as measured on the CPI) below (I think) 2%: all well and good. However, the indepdendence of the BoE has meant that it is now no longer linked to the government (at least in theory). What this has enabled Brown to do is to carry on spending massively whilst being able to absolve himself of responsibility for the inflation rate.

"Look," says the Gobblin' King, "the rate of inflation is nothing to do with me: I told the Bank of England to keep it down. It's independent, you know, I can't do anything."

The problem is that the BoE has no way of curbing the money supply beyond raising interest rates. But this is becoming ineffectual. Why?

First, the government is one of the biggest spending entities in the country; further, more and more of this spending is predicated on debt (nearly 40% of national income, in fact). However that debt is generated, it increases the money supply and thus inflation. The only thing keeping the government in check was the Chancellor's so-called Golden Rule and Sustainable Investment Rule.

Quite apart from the shenanigans surrounding whether or not these rules have actually been kept to (and whether the government intends to "officially" break them), they are predicated on the promise of one man; worse, they are predicated on the promise of a politician.

Even worse, the rules were made up by a politician who has promised to bribe the electorate invest in public services and eradicate poverty, no matter the cost. This is not reassuring. If nothing else, if one man can make the rules, then one man can break them.

The second problem facing the BoE is the second source of money supply; the private banks. The interest rate issued by the BoE is the rate at which the central bank will loan money to the private banks. Since the private banks rely on the central bank partially for loans but, more importantly, for security—as the "lender of last resort"—should they run into trouble, the rate at which the BoE set interest rates did act as a reasonable guide to the banks' interest rates.

Unfortunately, the Northern Rock debacle has shattered that relationship. The Rock had been doing some dodgy investments and was looking at a short term liquidity problem. From people who know, I gather that the amount borrowed by the Rock from the BoE was simply to ensure that they had the required actual money reserves to back their lending. Whilst the management were undoubtedly stupid, this is actually how the "lender of last resort" concept is supposed to work.

Then came the disaster: someone leaked, or people noticed, that the Rock had borrowed from the BoE. People lost confidence and the run on the bank started; what should have been a minor blip caused by mismanagement but dealt with through the provisions intended, became a major banking crisis. People started withdrawing billions a week and the bank's liquidity requirement soared, leading to yet more borrowing from the BoE and then, as the cash kept rolling out, eventual effective nationalisation.

Coupled with the US credit crunch (caused by yet more bad management), this caused a loss of confidence in the banking system; the trouble is that the credit crunch was also affecting our other large banks, who had considerable exposure through unwise loans, both directly to borrowers and to the lending banks. Normally, the banks would borrow from the BoE to shore up their money reserves but after the Northern Rock debacle, they dare not do so.

[interestrateripoff]

Can't find the quote but I'm sure Eddie George has made some comment that rates where cut after dot com crash 9/11 knowing full well someone else would have to clean up the mess after he left office.

Been searching but I can't find it.

[Tiger Woods?]

Can't find the quote but I'm sure Eddie George has made some comment that rates where cut after dot com crash 9/11 knowing full well someone else would have to clean up the mess after he left office.

Been searching but I can't find it.

It was on a video...try youtube...he's talking to some parliamentary committee. Absolutely damning.

[PotNoodle]

What I want to know is, where Gordon stole this model for growth from and if he thought it would work indefinitely???

He stole it from the same model as Pyramid Selling and the South Sea Bubble.

And, no, he knew it couldn't work indefinitely which is why he has been reliably

quoted as saying that a Chancellor has to get out of the job before his mistakes

catch up with him.

Which he did......

And now he might well be quoted as saying that a Prime Minister has to ....

oh I can't be bothered.

[interestrateripoff]

He stole it from the same model as Pyramid Selling and the South Sea Bubble.

And, no, he knew it couldn't work indefinitely which is why he has been reliably

quoted as saying that a Chancellor has to get out of the job before his mistakes

catch up with him.

Which he did......

And now he might well be quoted as saying that a Prime Minister has to ....

oh I can't be bothered.

The skill is getting out before the sh*t hits the fan, ideally you managed to hide your mistakes using the secrecy rules that cabinet ministers enjoy so we don't find out they have been incompetent until long after and by then they are probably dead.

Brown believed his own hype, and now he's being found out and he doesn't like it.

[nixy]

The biggest "mistake" was cutting rates in August 05. Except it wasn't a mistake, it was deliberate, as Gordon Browns 5 monkeys on the MPC outvoted the other 4 in an effort (successful for a time) to get the debt-fuelled housing frenzy kick-started again.

So we have the names of these people?