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Hmm the banks lend money to people who can't afford to pay it back, and Mr King is reponsible. Yet more Bank of England bashing, you really are in the pocket of the Labour party aren't you Mr Peston. Whatever happened to the 成人论坛s reputation for informed, fair and balanced reporting?

If you were running a business and you found that you required to borrow a "bit more" than you expected, then IF your bank would lend you the extra money, they would most certainly charge you more, probably a lot more, for the privilege.

So none of the UK banks should be whining now that the boot is on the other foot - if you need the money, pay the price.

The banks themselves are more than partly to blame for this situation by refusing to lend to each other.

If they are still not prepared to do this because they fear the creditworthiness of their fellows, then they can hardly expect the Bank of England to lend to them other than at punitive rates

But what is the BOE policy Robert? I just noted that NR looks likely barring a miracle to drop out of the FTSE 100 - a move that could cripple any revival plan that doesn't bring a a santa sack full of its own liquidity to the table. The BOE seems have tackled NR's problems with a 'stop-go' policy. Give a a bot. Wait. Give a bit more. Wait. etc. In between the chancellor has thrown his wisdom ino the ring; contributions which have offered little clarity on future policy to the market. The BOW has not sat on its hands, but it certainly seems to be able to sit on one hand at a time. UBS only publicly confessed its 10B hole once it had secured funding. Note the difference with NR. There seesm little prospect of the current liquidity and debit default circus drawing to a close for at least two quarters. Is the BOE thinking that far ahead?

Robert

Slightly off topic for this piece but are there not significant implications for government finances in all this.

My understanding (and I may be incorrect) is that a material percentage of corporation tax income comes from profits in the financial sector and a material amount of income tax comes from city bonuses. The implication of the writedowns would seem to be that declared profits (will the impact on taxable profits be similar?) will be substantially reduced and as a consequence there will be large falls in bonus pay outs.

Are the governments finances going to take a significant hit from all this over and above what is committed to Northern Rock?

Sadly the evidence suggests 2 things: 1. That Mervyn King does not have a real idea how modern banking works (previously demonstrated by the Bank's failures during the ERM debacle)& 2. his credibility has been compromised by the indecision over the Rock affair - we won't lend to Lloyds but will lend now; we won't take mortgage collateral, we will now, and so on. Worse, the Chancellor never had any credibility either and the FSA has struggled to show its qualities as well. UK banks that can access the ECB are doing so because of these facts.

If credit is more expensive for the public, then surely that is a good thing in the long term. People's borrowing patterns need to change.

The banks stand to lose money if borrowing goes down, since they can no longer earn fat fees on brokering those loans.

I do not think anyone feels a shred of pity of those chaps in the city losing their jobs - anyone could see that the excessive bonuses paid over the last few years were inherently unsustainable, morally or financially.

It isn't just fear of the BoE though is it? They need to keep the money on the balance sheet because they are terrified that they will have to mark to market all their toxic CDOs and bring their SIV losses back on their balance sheets.

And Sir Mervyn (as he should be) is not punishing all of us by not bailing out the banks, he is punishing all of us with inflation by cutting rates when they should be raised. Not everyone has a mortgage, there are retired people with savings, and those renting who are waiting to buy who are being harmed by that.

I do not think the solution to this is for uncle Merv of Threadneedle street to start making liquidity available for banks willy nilly! Actually he has put in place mechanism by which banks can acces further liquidity if they so need. The fact that they haven't used it is down to the individual banks decisions.
Actually what got us here in the first place where the actions of the banks playing loose and fast with the rules and following the new financial nirvana of securitisation and SIV's. Nice profits while the merry go round was operational and consequently big bonuses all round to the boys. Now it is time to wake up smell the double expresso.
King has acted appropriately throughout. The banks like to complain because they are not being bailed out of the mess they themselves created. This in turn creates downside on the bonuses of the rich city boys. A lesson sometimes is better learnt with a bit of personal pain. I know this will inpact on ordinary people, but they didn't complain while things were going good either with cheap credit and using their houses as a cash point.

