Skip to comments.Crisis may make 1929 look a 'walk in the park'
Posted on 12/26/2007 8:00:01 AM PST by Sonora
As central banks continue to splash their cash over the system, so far to little effect, Ambrose Evans-Pritchard argues things are rapidly spiralling out of their control
Twenty billion dollars here, $20bn there, and a lush half-trillion from the European Central Bank at give-away rates for Christmas. Buckets of liquidity are being splashed over the North Atlantic banking system, so far with meagre or fleeting effects.
As the credit paralysis stretches through its fifth month, a chorus of economists has begun to warn that the world's central banks are fighting the wrong war, and perhaps risk a policy error of epochal proportions.
"Liquidity doesn't do anything in this situation," says Anna Schwartz, the doyenne of US monetarism and life-time student (with Milton Friedman) of the Great Depression.
"It cannot deal with the underlying fear that lots of firms are going bankrupt. The banks and the hedge funds have not fully acknowledged who is in trouble. That is the critical issue," she adds.
Lenders are hoarding the cash, shunning peers as if all were sub-prime lepers. Spreads on three-month Euribor and Libor - the interbank rates used to price contracts and Club Med mortgages - are stuck at 80 basis points even after the latest blitz. The monetary screw has tightened by default.
York professor Peter Spencer, chief economist for the ITEM Club, says the global authorities have just weeks to get this right, or trigger disaster.
"The central banks are rapidly losing control. By not cutting interest rates nearly far enough or fast enough, they are allowing the money markets to dictate policy. We are long past worrying about moral hazard," he says.
"They still have another couple of months before this starts imploding. Things are very unstable and can move incredibly fast. I don't think the central banks are going to make a major policy error, but if they do, this could make 1929 look like a walk in the park," he adds.
The Bank of England knows the risk. Markets director Paul Tucker says the crisis has moved beyond the collapse of mortgage securities, and is now eating into the bedrock of banking capital. "We must try to avoid the vicious circle in which tighter liquidity conditions, lower asset values, impaired capital resources, reduced credit supply, and slower aggregate demand feed back on each other," he says.
Snip........ Telegraph UK ______
I hope someone at the central bank level knows what they are doing.
If you ask 2 economists what their outlook is, you'll get 3 opinions.
Beware of anyone with a hyphenated name...
“Twenty billion dollars here, $20bn there, and a lush half-trillion from the European Central Bank at give-away rates for Christmas. Buckets of liquidity are being splashed over the North Atlantic banking system, so far with meagre or fleeting effects.”
These pundits do not know how to analyze the effect. They apparently judge by whether real estate prices have been stabilized, yet, the US economy was growing at 3.9% during the last quarter, irrespective what real estate prices are doing. Subprime lending amounts to only about 6% of the home mortgage loan inventory. We are not on the verge of a depression, and probably not even a recession.
But hey, look on the bright side, you'll be able to pay off your mortgage with money that would buy an English Muffin.
The Economics trivia quizz has 400 questions and 1000 answers.
This was already posted:
And I am not one of the self-appointed posting police. In all my years of posting here I don’t recall more than once or twice commenting on a double posting.
I draw your attention to the fact that the article was already posted (with around 135 comments) because the title of the article is very much misleading. The economy is certainly not firing on all pistons, but do we really need to hype the problem?
Glenn Reynolds has a nice item on how the press is misrepresenting the economic news in order to influence the upcoming election.
I think we should be careful to recognize the facts, but not give too much emphasis to one sided or obviously slanted reporting. Referring directly to this being much worse than the Great Depression is bit over the top, don’t you think so?
Does the author forget the role the US Congress played in triggering the Great Depression by bringing world trade almost to a halt with a high tariff?
This article appears to be more wishful thinking than an honest attempt to warn about financial issues. When the ECB borrows $1/2 Trillion into circulation and the US Fed borrows a few hundred billion into circulation, the problem isn’t that world trade will be throttled, what we are seeing is the competitive debasing of the two major world fiat currencies.
If you don’t confuse money with wealth, you can understand why oil and gold have high nominal (numeric) money prices.
Watch the flow of wealth, not the flow of money. If wealth stops flowing, then look out.
And thanks to the generosity of the folks at the Mises Institute, copies of many of Mises’ books in PDF are available for free download from www.mises.org.
In particular, I would recommend that every Freeper read Mises’ book Human Action:
Free book download:
Another great book is Money, Bank Credit, and Economic Cycles by Jesus Huerta de Soto. He goes through the fiat money cycle step by step and proves that fractional reserve banks, when operating in a central bank community with other fractional reserve banks actually create money from nothing. He also works through a viable system of money and credit based on hard currency.
Free book download:
Or look up either on Amazon and buy a used copy of the dead tree edition.
We just had this crap last week. Same title, everything.
A lot of these guys remind me of Hank Kimble of Green Acres.
I agree and this time I’d say that it is partly Bush’s fault, actually some of those working for him. The regulators have been asleep at the switch for a long time.
Thanks for pointing out the double post and the link!
Gee, What did FDR say about fear?
Doom & Gloom has evolved. The articles are now polymorphic, self-replicating internet bots.
Sorry if I came across as bit cranky, particularly at this season when we should be mindful of grace. I am hoping that people will be realistic, rational, but predisposed to optimism. Pessimism doesn’t really solve problems -— it exacerbates them. (Come to think of it, cranky posts don’t help much either!)
We’d all do well to face our challenges with optimism and not panic or doom and gloom.
Of course, because regulation, and more regulation (with wide-awake regulators) is the answer.
Every so often the doomers become cadid: Bigger government is their answer.
According to Intrade, the winner of the December 12th GOP debate was... Duncan Hunter.
Why the smart money is on Duncan Hunter
In this poll Hunter is up 3% and even with Paul and Thompson.
This article didn’t scare anybody the last time it was posted.
I don’t totally understand your point - it’s not more regulation that I’m pointed too, it’s regulating within the current guidelines and keeping up with the scammers.
Ambrose Evans-Pritchard was one of the first and best reporters breaking the Clinton Scandals during Clinton's first term. The Dinosaur Media in this country was mum on Clinton's many, many scandals and Evans-Pritchard broke many stories in this country.
I used to go the the Telegraph on-line and read his stories.
What's that? A little tome written 20+ years ago about the pending financial collapse of the universe.
Not bad work if you can get it; peddling the same used oats that have been through the horse over and over.
Thanks for educating the other poster about who Ambrose E-P is.
That being said, he does tend toward apocalyptic rhetoric about this issue.
Those were all temporary repos meaning that there has been no permanent injection of liquidity. If even there had been, it will do no good. This is an insolvency problem, not a liquidity problem.
The Fed had better get busy dropping the dollars from helicopters because the money supply is deflating and asset values are dropping.
I think the article was written to justify the British goverment bailout of the Northern Rock bank. Sounds like a lot of payoffs to protect fellow upper class Brits from embarassment, whilst porking it to the Brit taxpayer. Or can I say that? I mean pork barrelling it I think.
It wasn’t intended to scare the U.S. voter, and it’s probably assumed that none of them is educated well enough in government schools to know what 1929 refers to, anyway.
Don’t confuse nominal dollars (the numeric quantity of money in wages and prices) with wealth! Indeed that confusion is so universal that it is like the air we breath and is an idea that must never, ever, be challenged lest people get confused by the sad truth of fiat money: anytime the government’s legal money monopoly central bank “borrows money into circulation” it is counterfeiting private wealth and thus stealing money to the advantage of those who create the money and who benefit from a graduated, progressive, tax on incomes.