After Northern Rock, More Bail Outs By Central Banks Likely

The Bank of England had been reluctant to come to the aid of speculators. The bankers feared that offering bailouts to rich punters would give them the wrong idea. They might come away thinking that they could do any damned thing they wanted – like a rich man’s spoiled teenager – and the central bank would always bail them out. Heck, they could even buy US subprime mortgage debt!

Northern Rock (LON:NRK) was the focus of their concerns over the weekend. The company has lent billions to Britain’s property speculators. But when Northern Rock itself needed a loan, all of a sudden the credit markets turned their backs. The mortgage lender then found itself short of cash. Then, to make matters worse, depositors turned their backs too. Middle-aged housewives and retired plumbers stood in line to get their money out, fearing that the firm might collapse.

“It is just like ‘29,” said an attractive French woman at last night’s dinner. “I don’t know anything about finance, but I don’t like the looks of it.”

Here at Markets and Money , we don’t know anything about finance either. But we also don’t like the looks of it.

As of two days ago, private lenders were a bit on edge. There is a kind of ‘de’ flation on the loose, they noticed. It is taking down US house prices…and, cometh the news last week…UK house prices, too. It was causing a general “re-pricing” of risk…and risky assets. Stocks were up…and down – as if investors couldn’t decide which direction the re-pricing should go. But a lot of debt-based assets – such as the infamous mortgaged-backed securities – are clearly being re-priced downward.

Among themselves, that is, as calibrated by the London Inter-Bank Lending Rate, the big banks figured they would lend each other money, overnight, at 6.47%. But along comes Ben and Mervyn, and the lending rates are dropped – to 6% overnight in London…to 4.75% in the United States.

We have to ask; what air do these central bankers breathe? What meat do they eat? What theories of economics do they believe…and what gods do they worship? How is it that they can believe, that of all the possible interest rates…from zero to the stars…they will find the very right one? How can they imagine that their judgment is better than the open market – in which they claim such confidence?

Oh, forget it…

But that doesn’t mean there are no open questions. “What next?” is the big one. Bailouts…bailouts…and more bailouts. “The crisis is behind us,” said one expert interviewed in the English press. But the pumps were working on the Titanic too. The engineers must have been proud of them.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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