The year was 1932 and credit was hard to find as fear led banks and individuals to hoard their capital.
History may not repeat ,but it certainly harmonises.In 2007 we have not yet seen the protectionism of that earlier time.
However ,conceptually the stories of then and today are the same.
The "external and internal" debt of the US this time instead of Europe. The lending to the US for credit to buy consumption to be produced in China,Japan,Europe.
The massive funding of that debt by the aforementioned and the Mid East etc via treasuries etc as opposed to the European and Latin American funds of yeaterday.
The securitisation of collateral backed by property etc rather than National and municipal bonds this time ,but the process of distribution virtually unregulated the same with just the odd wrinkle thrown in.
Appears our finance rocket scientists may still be overpaid , but they are not very original are they ?
So,the only question that remains is ,can the central banks do anything very much to bail ouit this situation ?
Limited ,I think ,very limited. The fact is our financial institutions live in fear of their own realisation that they have built something very unsound. On an individual basis they know their positions have rarely been more serious and thus they suspect their colleague institutions to be in a similar position. A consequence of this is hoarding to try and improve their balance sheets and risk exposure. The BOE will have a hard time 'fixing' that and arguably they shouldn't try too hard because they may spend their ammunition at this time for very little gain.

I think the Bank of England have got a difficult job controlling inflation and maintaining robust economic activity. They are getting it about right.

Banks as commercial organisations are in the business of taking risks. Some you win, some you lose. I think it can only be good if banks are accumulating cash it will make them more robust in the medium term. Although obviously some banks are weaker and more exposed than others and there is some short term pain. It will build confidence if banks are better balanced.

Huge bonuses are still being paid at some financial organisations. People are still making money in all walks of life at all levels of society. If people have overstretched themselves and/or taken on to much debt they'll learn from it. It won't destroy them. It's happened before in the late 1980's early 1990's. Life goes on.

Perhaps we'd all do better focusing on being innovative, investing in high level technologies, fusion, biotechnology, advanced computing, artificial intelligence and other useful things that will deliver economic growth and societal benefits instead of trying to make a quick easy 拢 from houses.

"But their fears are really about the attitude of the Bank of England as and when one of them is forced to borrow a bit more than they鈥檝e agreed to do or expected to do."

Would you care to elaborate on that with a concrete example ? I think you may be understating the size of the problem, somewhat.... (just a bit more borrowing - doesn't do any harm!)
It's up to each Bank to ensure that they can fund themselves in good times and bad.
If a bank gets into trouble through being irresponsible and taking too many risks, then they should suffer serious consequences. That's what happens (and is about to happen) to someone lying about their earnings to obtain a huge mortgage. If you take a risk, then you're taking a risk ! Not all banks are in serious trouble, so you have to ask yourself - why might that be ?
Once again, Merv has it right. The bankers (and maybe you ?) might be upset that he's reluctant to cover for their greed and incompetence, but I'm not.

Maybe the BOE are actually concerned that the banks still haven't got the message about being careful about who they lend money to. To be fair, the banks, and us as consumers have been taking the mickey for quite a few years, and the amount of credit available needs to be reduced. It's either a bit of pain now, to stop the rot as it were, or the whole economy will go into total meltdown in a couple of years time.

And if I understand correctly, if the BOE release more capital into the market, this is likely to be inflationary, as the BOE's PRIMARY aim is to control inflation(something that seems to be forgotten by many economic pundits), which is already at the top of it's margins, they need to be quite careful about how much capital they release.

Erm, the supply of money is growing at 12% a year. The last thing we need is for the Bank of England to spew more money at lenders so they can get us into more debt.

Either there are 12% more things to buy last year, and people are producing 12% more value to earn that money, or prices will go up and the pound will devalue.

I think the Bank of England have got a difficult job controlling inflation and maintaining robust economic activity. They are getting it about right.

Banks as commercial organisations are in the business of taking risks. Some you win, some you lose. I think it can only be good if banks are accumulating cash it will make them more robust in the medium term. Although obviously some banks are weaker and more exposed than others and there is some short term pain. It will build confidence if banks are better balanced.

Huge bonuses are still being paid at some financial organisations. People are still making money in all walks of life at all levels of society. If people have overstretched themselves and/or taken on to much debt they'll learn from it. It won't destroy them. It's happened before in the late 1980's early 1990's. Life goes on.

