Nov 06 2007
The Governor of the Bank of England spills the beans
If anyone had been in any doubt about the importance of Mr Darling in the handling of the Northern Rock crisis, they cannot be this morning. The Governor confirmed that the Chancellor knew well in advance of the difficulties facing Northern Rock, and himself took the decision not to help a takeover of the ailing institution by Lloyds Bank. We already knew that Mr Darling endorsed the decison not to make more money available to UK markets over the summer, and was himself telling the bankers it was all their fault just before the run on Northern Rock took off.
The UK authorities latest statements are not good for morale or confidence. Confidence is a precious flower at the best of times. Today it is much needed. If the authorities take a gloomy view, and encourage markets to think the losses are bigger and the problems deeper seated, it will be that much more difficult to rekindle bank to bank lending which underlay the expansion of recent years. The authorities should be worrying privately about the way bank losses will cut both their profits and their ability to sustain all their lending from their more stretched balance sheets. If the latest suggestions for how much value has been destroyed in world banking are correct, it represents a substantial reduction in credit for the advanced economies which will slow them down further. It is as if the UK authorities have forgotten what a credit crunch compunded by an economic downturn is like. The one reinforces the other, destroying jobs, bankrupting businesses and forcing repossession of people’s homes.
It is still possible to get the UK through this without a recession, and that should be the aim. The US is clearly now trying to stop the housing problems spreading too widely to send that economy into recession, with its aggressive policies of interest rate cuts and more liquidity being supplied. Too much gloomy talk by either the Chancellor or the Governor in the UK will not help, when so much value has been destroyed and when banks everywhere are having to pull in their horns.
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
John, with each passing article that you write Alistair Darling shrinks a little bit more. The man is clearly not up to the job of chancellor. The second most important job in the government. My opinion is that Labour dare not reduce interest rates because they know it will release the underlying inflation that they have allowed to build up with their credit-led growth.
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Well I’m confused as to how cutting base lending rates increases ‘liquidity’, I’ll admit I don’t really understand finance, but I understand base lending rates as the price that the UK pays for money from financial institutions - which seems to have no effect on interbank rates at the moment.
I read about this ‘re-pricing of risk’ as assume it is all one in the same to me. The fed cuts in interest rates did not stop Citibank writing down (if that is thet right way of saying it) sub-prime related losses.
The Bank of ENgland have offered emergency borrowing at 6.75% and no one wants to take it as it seems to be a stigma. I can’t see how if rates are cut so sat 5.25% and emergency borrowing becomes 6.25% (which is similar to interbank 3 month rates) anyone will want to drink from the poisoned chalice for fear of speculation on their shares.
In my humble opinion, cutting fuel duty and allowing the consumer to spend more in the economy is the way forward.
Reply: Cutting interest rates makes more transactions and purchases affordable - people can borrow more on the same income. As people borrow and spend more so the money they borrow and spend is placed back in the banks as deposits by those who have supplied the goods and services, allowing the banks to lend more. The danger now is that the banks are wanting to keep what cash they have and are nervous of the losses they have recorded, so cutting interest rates may not have the same immediate effect, but it is still a move in the right direction. Keeping interest rates high or allowing market rates to be higher than the MPC rate just increases the pain, and makes more defaults likely as people struggle to pay the interest on their loans.
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What does more liquidity mean? Does that mean more cash in the markets? Doesn’t that mean more inflation? Sorry if it’s astupid question.
Reply: yes it means more cash and financial instruments like cash in the markets. That does not necessarily create more inflation if there is not enough cash in the markets to start with.
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