±«Óătv

Seems to me the banks have created their own problems but expect to be bailed out by governments when they are too frightened or willing to do it help themselves. Don't want to risk their money.Good old fashioned state intervention having to bail out the capitalist's mess.

Also the same bankers who created the situation and the same central bankers who allowed it will continue in their jobs. In the modern world of business failure is no block to obscene salaries it is in fact a positive on the CV. If they are sacked they have paid themselves so much it does not matter if they lose their jobs. They don't need to and don't try. They are made for life.

Does this action constitute more taxpayer money being used to prop up banks that are faltering? And if so how much? (Not that I'd necessarily be against that, but I don't understand how central banks could otherwise afford to do this)

Central banks getting together? You mean economics within our control?
It's as if the Christian religions of the world got together and pronounced that God doesn't exist, exept as we characterise him (/her/it).

I am sceptical of both notions. Economics is more like the Weather than splitting the atom.

You wrote "They don't trust each other to have sufficient assets."
Surely this is an argument for more transparency as to what those assets (and liabilities) really are.
Don;t their company accounts state this?

"But long term, confidence will only have a sustainable effect on the solvency of our banks, if the confidence ultimately seems justified."

If a reckless gambler is going to the bank with a bunch of IOUs 'secured' from his crack-head associates, and the bank then - based on this 'crack-paper' - extends the gambler's line of credit, I'd say the only people who have confidence in this system are the crack-heads.

Your analysis is interesting and no doubt informed. But lacks bite... Please allow me: There are cracks in this financial multi national corporate banking system which are continually papered over at the whim of these central issuers. The Federal Reserve is neither Federal nor is it a reserve. It is a privately owned bank with absolute control over international financial markets : it is where problems are both created and solved to their gain. It is allowed to continue without checks or balances applied by US Gov... not that this would be particulary helpful... so why is it allowed to do this? Find the answer for yourself. Cheers!

The fundamental questin os are the banks leaders or followers. Your article has them as both. Either they are knowlegeable and in control or they are reacting to 'news' but lacking in facts and, perhaps more importantly, the ability to make reasoned informed decisions. It seems to me that not for the first time banks are revealing that they don't know what they are doing but get paid well all the same. If this view is correct then as soon as peopkle like Evan start writing positive articvles the banks will believe it, start lending and we can all get back to normal. But of course Evan can't do that because he needs excitement so people read what he is writing. So roll on the time Evan thinks it is exciting to say recovery is on the way.

As much as I agree with Evans analysis, I feel sure that the central banks know it too. So does this mean that they know something we don't? If it was just Benanke and the Fed, i'd say no, but since our own bank is involved as well, makes me query what else is out there. And if there is something else, will this cash injection work?

What about Inflation? Does this mean that on the one hand the BoE makes this cash injection and on the other puts up Interest rates to fight off the inevitable inflation. How do they win?

Perhaps this is all a confidence trick, not for the banks, but for us. We all think that they are trying to do something. If and when it all goes really pear shaped, how will the media and the public react if the central banks did nothing but keep rates on hold (or even put them up). They would then be blamed for all the trouble!! They do something now, and they can say "Well we tried!"

Personally, I don't think that they can solve this. This is the bursting of the debt/credit bubble. This is a bubble which has been forming for several decades. The after effects will be bad because it is a problem directly with our financial institutions.

A note of caution...much like the bears on the way up of a boom, shouting how its all about to go wrong, the Bulls will be telling us all how its going to bottom out very soon. They will say this all the way down to the bottom. If economists were worth their salt they would have predicted all this and acted earlier to prevent it getting out of hand!