Perhaps we'd all do better focusing on being innovative, investing in high level technologies, fusion, biotechnology, advanced computing, artificial intelligence and other useful things that will deliver economic growth and societal benefits instead of trying to make a quick easy 拢 from houses.

Perhaps the banking system is only now beginning to price money efficiently? Perhaps what it has been doing since the start of this decade has been inefficient. We can all now see in the glare of daylight that risk was underpriced and has generated imbalances and inefficiency. The repricing is going to be painful but necessary. It is about time that people focused on making a living by actually trying to make things, provide services and by innovating; rather than, as has been happening, through mere speculation by trying to hoard assets such as real estate and commodities.

Banks were free to take risks in an benign environment. Many did so with scant regard or planning for the risks involved, if they ever truly understood them.

Mr. King is not punishing anyone. What we are seeing is the depressingly familiar idiocy of investment bankers who, having rushed too far in the direction of easy mutual liquidity, repeat their flock-of-sheep charge too far in the opposite direction.

The banks punish all of us by failing to admit their fault, use the BoE's facilities and take the hit to their share prices and retail customer bases that their actions thoroughly deserve.

"In the summer, for example, Barclays drew on the facility and promptly saw its name splashed all over the media. The implication was that there was something seriously awry at Barclays, which was not the case but wreaked considerable reputational damage on it. The consequence is that the standby facility 鈥� whose point is to provide comfort in a time of crisis such as the one we鈥檙e living through now 鈥� has been used much less since the onset of the credit crunch than in the normal market conditions that preceded it. Which is crazy."

Dear Robert, I hope you see the irony in this and are a little more careful about your telling of the truth in the context of how it is received and perceived.

The US banks in trouble are going to the Federal Home Loan Banks as a lender of last resort.

We're not seeing this openly being reported at all.

Perhaps the banking system is only now beginning to price money efficiently? Perhaps what it has been doing since the start of this decade has been inefficient. We can all now see in the glare of daylight that risk was underpriced and has generated imbalances and inefficiency. The repricing is going to be painful but necessary. It is about time that people focused on making a living by actually trying to make things, provide services and by innovating; rather than, as has been happening, through mere speculation by trying to hoard assets such as real estate and commodities.

So what you are saying Mr Peston if I understand correctly is that the problem is not a short term financial one, but a long term socio-political one?

"Right now, if Mervyn King is punishing the banks, he is also punishing all of us - in the sense that we all depend on the banking system to price money efficiently, and that鈥檚 not happening right now."

Liquidity is priced at a premium, it does not follow that it is not priced efficiently. The banks are responsible for arranging their balance sheets in such a way as to get through such events. It is right that they should not run to the Bank of England to finance their cash pool. Instead they should take the advice from the FSA and make every attempt at rebuilding their own liquidity reserves. Unfortunately for everyone, that means forgoing profit, by reducing new long term lending and instead taking existing interest and downpayments received, and putting them aside.

Banks are reluctant to do this, because it means even higher mortgage and lending rates for a while, which is likely to deflate even further the prices of the assets the banks hold as collateral on their existing loans (e.g. property), and will increase defaults and losses. They are also playing a game of chicken, competing to keep market share while running liquidity reserves dangerously low.

However, there is nothing inefficient about this. The inefficient pricing of money has been happening on a grand scale over the last decade, by not factoring in risk adequately. Sub prime mortagages are only the final piece of insanity that has caused markets to wake up. The credit crunch is evidence of a reappraisal of risk, recognising that everyone in the market is fragile in this respect.

The final dawning will come when banks realise that it won't do transferring this risk to the liquidity side, and then ask the Bank of England to make it go away by printing more money. Some of the money tied up in houses and mortgages must be put back in the till.

Robert Peston is spot on in the need for everyone in the financial markets to (re?)agree what the rules are rather than just blaming each other. The longer this drags on, the worse for everyone.

However Rob (#1) has made a great point. Real wealth creation for the UK comes through the creation of assets in business rather than just moving the ownership of assets around in a sophisticated game of pass the parcel. Successive governments have overpromoted and incentivised the financial services sector whilst through neglect allowed other sectors of the economy to decline or disappear offshore.

