Friday, October 10, 2008

Better placed to deal with the downturn?

Unfreeze the interbank markets by guaranteeing interbank lending

Gordon Brown is absolutely right in his proposal that the G7 offer state guarantees, on ‘commercial’ terms (really terms that provide the state with an adequate risk-adjusted return on the funds it commits) to restore life to interbank lending. Banks today don’t lend to each other without high-grade security at any but the shortest maturities. When banks don’t lend to each other, they don’t lend to the real economy - non-financial businesses and households. That is the road to economic disaster. If French officialdom believes the interbank lending market in the eurozone to be in materially better shape than in the UK, it is detached from reality.

Posted by stevie dee @ 09:09 AM (451 views)
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3 thoughts on “Better placed to deal with the downturn?

  • planning4acrash says:

    Interbank lending is from banks over their fractional reserve to those under it. Central banks add liquidity when all banks are under their fractional reserve. So, Brown is proposing a guarantee to the problem, fractional reserve banking.

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  • Nicely put p4ac! So I assume what you’re saying is that, even if they don’t trust each other but some are over their reserve, then there’d be no problems?

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  • mountain goat says:

    good article thanks stevie dee. He points out that solvency is THE problem. Left to themselves the banks are insolvent and so will fall.

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