The Credit crunch - Reality Kicks in as UK banks scrape in deposits

INFLATION REPORT PRESS CONFERENCE
Wednesday 8 August 2007 - Opening Remarks by the Governor of the bank of England

Sea bass is farmed off the coast of Greece and last week Mr Tesco was selling it raw, fllleted at £12.00 per Kg. This week ? ..er .... £16.75 per Kg.

Now Sea Bass fillets don't figure too highly on the Cost of Living Index but try kippers, a few weeks ago £1.20 a pair, now ...? £1.40 - and Mr Tesco will supply you then either raw (undyed) or seared with brown shit (E - 154 ) that no other country in the world will allow you to bemerde your food with.

Just another example from the daily experience as inflation / declining exchange value of money hits the pocket.... so a good time to the Bank of England Inflation report. The latest slim volume (3.5 Mb. pdf !) is was introduced by Lord Mervyn King on the 8th August. Wasn't he pleased with himself ?

"Inflation has fallen back quite sharply, from 3.1% in March to 2.4% in June, as household gas and electricity prices started to decline."

What caught the eye in his Press Release was however his bland remarks, just as the credit crunch was unsettling the banking parlours of Bishopsgate and beyond....

"In the past few weeks there have been falls in equity prices and credit spreads have widened, especially on riskier debt. We don’t know whether these tremors in financial markets signal a more disruptive movement to come, or constitute a gradual release of pressure on spreads that had built up over some time. So it’s impossible at this stage to udge how large and how persistent this tightening of credit conditions is likely to be.

The Committee will monitor carefully data on both the price and quantity of credit."

Well Lord King "The Committee will monitor carefully data on both the price and quantity of credit" in the same way others monitor the quaintly named 2nd Division of the Coca Cola League ( AKA 4th Division when sub prime mortgages hadn't hit the headlines and the Halifax or the Woolwich took six months to handle your application and don't waste their time if you are not married and don't work for the Council) to check on the progress of Rochdale.

Exhortations , either as they train beside us at the gym or from the terraces on Saturday afternoon will, it appears not deflect them from their suicidal early season traditional dive. Imprecations , sneers, offensive reamrks will be as effective as you murmering in the ears of the money jugglers of Mayfair with their hedge funds growing amok like unclipped yew or privet .

There are forces, deep ocean swells at work beyond our understanding or control which roll on regardless, uncontrolled and uncontrollable.

It took a shrewd American lady scribbler from Bloomberg to remind my Lord King with a sharp question ..

"Hello, Jennifer Ryan from Bloomberg News. I wondered if you could elaborate a bit on the extent to which the volatility in financial markets is complicating your forecasts. And also if you could discuss what kinds of concerns you have about the availability of credit going forward, both to businesses for investment purposes and to households?"

So Mervyn slaps the bitch down with some firmly worded clear observations that make it clear that they have 3 jobs to do ..

1 "The first is that monetary policy is set to meet the inflation target."

2."...interest rates are not a policy instrument for protecting unwise lenders from the consequences of their past decisions." ( Evidently not having read (or ignored)Walter Bagehot's views onthe topic in Lombard Street pub. 1862)

3." .....a central bank, obviously always monitors all the time and regularly whether or not there are risks to the stability of the financial system as a whole and whether there are any systemic risks posed by problems arising in particular institutions or markets."

Here we go again , monitoring something over which they have neither influence nor control, and there is even more of this bland wisdom of the elderly ... for Miss Ryan.

"we cannot be sure, no one can be sure at this stage whether what we're seeing so far foreshadows a more disruptive movement in financial markets or whether it's the sign of a gradual easing of pressure that allows credit spreads to return to more normal and sensible levels. That remains to be seen. I don't pretend to be able to know what will happen but we'll be ready to respond to it."

Ho.Ho.Ho. "I don't pretend to be able to know what will happen but we'll be ready to respond to it."