Surely the impact on inflation of creating more money outweighs the pain of less free borrowing?

Anyway, the people really feeling the pain are us - the architects of our downfall. Is this all not the result of our willingness to put ourselves in this position? Yes, the banks have played their part by offering the forbidden fruit, and they knew the risk better than anyone. But lets not forget that we have been entirely complicit in this scam. No-one forced us to take the money. There was no gun against our heads. It was our greed that led us to take the money for the better life we could buy ourselves today with someone elses money. 'Monthly payment' was the catchphrase of this boom, and neither 'interest rate' nor 'total amount repayable' were anywhere to be seen.

To illustrate, a close friend had about 拢40k of mortgage on a place that cost 拢50k about 4 years ago. She wanted to move to a more expensive house. No-one, except her current relationship bank, who have a history of irresponsible secured lending anyway, would lend her the money. I suggested she think very carefully, and think about what would happen if interest rates went up. She said that it wouldn't happen. Within 6 months, interest rates had gone up 0.5%, and within the year they were up a whole percent. Now they're up nearly 2%. She's since moved again, and her husband has just lost his job. And this sort of financially imbecilic behaviour from someone who's father was made redundant in the last property crash. Will we ever learn?

Excellent summation Robert.
I would only add that there is a strong quarterly seasonality that is at its peak right now. But the fundamental problem is as you described it, with a focus on those Banks that depend on the wholesale markets which, incidentally, doesn't include Barclays.

The crisis in interbank rates means that the stance of the bank of England is, IN EFFECT, tighter that earlier this year despite the base rate cut. This is irresponsible. They need a kick up the butt to supply sufficient liquidity to the banks to at least halve the difference between Base Rate and the 拢 Libor interbank rate after the seasonal factor goes away at the end of the year.

Can someone explain what precisely is the Bank of England base rate, since it only seems to have a very loose connection to real life interest rates. In which case the BOE changing the base rate can only ever have a very marginal effect on the economy. Is it the rate at which the BOE lends money overnight to banks? In which case, why would a bank ever borrow from another bank (at a higher rate?) or is it the interest that the BOE pays on overnight deposits by the Banks? If the latter, then it is difficult to see why the base rate would ever have much of a correlation to LIBOR.
I have a tracker mortgage linked to BOE base rate. In providing such mortgages it seems the Banks are taking a huge risk, since the rate at which they can borrow (LIBOR) is only loosely relate to Base Rate (I suppose the prudent banks take out a derivative contract to cover this risk).

That things should be being cocked up under the auspices of Mervyn King should come as no surprise. Some decades ago I had the misfortune to be 鈥榯aught鈥� economics by King when he was at Cambridge. He was an extreme theoretical free marketeer who disdained any consideration of the practical issues then facing the British economy. He was totally intolerant of any approaches other than his own, and contemptuous of their proponents, no matter how distinguished. When challenged, he would seek to blind with science, or rather to take refuge in a mixture of his undergraduate level mathematics and his mastery of his own peculiar little mind game. His one skill appeared to be the ability to spot an approaching academic bandwagon and jump on it. Doubtless it was this ability which allowed him to ascend to his current position. He appears still to live in a fantasy land of a now discredited economic theory, and as soon as facts arise which contradict his theory, his response is 鈥榮o much the worse for the facts!鈥� - whilst we all suffer.
The sooner this third rate ideologue is dismissed to sit in a room on his own and play with his Pareto optima and Walrasian General Equilibrium functions the better for us all.

Are the banks living in terror of the Bank of England or the Media?

Media hype means any business can be damaged significantlty with a bit of sensationalism....can this really be legal?

Peston, it sounds like the City thinks that it should be on Benefits from the Welfare State (BoE) to save their skins and Bonuses. They got it wrong, like Brown weren't prudent, it was all 'OPM' and now they are whinging. In fact they should be having large Rights Issues or converting shares to Part Paid as they'll need the money.

Why doesn't the Treasury buy in T-Bonds and supply liquidity to the market or wasn't it selling T-Bonds when the economy was 'so strong' to control liquidity?

