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The Mervyn and Alistair Show
Sep. 18th, 2007 07:48 pmThis is how I reckon it went down yesterday afternoon during an interesting telephone conversation.
Darling: Mervyn, look, you've just got to guarantee the loans to whoever buys Northern Rock. No-one will touch it with a barge pole otherwise.
King: Ahh, Alistair, hello! Hmm, Well, I strongly suspect that I don't HAVE to do anything that you say. I vaguely recall that one of your predecessors ... ah yes, your immediate predecessor, that guy who is now your boss, you see, he gave the Bank of England its independence on matters like these, and, ahhh, well, I believe that means that although he is your boss, you most definitely aren't mine. So, up yours Delors! as I believe The Sun might put it.
Darling: But Mervyn. They're queueing round the fucking block to take their money out! It's on the one o'clock news! This is terrible. Northern Rock could actually go under! The pensionwers are revolting!
King: So you are phoning me up, asking me to create a system of chronic systemic risk, just because something makes bad television for the government?
Darling: Mervyn, Mervyn, thats not what I meant at all. You know that. But couldn't you, like sort of guarantee the loans, just for a month or so?
King: Hum tee hum tee hum. I can't hear you....
Darling: Fuck you, you jumped up cunt. When I'm Chancellor, I'll fucking renationalise you. That's what I'll do,
King: But you are Chancellor, Alistair. You just aren't really in charge...
So, away stomps Alistair, having been rejected by his ex-friend at the BoE. What to do, he wonders, what on earth to do?
Net result, he makes a panicked speech which means that virtually all bank deposits in the UK are now implicitly guaranteed by the government, solely because the Chancellor turned green at the sight of "bad television" and couldn't bear the thought of being in charge of the country's finances when the country's eighth-biggest bank went into administration.
Now, think on what a complete guarantee means. If a bank offers you a 15% fixed interest rate for the year, it used to be that you might say to yourself "Hello, my investment might be at risk here". But, no longer, because it's all guaranteed! Moral Hazard A Go Go! Systemic risk, writ large.
Now, my question is. Suppose this had been an Internet bank? Suppose it had not had any branches? No bad TV shots of 93-year-old Olive Sproggs of Richmond who had her last 500K invested in her Northern Rock account. Would the Chancellor have stepped in then?
Like fuck he would have.
Sometimes, you have to let things fail. I actually heard some respected commentator say on the news today that "you can't expect people to have to check the quality of a bank's loan book before they deposit their cash there". But why not? If a bank is offering a higher rate of interest, it can do so because it is charging its borrowers a higher rate of interest. And it can only do that if the borrowers are higher risk. That's how it works.
Or, that's how it used to. Now it doesn't matter a fuck, because a higher rate of interest is of little more risk than a lower rate, because your capital is guaranteed.
The Fed guarantees $100,000, and puts depositors at the head of the queue of creditors. With luck, we will have a similar system in place within six months. But, for the moment, just take the highest interest rate. There is no downside....
PJ
Darling: Mervyn, look, you've just got to guarantee the loans to whoever buys Northern Rock. No-one will touch it with a barge pole otherwise.
King: Ahh, Alistair, hello! Hmm, Well, I strongly suspect that I don't HAVE to do anything that you say. I vaguely recall that one of your predecessors ... ah yes, your immediate predecessor, that guy who is now your boss, you see, he gave the Bank of England its independence on matters like these, and, ahhh, well, I believe that means that although he is your boss, you most definitely aren't mine. So, up yours Delors! as I believe The Sun might put it.
Darling: But Mervyn. They're queueing round the fucking block to take their money out! It's on the one o'clock news! This is terrible. Northern Rock could actually go under! The pensionwers are revolting!
King: So you are phoning me up, asking me to create a system of chronic systemic risk, just because something makes bad television for the government?
Darling: Mervyn, Mervyn, thats not what I meant at all. You know that. But couldn't you, like sort of guarantee the loans, just for a month or so?
King: Hum tee hum tee hum. I can't hear you....
Darling: Fuck you, you jumped up cunt. When I'm Chancellor, I'll fucking renationalise you. That's what I'll do,
King: But you are Chancellor, Alistair. You just aren't really in charge...
So, away stomps Alistair, having been rejected by his ex-friend at the BoE. What to do, he wonders, what on earth to do?
Net result, he makes a panicked speech which means that virtually all bank deposits in the UK are now implicitly guaranteed by the government, solely because the Chancellor turned green at the sight of "bad television" and couldn't bear the thought of being in charge of the country's finances when the country's eighth-biggest bank went into administration.
Now, think on what a complete guarantee means. If a bank offers you a 15% fixed interest rate for the year, it used to be that you might say to yourself "Hello, my investment might be at risk here". But, no longer, because it's all guaranteed! Moral Hazard A Go Go! Systemic risk, writ large.
Now, my question is. Suppose this had been an Internet bank? Suppose it had not had any branches? No bad TV shots of 93-year-old Olive Sproggs of Richmond who had her last 500K invested in her Northern Rock account. Would the Chancellor have stepped in then?
Like fuck he would have.
Sometimes, you have to let things fail. I actually heard some respected commentator say on the news today that "you can't expect people to have to check the quality of a bank's loan book before they deposit their cash there". But why not? If a bank is offering a higher rate of interest, it can do so because it is charging its borrowers a higher rate of interest. And it can only do that if the borrowers are higher risk. That's how it works.
Or, that's how it used to. Now it doesn't matter a fuck, because a higher rate of interest is of little more risk than a lower rate, because your capital is guaranteed.
The Fed guarantees $100,000, and puts depositors at the head of the queue of creditors. With luck, we will have a similar system in place within six months. But, for the moment, just take the highest interest rate. There is no downside....
PJ