Evan, I disagree with you that the measures today are not designed to prop up the value of assets. The new facility announced by the Fed allows banks to swap less liquid securities (read mortgage-backed securities, where liquidity has completely dried up over the last couple of weeks) for the only asset that investors appear willing to hold at the moment, US Treasuries. Effectively, officials are attempting to prop up liquidity in the MBS market (which, after all, is even larger in total to the Treasury market). As an economist, I'm sure you would agree that an asset's price also reflects a liquidity premium, so that by allowing banks to temporarily 'swap' these instruments for treasuries the Fed is effectively trying to put a floor to their price. Of course, the problem remains that at the end of the swap arrangement these securities will end up back on bank's balance sheets. Government bailout, here we come.

As much as I agree with Evans analysis, I feel sure that the central banks know it too. So does this mean that they know something we don't? If it was just Benanke and the Fed, i'd say no, but since our own bank is involved as well, makes me query what else is out there. And if there is something else, will this cash injection work?

What about Inflation? Does this mean that on the one hand the BoE makes this cash injection and on the other puts up Interest rates to fight off the inevitable inflation. How do they win?

Perhaps this is all a confidence trick, not for the banks, but for us. We all think that they are trying to do something. If and when it all goes really pear shaped, how will the media and the public react if the central banks did nothing but keep rates on hold (or even put them up). They would then be blamed for all the trouble!! They do something now, and they can say "Well we tried!"

Personally, I don't think that they can solve this. This is the bursting of the debt/credit bubble. This is a bubble which has been forming for several decades. The after effects will be bad because it is a problem directly with our financial institutions.

A note of caution...much like the bears on the way up of a boom, shouting how its all about to go wrong, the Bulls will be telling us all how its going to bottom out very soon. They will say this all the way down to the bottom. If economists were worth their salt they would have predicted all this and acted earlier to prevent it getting out of hand!

Evan, I disagree with you that the measures today are not designed to prop up the value of assets. The new facility announced by the Fed allows banks to swap less liquid securities (read mortgage-backed securities, where liquidity has completely dried up over the last couple of weeks) for the only asset that investors appear willing to hold at the moment, US Treasuries. Effectively, officials are attempting to prop up liquidity in the MBS market (which, after all, is even larger in total to the Treasury market). As an economist, I'm sure you would agree that an asset's price also reflects a liquidity premium, so that by allowing banks to temporarily 'swap' these instruments for treasuries the Fed is effectively trying to put a floor to their price. Of course, the problem remains that at the end of the swap arrangement these securities will end up back on banks' balance sheets. Government bailout, here we come.

Solvency?

Banks by nature are insolvent. If we all went to our local bank and demanded our money back, only 3% of us would get our money. The other 97% would sadly be out of luck.

I don't think the stock markets appreciate the magnitude of the problem the U.S. is facing. If the situation was improving this present action would not be necessary.

There's nowt wrong with Bear Stearns.
Just a little bit of mischief during their closed period when they can't talk about the falsehoods being spread. If you pardon the pun....
I thought you weren't allowed to move markets.... how naive of me.

Evan, an intelligent summary as always.

I think it is also important to point out that any economic situation is profitable, all be it for different individuals and institutions in different situations.

In this specific situation we now find ourselves in, the FS industry will re-allign as a broader church - focusing less on debt and more on supporting long term investment. That is, until, this new generation of bankers forgets this round of Credit Crunch 101 lessons.

Central bank support is crucial to allow this change to come about speedily.

The Central Banks have always been as one, the illusion that they are separate entities suit their purpose. The Queens of England and Holland, the Rothschild dynasty, the Warburgs and other top Jews own these institutions, it is they who receive our income tax payments in exchange for the inflation they cause which is the charge for the fake monetary system they created almost a hundred years ago - the system is a sham and needs to be exposed.

What the central banks are doing lending money to banks.

If the Bank of England has lent any money to any UK bank or building society, then (based on the Northern Rock precedent) that borrowing institution must be nationalised immediately. Failing to do so will give former NR shareholders plenty of legal recourse to challenge the actions of this most financially incompetent of Governments.