The whole system created by Brown is just awfully flawed and as money has grown c.12% pa and that needs to be reversed.

Basic costs are rising at well over 6% pa that is far above where they should be so interest rates should be raised I'd guess to around 10% for quite a long while. When asset prices have collapsed then they can be eased.

It has nothing to do with the Bank of England as you suggest and all to do with margin banks work to. Be it in primary lending or credit card.
Greed is what drives banks and they will never accept responsibility for their actions citing any and everyone else for their woes.
Please do not believe a word they say, if they cant use sterling they can borrow any other currency and convert it at any time for a nominal percentage point.
This is all a big rouse in lieu of the OFT case in January, a plan to make us all feel sorry for the banks who last year lets not forget made 拢50 billion profit.
They deserve not one centilla of sympathy and are just having great problems coming to accept they are no longer masters of the universe.
This red herring is a joke and we should laugh them off court and tell them to get a life

It's sad when an institution designed for one age doesn't notice that it is increasingly irrelevant in another. What this article illustrates is the the model of interest rate setting which underpins the Bank of England's role is irrelevant - the bank is simply too small a factor in the market to rally affect much. The reason why many smaller nations joined the euro was that is was a big enough institution to have some real impact in "modern" financial markets. The BoE simply isn't any more.

Incidentally, I stand by an earlier question - if the banks don't trust each other enough to lend each other money then why should we truct then either?

I'm very dubious about your portrayal of the situation as the BoE "punishing" the banks for past misdeeds. Rational negotiation between grown-ups is not served well by such symbolic gestures of disapproval and assertion of authority. It's the threat of future hardship that moderates today's bad behaviour - not the imposition of penalties for past misdemeanours.

This is a classic intellectual battle between disinterest and self-interest, isn't it. The BoE asserting that self-interest will only ever reach the best solution by accident, because the consequences are not fairly weighted. With the banks, government, general public and other self-interested parties arguing that disinterest is too far from reality to be able correctly to gauge the weights to be attached to each consequence.

I'd always favour disinterest, but I'm afraid that one or another of the self-interest camps will always win, because they have strength in numbers. I'd suggest that the more educated (as opposed to trained) the society, the more likely disinterestedness will be its arbiter.

And who was it who splashed Barclays' name all over when they did draw on that facility? The same people who drew a picture of doom over Northern Rock. And who was that? The British media. Companies can't win against a pack of baying hyenas like the tabloids and the all-powerful state broadcaster, so why give them more ammunition to sell papers with?

If you have an apple in one hand, and 10 pence in the other hand, what is the apple worth?

If you have an apple in one hand, and 20 pence in the other hand, what is the apple worth?

If you have an apple in one hand, and 250 pounds in the other hand, what is the apple worth?

Has the apple changed in value?

Constantly inflating and deflating our money supply simply allow "financiers" to acquire our wealth without having to actually produce anything. It's completely unnecessary and is literally counter productive...

And who was it who splashed Barclays' name all over when they did draw on that facility? The same people who drew a picture of doom over Northern Rock. And who was that? The British media. Companies can't win against a pack of baying hyenas like the tabloids and the all-powerful state broadcaster, so why give them more ammunition to sell papers with?

Good to see that the politics of envy is not dead judging by all the responses to banking stories.

However those suggesting high interest rates, a contraction in credit and a rerun of the great depression 'to teach those greedy bankers a lesson' are presumably well off enough to also cope with unemployment in to double figures, government unable to meet the costs of welfare for families unemployed and homeless and potentially social disruption...leading eventually to international strife?!

I can understand people not liking where we are now and not wanting to reward those who they see as responsible for the situation but I'm afraid the proposed punishment will cause harm much more widely than those who it is suggested should be held responsible.

I posed exactly this question in a previous thread so I'm grateful that Robert has devoted a whole thread to it.

The continuing mystery for me is how can financial institutions still be offering 5-year tracker mortgages at BBR + 0.29% or thereabouts, when LIBOR is so much higher?

I know I'm showing relative ignorance here but would appreciate some answers!

Right now, if Mervyn King is punishing the banks, he is also punishing all of us - in the sense that we all depend on the banking system to price money efficiently, and that鈥檚 not happening right now.

