Crisis may make 1929 look a 'walk in the park'

Telegraph UK ^ | 23/12/2007 | Ambrose Evans-Pritchard

[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 ______

[Sonora]

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.

[A. Patriot]

Beware of anyone with a hyphenated name...

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.

[Proud_texan]

Whatsamatter Ambrose? The royalities dropping off from "Blood in the Streets"?

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.

[jaime1959]

Thanks for educating the other poster about who Ambrose E-P is.

That being said, he does tend toward apocalyptic rhetoric about this issue.

[Vet_6780]

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.

Wrong.

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.

[Cincinnatus.45-70]

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.

[theBuckwheat]

Fans of fiat money never complain, at least as far as I have observed, when the Federal Reserve has a stated, published, policy of deliberate inflation of 2%. In my book, any inflation is theft of wealth from the lender. Now that we are faced with “assets values dropping”, meaning disinflation which is theft of wealth from borrowers). The remedy? To help borrow (print) as many billions as it takes return us to the target rate of theft of wealth from lenders.

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.