The Old Lady of Threadneedle Street, the venerable Central Bank of England, the Bank of England, announced today that it is going to bail out Northern Rock, a big building society in England (a morgage lender), who apparently got into trouble as it could not fund its liabilities.
So all this high faluting lecturing about the fact that the current situation was all just a mispricing of risk, central banks shouldnt bail out bad lenders and this creates moral hazard was just bunk then? Here's what the Independent says and I quote
His letter to the chairman of the Commons Treasury Committee was as lucid an explanation and analysis of the crisis that has engulfed the banking system over the past two months as you are likely to see, but that doesn't necessarily mean his conclusion – which loosely translated into plain English reads, "Sod off, you are not getting a penny" – is the right one.
What happened 2 days afterwards? the Old Lady is busy shovelling out money just to save this mortgage lender who had some very risk investments. And dont give me that guff about markets not lending each other. What rot, they are lending each other but only to people who have managed their risk. Not to risky people.
And if others are refusing to lend to Northern Rock, why is the Old Lady taking MY tax money and giving it to these bad risk managers?
Central Bank's reputations rely on a firm hand on the tiller. The Old Lady, after a series of major incompetent issues, such as the BCCI case, has managed to recover and has established a reputation of good sound macro-economic management. Now look at it, I think the chaps inside there are a bunch of blithering idiots.
Actually, I have a very good idea that this was political pressure, and if that was indeed the case, then they are even more contemptible.
All this to be taken with a grain of piquant salt!!!