Wrong. Borrowers might be punished, but not savers, who are seeing some excellent deals as banks now have to offer interest rates to encourage savers.

Its only fair that savers are rewarded for their prudence having endured years of seeing their saving erroded by stealth inflation.

Just imagine the banks as adult children of the Bank of England.
There comes a point where the most indulged will demand of the parent more than they can or are willing to provide.
They have gone out into the big wide world and had a great time, now the bill is to large to ignore.
The bank of Mum and Dad who have built up their assets through good old hard work and sacrifice have relised they should have been harder on them years ago, but there is still time-just!.
Dont spoil them now or next time will be even worse.

Actually the banks, especially Northern Rock, are not frightened enough of The Bank. They are not sure who to be frightened of: the FSA which regulates them even though they seem to lack the necessary expertise (does the FSA employ bankers, let alone central bankers?) the Treasury or, perhaps most dreaded, the Financial Press.

If The Bank had continued to regulate banks, as it is surely should be, one suspects that the Chairman of NR would have been summoned to the Governor's office a long time ago and, with the Governor looking across the desk, an adviser would probably have asked: 'and do you think your business model is a prudent way to operate a bank?'

Just imagine the banks as grown up children of the Bank of England.
They have had a great time making and spending money in the big wide world, it was oh so easy. Now real economics have come into play the bill is in and the assets have been enjoyed.
The Bank of Mum and Dad are now unwilling or unable to use their assets built up with hard work and sacrifice to pay for past great times enjoyed by the kids.
Dont spoil them again or next time it will be even worse!!
These are the morals that have been the way our soceity has favoured over the last 5 years or more, now we will have to change, and raised costs will force change apon us.
As the saying goes - If it dont kill yer it will make you stronger.

Robert is there any possibility of you putting this to Mervyn King? I'd be interested to know what he thinks, and whether or not he's prepared to do anything. It's clear that the major problem is the current premium banks are placing on lending to each other, and it's no good the BoE being pious about it, it's affecting all of us, and I didn't do anything wrong!

Actually the banks, especially Northern Rock, are not frightened enough of The Bank. They are not sure who to be frightened of: the FSA which regulates them even though they seem to lack the necessary expertise (does the FSA employ bankers, let alone central bankers?) the Treasury or, perhaps most dreaded, the Financial Press.

If The Bank had continued to regulate banks, as it surely should be, one suspects that the Chairman of NR would have been summoned to the Governor's office a long time ago and, with the Governor looking across the desk, an adviser would probably have asked: 'and do you think your business model is a prudent way to operate a bank?'

One thing to note about the Euro situation is that the Euro money supply is rising at 14% p/a. Meanwhile, inflation in the Euro zone is at its highest for 6 years (3% and rising). As I understand it the two are not unconnected. Massive injections of liquidity into the banking system made by the ECB, a policy that has been lauded by many economics commentators, will find its way into the economy and could result in rising prices as productivity fails to keep up. This in turn will impoverish those people in society who are not asset holders (usually poorer people in the first place).

I posed exactly this question in a previous thread so I'm grateful that Robert has devoted a whole thread to it.

The continuing mystery for me is how can financial institutions still be offering 5-year tracker mortgages at BBR + 0.29% or thereabouts, when LIBOR is so much higher?

I know I'm showing relative ignorance here but would appreciate some answers!

Post 37 people can still get mortgage deals such as bank base rate plus fractions of a percent as many organisations do not rely on other financial institutions and as such LIBOR to raise money.

A traditional building society raises the money to lend out to borrowers by taking deposits i.e. people open savings accounts. Many banks do much the same and also have current accounts. The building society pays the saver a rate of interest and uses that money to lend to people wanting mortgages or loans. It charges those people a higher rate of interest.

The building society funds its operations from the difference between the two rates.

Most mortgages in the past are based around something called Standard Variable Rate (SVR) and most people will be paying an interest rate based on this.

To use an example of the Nationwide Building Society it collects money in from savers and pays interest at rates varying between 0.25% and 4.25% on its current account and between 2.65% and 3.55% on its cash builder instant access account.

It also charges those people that go overdrawn on their current account 9.9% if the overdraft is authorised and 24.9% if it is unautorised but bank charges are another issue.

