Friday, September 14, 2007

Another Outbreak of Foot in Mouth Disease

. Friday, September 14, 2007

As long as I am poking fun at central bankers, did anyone else notice the following?

On Wednesday, Mervyn King, Governor of the Bank of England was all self righteous about his bank's steadfast refusal to inject additional liquidity into the market. "Unless the economy was in danger an injection of funds to encourage banks to lend to each other would reward reckless behaviour. Mervyn King said the closure of the money markets was the result of the mis-pricing of risk in the financial system rather than the state of the economy, though he warned that the supply of credit to households and businesses may tighten and borrowing costs would rise." So, a governor who actually admits in public to belief in moral hazard.

And then I awake today to the following news: "The Bank of England Thursday provided extra short-term funds to the money market through its weekly open market operation and sharply widened its reserve-requirement range for banks' accounts at the BOE." They followed this up on Friday by "rescuing [a] mortgage lender by providing emergency funds after Northern Rock was unable to finance its operations in the money markets." Can anyone say bailout?

Maybe the BOE bailed out Northern Rock at penalty rates, I haven't seen the details. Even so, it remains a pretty big about face in two days. And while it is tempting to make fun of pompous central bankers, one must also wonder, what did Mervyn learn that caused the 180? Should we be worried?

Update: "
The Bank of England emphasized Friday that its lending to Northern Rock would be conducted at a premium to market interest rates."


Another Outbreak of Foot in Mouth Disease
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