Thursday, December 27, 2007


"First" of the Day

The kind of upheaval observed in the international money markets over the past few months has never been witnessed in history. —Thomas Jordan, "a Swiss central bank governor," as quoted by Ambrose Evans-Pritchard writing in "Crisis may make 1929 look a 'walk in the park'"

It was not the above quote but a conclusion drawn earlier this month by Evans-Pritchard that has drawn the attention of bloggers—

The strategic failure of a whole generation of economists, bankers, and policy-makers has been so enormous that it may now take a strong draught of socialism to save the Western democracies. We start - but may not end - with the nationalisation of Northern Rock. from "America faces day of reckoning with debt"

Perhaps thanks to the spectacle of anxious account holders standing in line to withdraw money from a bank for the first time since the Great Depression, the British appear to have a better understanding than Americans that the crisis is not one of sub-prime mortgages per se but of the banking system itself.

Ten days ago the British Treasury announced further guarantees of Northern Rock to include "'uncollateralized and unsubordinated wholesale deposits' and liabilities under any ''uncollateralized derivative transactions,'" which brings the public's liability to 113 billion pounds [$226 billion].

It is now occurring to some folks that if the government is to be responsible for the bank's obligations, the government might as well own it—hence Evans-Pritchard's loose use of the word "socialism." This is not, however, socialism but an effort to perpetuate capitalism under new ownership.

To show you what I mean, we might compare an action being contemplated in the U.S.—

Quietly, insiders are perusing an obscure paper by Fed staffers David Small and Jim Clouse. It explores what can be done under the Federal Reserve Act when all else fails.

Section 13 (3) allows the Fed to take emergency action when banks become "unwilling or very reluctant to provide credit". A vote by five governors can - in "exigent circumstances" - authorise the bank to lend money to anybody, and take upon itself the credit risk.

It works out to be the same remedy that the Brits are applying to Northern Rock, but if and when there is ever a discussion of government takeover of U.S. banks, you will know that the dollars have hit the fan. You will also notice a very strong smell as they disintegrate into brown flecks.

Related post
Shades of 1929 (9/15/07)


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