Monday, 21 April 2008

Is this the right medicine for the City?

Today the Bank of England (BoE) has unveiled its plans of a £50 billion lending boost. While I suspect that most bankers and traders alike will welcome this move, I’m mindful to point out that such governmental financial manoeuvrings is not without disquietude.

In broad strokes, the plan is that banks will be able to swap potentially risky mortgage debts for £50 billion of secured government bonds, thus allowing them to operate with some semblance of liquidity in the banking system.

Early indications are that the banks broadly welcome this move by the BoE; hitherto both the BoE and HM Exchequer seemed either unwilling or incompetent in the face of the current credit crunch. On a point of information, I’m intentionally refraining from referring to this as the “US” credit crunch, as I believe this to be an unhelpful misnomer.

The insatiable appetite of British banks for consuming exotic derivatives and more importantly, not correctly understating these financial instruments, is as much a causative factor in producing the current credit crisis as our American cousins.

My worry about this current action is the sense of timing. Are we now collectively paying the price of failure in the Exchequers deficiency in providing leadership at “first light” of the credit problems?

Just about every Central Banker in the world realized sometime ago the exigency of the moment, while the Bank of England lacking leadership from the Prime Minister and the Exchequer, seemed more intent on riding their moral high horse (moral hazard). The refusal of the Mervyn King to pump much needed liquidity into the markets as early as last August was an incongruous decision.

While it is true that financial ignobility should not be rewarded with the taxpayer cash, the balance of the public interest and private interest in this instance are deeply coupled. What the BoE should not do, is allow these banks to persist in this reckless mortgage lending.

Let’s be clear here, most of these banks pocketed large amounts of cash profits from partaking in subprime related financial instruments. As a fully signed up capitalist, I defend their right to make such money; however it must be made abundantly clear that the losses are theirs too, not the taxpayer!

If it is one thing that this current crisis should teach us, it has to be this – unrestrained cheap credit is “expensive!” Our collective predilection for credit has been a contributory factor for the current turmoil.

I know Liberal Democrats and hard left Labour members would like too woo us with their unabashed liberal narrative of the credit crunch as some capitalist conspiracy, but this can be safely ignored.

New Labour has a well document penchant of legislation, and I fear this will act as a cue for satisfying this urge. We should not rush into legislation for legislations sake. Calmness combined with vigilance is the more sensible route.

On reflection I would have to conclude while the action is late, I broadly welcome the move. I hasten to point out that the fallout from this credit crisis is far from over. For one thing Fannie Mae ( and Freddie Mac ( ) combine to make up the trillion dollar ticking time bomb. For my money, as long as these two institutions remain in credit limbo, the crisis is well and truly unfinished business. Let’s just say the “patient” is still critical.

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