Monday, 05 January, 2009
 | Definitive proof that the Bank of England saw the financial crisis coming |
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The Daily Telegraph's economics editor, Edmund Conway reveals that the Bank of England knew in 2006 precisely what risk was posed by the dangerous build-up of debt which was brewing in the economy but neither the Bank, the Regulators nor the Government took any action.
Full article 5 Jan 2009 Media is Partly to Blame for the Recession
Edmund Conway's Blog on this
......... but we (financial journalists) were guilty of a more fundamental failing – one about which most of the financial press has remained shamefully silent. We should have made more noise about the risks of a crisis before it erupted. And I feel this more keenly than most. You see, I was among the few writers privileged to have been shown the evidence that the crisis was heading our way – more than a year before its earliest impact.
I remember the moment that I twigged that something was wrong. I was sitting in a wood-panelled room in the Bank of England on a rather warm July morning. In front of me were three of the Bank's leading experts in financial stability – the emergency room surgeons of the City. On the table was an intriguing chart. What it seemed to be saying was rather alarming, or at least that is how it struck me.
Cast your mind back to summer 2006, when the idea of a run on a British bank was among the most peculiar conceits imaginable. Although we had issued plenty of warnings on the levels of debt being taken on by anglophone households around the world, the notion that the entire British banking system could, in little more than a year, find itself on the brink of collapse would have sounded ridiculous. But on this chart was a wiggly line screaming that something was going very wrong: the banks and building societies were lending significantly more than they had in their vaults.
Wasn't this, well, a bit of a worry? I asked (in the Bank of England understatement is the modus operandi – or at least it was then). The faces that stared back looked drawn, fearful and rather weary. They pointed me towards another set of figures, even more worrying. They implied that if there was an unexpected shock that made it difficult to fill that gap by borrowing short term from other investors, home and abroad, the consequences would be disastrous: we were talking about a year's worth of profits – £40 billion – being wiped out; about house prices falling by a quarter and the economy shrinking by 1.5 per cent.
The boom went on for another year and a bit, and the eventual slump looks like being even worse, but the fact remains: there was a distinct bat-squeak of worry in the Bank of England in 2006 – and it was more or less ignored. Granted, the Bank had not identified all of the details, nor precisely how this crisis would become the worst since the Great Depression, but it did enough; it identified the root cause of the credit crunch.
So what went wrong? There was enough time to have prevented Northern Rock from embarking on the horrendous borrowing and mortgaging spree that led to its destruction; enough time to have ensured that a fatal breath was blown into the housing bubble; enough time to ensure that while a slowdown was inevitable, it needn't have been so panicked and painful.
The large part of the answer was the failure of the Bank's experts to send out a louder clarion call to chief executives; the failure of Gordon Brown to take seriously this threat, relayed directly by his central bank; the failure of City regulators to turn this worrying little chart into action.
Edmund Conway Daily Telegraph 5 January 2009
Thursday, 01 January, 2009
| The perils of Sterling's devaluation |
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The Independent's Jeremy Warner has published two articles on Sterling recently and wonders why there has been so little public attention given to this. He wonders if this is because the public's immediate reaction is that devaluations are probably beneficial overall. However there are some significant disadvantages and Jeremy Warner argues that these may both outweigh the advantages and also kick in immediately while any benefits (exactly what exports are going to benefit?) will only show later on.
Full article 1 Jan 2009: Perils of Sterling's Devaluation
Full article 12 Nov 2008: Sterling crisis threatens Brown's reflationary plans
....... Government ministers lambast the banks for not lending enough, yet the reason credit is being squeezed is because it is no longer possible to borrow internationally as freely as we used to. In extremis, the flight of capital becomes a self-feeding phenomenon. The lower the pound falls, the more it frightens the money markets and the less inclined they are to lend in sterling.
Many international investors regard the outlook for the UK economy as truly dire. Its key strengths, the housing market and financial services, lie in ruins, and now there isn't even the attraction of high interest rates relative to Europe to keep the money flowing in. Like the banks, Britain as a country is being forced to deleverage, and most disagreeable it is likely to prove too........
Jeremy Warner The Independent 1 Jan 2009
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