Nationwide are advertising a five year fixed rate mortgage at 5.63% then moving to its standard variable rate of 7.24%.

As it is getting money in from savers and paying them between 0.25% and 4.25% and lending it out at between 5.63% and 7.24% they make their money from the difference in rates.

I hope this explains it.

The media seems to consistently suggest that the current credit crunch is a result of unkowable, unforeseen circumstances. This is patent rubbish.

The liquidity boom, which saw the Bank of England increasing the money supply by double figure percentages (and continuing to do so) was wholly created by Eddie George, Mervyn King's predecessor. Fast Eddie admitted in front a parliamentary enquiry in March this year that the risk climate which they created keeping interest rates below their long-term average for too long, was a completely unsustainable and reckless plot to avoid recession by inflating the value of assets (houses).

But this is a little bit like using the credit card to pay back a debt - not really a long term prudent solution.

The most recent interest rate cut was Mervyn playing a "la la la I'm not listening" game when reminded of his predecessor's failings, and by throwing yet more cheap credit at the problem, I think we recognize the sowing of the seeds for a next financial crisis.

The current crisis, with bank-runs, liqudity markets drying up and central banks losing control, is already starting to resemble the beginning of the Great Depression. Let's hope the one we're sowing the seeds of now resembles October 1929 less rather than more.

Comment 39 : colin

Yes, I started to write something along similar lines, comparing the situation to an end-of-term bunfight in which each of the parties, the children (general public), their ringleaders (politicians) and the bun-suppliers (banks) - all of them would conclude that what's needed is more buns, because they're overweighting the consequences that are associated with their self-interst.

It's only the teacher (the BoE) who is looking at this from the point of view of an unbiased weighting of the consequences. And it's only him who is saying no more buns.

What we need to be very careful about is that the bun-supplying banks are ACTUALLY capable of doing what the BoE teacher requires of them. Could it be that the reality is that they are stymied from proper action by their necessary involvement in the protection racket that is world finance? If so, they should be going to the ends of the earth to make sure teacher is aware of it. Because just at the moment teacher seems to think there's a lot of wolf-crying theatricality going on. Is he wrong?

BOE's remit is to target inflation. Inflation is looking grim in the short term.

Are you really suggesting that the BOE destroy sterling, the very crux of British civilisation, so that some bankers can be soothed in the short term?

Tell you what, why not reduce interest rates to zero. That should make everyone happy. Can't see any problems with that, can you?

The banks are afraid to undertake "business as usual" borrowing of short term funds from the Bank of England because of the scare-mongering headlines that would appear in the media.

We desperately need a news media, both print and broadcasting, motivated by a desire to inform rather than to deceive for reasons of quick commercial gain, or political axe-grinding.

Michael,
"rerun of the geat depression".Aimed at my link so I will respond.First that is not the proposition. The aim is to highlight the events so they DO NOT REPEAT.
Second,it need not happen if responsibility is injected back into the financial system. It's been absent for far too long whilst the latest generation of financial wizards played with ammunition they don't understand and no they do not. lending at it's core is very simple ,but making it appear complex pays better of that there can be no doubt.
Of course a return to fiancial responsibility is once again decried to be not good for the greater good.All those poor people who will suffer from it.
Welcome to the simple ,but real world of money which is sometimes to correct a wrong there is no painless option on the table.It becomes more a choice between the lesser of two evils.

Frankly,I am all in favour of the BOE riding to the rescue ,but this is just far too early. Record employment ,consecutive periods of growth etc etc and all it takes is the merest hint that recent boom times in markets is slowing down to bring about the pleading for succour. The BOE would be applauded for their knee jerk reaction from those same people if they were to oblige them. By the same token the greater good would be ill served in the long term.

Call it generational if you will ,but older age groups have seen the financial disconnect in younger age groups for a long time now.Basically ,they can't service their debt level and won't until they change their consumption patterns.it's called choices and it's time to make them.

The analogy to Bank of Mum and Dad in post 39 is a good one.

However to the children the Bank of England is in the old people's home who they don't visit because they've heard all the old war stories about recessions, hard times, oil crises before.