The most galling fact of this entire economic situation is that banks gambled on giving loans to people and companies whose chances of actually being able to pay back those loans were slim. If you or I took a bet and lost, we'd have to take the consequences, so why is public money being used to cover up the banks mistakes?

the bill has landed is a good description of whats happened in the last 10 years,we have all borrowed too much ,government as well ,to fix our situation the only way is to reduce taxes,curb public spending, cap council tax, give people more disposabe income ,tax and spend has never worked but it seems like a set in stone labour policy, absolute power corrupts absolutley.

Is it really Confidence or just a bit more Time?

“But the measures taken today are not designed to subsidise banks, or prop up the value of assets. So the "active ingredient" the central banks themselves place emphasis on is the injection of confidence. “
I am always puzzled by the word ‘confidence’ as confidence is neither measurable nor tradable on any exchange that I am aware of and it has a 0$ value.

Confidence here really only means the ‘underlying ability to repay capital’ and that cannot be helped by adding more credit to a system that already has problems meeting some of its current debt.

Additional credit from central banks can help liquidity problems but I am not aware that the current problem is at all liquidity based. If one can demonstrate sufficient collateral to cover capital borrowed and sufficient resources to repay interest then lenders will still lend at both retail and wholesale levels. Even sub-prime credit is still available but the price is very high, as one might argue it should always have been.

Extra credit for the system is probably better seen as ‘time’ rather than ‘confidence’ as it does stave off the time when one has to repay capital and one can measure that time extension and give it a real $ value.

The US markets have bounced back this evening on this news which I am afraid shows that they hope for business as usual to follow when there is no guarantee that a continuing supply of under-priced credit is not simply adding more fuel to an already major fire.

One might instead hope that the explosive destruction of just those places with a failed ‘underlying ability to repay capital’ might clear enough of a fire break to allow those that remain to preserve the system as a whole because, if the combined action of the central banks does not do more than give us a few extra weeks, I for one am unaware of where one goes for yet more credit after already borrowing from the lenders of last resort?

What is the difference between central banks making funds available, and the lifeboat fund provided for Northern Rock?

Do you think that if the ±«Óătv indulged in the hysterical reporting it broadcast for Northern Rock, i.e. find the longest queues and interview the articulate, middle class in almost exclusively London and the SE, there would be a general run on the banks entitled to take up the loan facility?

Colin
from
Penn

One way to get out of this crisis would be to print the money in the amount approximately equal to the bad loan estimate. Give that amount to the banks and cash infusion would offset the loan losses... no write offs and additional liquidity all at once. Interest rates may have to be raised to keep inflation in check.

My sense is that banks are averse to lending to each other not only because they don't trust other banks to pay back, but also because they are aware that value of their assets is no longer reliable. Extra money would provide some cushion in getting over the next bad news on their existing portfolio of assets.
I agree with Evan that the new move by the Central Banks will not work unless recapitalisation is undertaken in a big way. Perhaps now is the time to look afresh at the very low limits set for capital adequacy in the banking industry. I am afraid the crisis will not be cured till tax payers make huge pay outs for the excesses of a few people who are cooling their heels in some of the best places on the planet.

The real problem is that because of interest rates were below the rate of inflation we have had a credit bubble. Banks have
lent too much money (that they create out of thin air) and people have borrowed too much money. Now, to try and stop
deflation in asset values they are printing money like crazy (actually thats not true, money or currency are now simply
electrons they dont need to print it any more).

The system only works if people continue to borrow money, why? Because banks lend the principle but not the money to pay
back the loan. So if the borrowing stops, the price of things goes down to reflect the new amount of money in circulation and people
find they cant pay back the loan with interest, the book entry in the bank goes to money hell and the banks make a loss (which they would
have borrowed money on or done all kinds of derivitive magic etc = BIG LOSSES).

So their solution, try and make it easy to borrow money again, by REDUCING the value of all the money, nominally asset prices stay
almost the same, however price these assets in gold or silver (or even hamburgers) and you will see the extent of the REAL losses.
They act together to save the banks only. If governments really cared about people, they would legalise non-debt based money (i.e. gold and silver) and give
people the option to use that, they would outlaw fractional reserve banking and move back to sound honest money.

