Tuesday, July 1, 2008
We Never Learn
"The governor of the Central Bank of Luxembourg raised some eyebrows when he questioned the integrity of the fast-growing balance sheet of the European Central Bank. ... In so many words, Mr. [Yves] Mersch charged that the commercial banks are gaming the central bank, a situation he called of 'high concern.' ... It was [Walter] Bagehot who laid down the law that, in a credit crisis, a central bank should lend freely against good collateral at a high rate of interest. ... Neither Bagehot nor [Francis] Baring seemed to anticipate that, before many hundreds of years would pass, the Bank--indeed, many central banks--would become, so to speak, 'le premier resort.' ... What passed for good banking collateral in the mid-19th century were bills of exchange, i.e., short-dated, self-liquidating IOUs. ... By now, a busy reader of Grant's Interest Rate Observer might be wondering why the editor is reaching back to 1867 for actionable ideas on the 21st-century monetary situation. ... [Thomson] Hankey, in a losing cause, marshaled two principal arguments against the Bagehot doctrine. No. 1, moral hazard. ... No. 2, simple fairness. ... How far the world has come: Gold, the most liquid of monetary assets, today is officially demonitized, whereas mortgages, the least liquid of banking assets, are now--all of a sudden, because there seems to be no choice--being embraced, or at least, tolerated. ... 'Ready money,' writes Hankey ... 'cannot from its very essence bear interest; every one is therefore constantly endeavoring to make is profitable and at the same time to retain its use as ready money, which is simply impossible.'," James Grant (JG) at www.nysun.com/opinion/walter-bagehot-was-wrong/80283/
I love JG, or at least agree with 95+% of what he says, see my 31 January, 25 February and 21 March 2008 posts. I've said things like JG writes here for 28 years. Thanks, Yves Smith at http://www.nakedcapitalism/ for bringing JG's article to my attention. Yes, the bankers are alchemists, see my 23 August and 24 December 2007 and 3 April 2008 posts.