These children aren't naive youngsters. They are middle aged who think they've been round the block a few times and know how the world revolves.

But they've got too big for their boots.

The Bank of England shouldn't be forced to bail out the children. The banks have a lot of middle-aged spread they cut down on. Get to the gym and cut out the fancy HQ buildings and huge bonuses.

To overcome the stigma of borrowing from the BoE, why dont they make it mandatory, that each Bank must borrow from the BoE, at least once over a 3 month period. Simple.

Robert - as you know so much, perhaps you could explain whether the current events mean we are heading for (hyper)inflation (more money supply being pumped in) or deflation (destruction of money by asset falls and default)?

Banks are afraid that if the borrow from BOE it might be leaked? Do you see any irony in reporting this?

S Thanks for your comments. I agree that the Greenspan put is not beneficial in the long run, however I am also concerned about whether 'a moderate amount of punishment' can be applied. In the current financial markets where information is diseminated instantly it is a change in expectaions that could quickly take the situation out of the control of the Central Banks - I think Japan and Germany show that sometimes reflation can not be engineered by governments and in these cases sustained average real growth rates of below 1% have resulted in massive cumulative difference in GDP below trend.

credit has been too cheap for too long ensuring poorer quality ideas raised marginal finance. Hence the so called calamity that is now observed and talked about.When allowing for the bias of tax deductability for interest costs and the penalty of double taxation on interest income, it is a wonder that genuine market interest rates have not tended even higher away from a totally artificial bank base rate.

It remains a mystery as to why individuals should accept pre tax interest rates at 4-5% when the banks they lend to (aka deposit.) wont lend to each other at 6%.

Individual savers need to figure out how they can get closer access to libor rates as providers of finance...the market is wising up....those institutions feeling relaxed about their inheretance of a large pool of passive domestic retail accounts had better wake up soon before they find out what a real market is like...

There is a much bigger picture here and your original post does not recognise that nor give due credit to Mervin King and BOE.

Chickens have come home to roost - and who is going to pay for the past extravagance and folly of some/many?

Every person in the land whether they have acted prudently or not? That is what your are proposing!

I think many (and you) are reacting to fear of a house price crash. In the belief it is a universally bad event. It is not - far from it - what has happened in recent years is an apparent one way bet - borrow money from others and GAMBLE - if you lose it is the lender who pays, if you win - Hurrah!

What King and BOE are trying to do is to balance that and a large number of other variables - most of which are controlled by the Chancellor and the Government. The gold rush into property and the subsequent bubble was their doing. What you are mistakenly doing is blaming the BOE - remember it was Brown who removed house prices from the RPI - which is the target for the BOE.

The sooner the house price crash happens the better for the UK economy - rather than rampant speculation - employment will shift into real jobs of global significance. Rather than alienating the next generation priced out of the home market, there will be opportunity for them to participate.

Oh - the bank of England does not set interest rates for sterling borrowing? Is that surprising? the BOE is a part of the UK拢 and as such - do you know any other borrower who sets their own interest rates on their own borrowings?

What the market is correctly doing is saying - there is a risk premia on sterling - interest rates should be higher than the BOE says - so I will ignore the BOE.

And if those rates do not rise - two things will happen:
-sterling will fall
-inflation will rise rapidly

and those of us who have acted prudently, and those on fixed incomes such as pensioners etc - will lose out.

But as Government pensions are fully indexed linked..........

US banks have already written off around $100 billion and are about to write off another $100 billion or so, the US FHLBs exceptionally loaned over $90 billion against US mortgages over the last quarter, the FED has dropped its deposit rate by a percent with maybe more to come, Swiss and other banks have written off another 10 billion Swiss francs, the UK central bank is covering the Rock for up to 拢100 billion... and now the combined central banks are going to lend another $550 billion at highly preferential rates titution" with a bit of paper it claims is a debt of some sort?!!! Will they take CDOs and credit swaps? Would they take my backdoor mat? It's probably worth more! And what about the Municipal bond insurers who need an undisclosed capital injection of millions of dollars... Will they be covering Australian and other municipalities against default?

This does not look like just an ordinary recession! They must be scared out of their tiny little minds. Of what?