It is really quite sad the INDIVIDUALS cannot choose what they use as money and we have to be told what to do by some government/bank cartel who can
simply print this stuff up as and when they want.

Basically, if you are a banker you will think, you cure inflation with more inflation. However, there does come a time when the money
truely does go to zero (hyper-inflation).

Despite what they do we have two choices only hyperinflation or deflation, there are no other ways out. Central banks are heading for hyperinflation.
This is all caused by manipulation of the money supply not by "real" economics. Read Rothbard and Mises.

You miss the point; the underlying cause is that the assets (which of course have been leveraged many times) cannot now support the monies lent.

So the great American banks having been reckless to whom they have lent money and whose businesses as a result are technically bankrupt, are being bailed out by the Fed; for Fed read tax-payers - and the same is happening in European markets.

Not only have Governments already reduced interest rates – thus totally discounting the cost of risk – to “ease the burden” on these financial institutions we now have massive amounts of money being thrown at them!

When you or I, or any other business messes up, the banks foreclose, but now these palookas (remember they used to call themselves the “Masters of the Universe?” are being bailed out. Why? So they can be similarly reckless?

Has the World gone mad? In a sane World we would accept that the last years of plenty have been built on a mountain of credit, tighten our belts, accept a degree of recession and in doing so build a stronger platform for future growth; instead we are still pushing this mountain of debt forward until the eventual certain implosion will flatten us all.

The more money Central Banks pump in now the more inflation we will have in the future. MV=PQ. Unless of course they choose to use open market operations to reduce it again in which case interest rates may have to rise.

Evan is well aware that the problems in the banking sector cannot be resolved by central banks (each and every one, including the Bank of England, privately owned, as a previous poster has pointed out). When the governments of the developed world allow banks to legally retain only 10% of monies deposited through the fractional reserve banking system, then how can anyone have faith in these cash poor banks? 90% of all money deposited is then lent to the public to buy houses or start businesses or is badly invested buy the bank itself. There is no reason for anyone to trust any bank. The people who withdrew their savings from the Northern Rock were the wise ones. In the next decade the banking system will collapse and people will realize what a fraud the pound, euro, dollar or any other fiat currency really is.

Some great comments posted already.

To clarify for some of you, the central banks are not government institutions, they are private and act in their own interest.

Secondly, I do not wholly understand, Evan, your assertion that cheap money is not a subsidy. If banks are not willing to lend money to each other (reflected by high interest rates) the central banks move to offer money at lower rates is either a subsidy or a market distortion.

It's like the 1970s re-visited, back then fiscal policy was pushed to the limit and failed, we now seem to be making the same mistake with monetary policy.

We just need to ask ourselves who is benefitting from all of this?

When a volcano erupts it spews vasts amounts of incandescent material upward. As long as there is energy in the magma chamber this material is supported but once this energy is gone the plume colapses sending out a pyroclastic flow that incinerates all in its way. I am sorry but that is our present situation, the credit plume is colapsing and there is nothing the Central Banks can do to stop it.

Re: #22 Parijat Sharma

One way to get out of this crisis would be to print the money in the amount approximately equal to the bad loan estimate. Give that amount to the banks and cash infusion would offset the loan losses... no write offs and additional liquidity all at once. Interest rates may have to be raised to keep inflation in check.

I think you'll find the German government took this approach of printing money in order to repay the costs of the Allied Forces nations following World War I (I'm no historian nor economist, so I'm open to correction on this). Unfortunately, their actions led to hyperinflation in the then German Mark (a similar situation to that current in Zimbabwe), and forced them to scrap their currency and introduce a new one: the Deutschemark.

Inflation is the devaluation of (fiat) currency. High inflation is the surest way to destroy an economy. The Federal Reserve seem to be ignoring this, and there seems to be a lot of pressure on the Bank of England from all the major players in the current UK Ponzi-scheme economy to follow suit.