Well you only have to look at the LIBOR rate and it's not the BOE who are responding but the bankers and money jugglers who know only too well that these "asset backed securities" which we mysteriously call collateralised debt obligations (CDO's) do not represent any asset and are certainly not secure. As a result inter bank interest rates (LIBOR) have risen and therefore the rates offered to depositors - totally and completely regardless of the Bank rate (now at 5.75%) - ie : the rate offered by the lender of the last resort. Why because they know the deep, deep, doo doo they are all in and are reluctant to lend each other money - even overnight.

3 month LIBOR usually hovers 0.1- 0.125% above Base rate yesterday it was 6.89% or 1.14% over base rate.

Today you can walk in off the street and buy deposit bonds at 8.1 % (pic) and some fixed-rate savings accounts with building societies have now reached 6.86 %.p.a.

That means LOWER bank profits, HIGHER borrowing costs, INCREASED bad debts privately and commercially and .... well don't worry, Lord King and his chums..."will monitor carefully data on both the price and quantity of credit" ...

UPDATE SUNDAY 9/9/07

Reading the Sunday blats it is evident that the wannabe city slickers have still not caght on that the MEPC's decisions about the base lending rate has been overtaken by the actual real free market out there.The BOE is simply out of control, because it is not IN control *** see D Telegraph

Also pondering on Sir Mervyn Wanking's warning to the the delightful Miss Ryan from Bloomberg ...."...interest rates are not a policy instrument for protecting unwise lenders from the consequences of their past decisions." Here is the arch regulator who cannot grasp ther reason for regulation , firstly to provide order and and control over issuers of credit and secondly to protect the improvident and credulous (and those who's SAT's scores just amtch their show size) both from themselves , and those who would prey on them. Regulation is the reason , for example in health matters that we don't have men stood on street corners explaining how they extracted the oil from the snake themsleves and that it will cure gout, lumbago, cancer and nightmares.

It is interesting to compare and contrast the remarks of Martin Feldstein (President and Chief Executive Officer, National Bureau of Economic Research) this week when the Federal Reserve top brass repaired to Jackson Hole, Wyoming for their annual knees up to discuss, "Housing, Housing Finance, and Monetary Policy" All 11 pages of his review of the proceedings are recommended reading. The contributions by the Fed's top brass e.g Frederic S. Mishkin, Member ,Board of Governors of the Federal Reserve System range from the banal ..."Developments in the housing market have a major effect on economic activity.".. Yah don't say !. to the self delusional ..."Fortunately, the overall financial system appears to be in good health, and the U.S. banking system is well positioned to withstand stressful market conditions."

"It is widely agreed that neither the Federal reserve nor the Government should bail out individual borrowers or lenders whose past mistakes have created losses .... to simply encourage more reckless behaviour in the future"

"Much of the credit market problem reflects more than a lack of liquidity : a lack of trust, an ability to value securities, and a concern about counterparty risks. The inability of credit markets to function adequately will weaken the economy over the coming months... even when the credit market crisis has passed the wider credit spreads and increased risk aversion will be a damper on future economic activity."

Feldstein of course does not run the Fed, and there is precious little evidence to date they are taking any notice of him, simply pumping liquidity into the market (inability of credit markets to function adequately ) and here in the UK Lord King and his chums..."will monitor carefully data on both the price and quantity of credit" ...and pump liquidty into the market (especially Barclays)

Daily Telegraph today "DeAnne Julius, a former member of the Bank's Monetary Policy Committee, told The Sunday Telegraph: "The Bank has a responsibility to allow the smooth functioning of the sterling money markets and it has a pretty clear framework for doing that. But it needs to apply that framework to achieve the objectives it is aiming at. The experience of the last couple of weeks does not look as if it [the Bank] has been very successful at that."

Although the markets have viewed King as reluctant to bail out irresponsible lenders, (se above - ."...interest rates are not a policy instrument for protecting unwise lenders from the consequences of their past decisions." ) the BoE has not ruled out further interventions. But senior bankers say King is unsure that pledging funds over a three-month duration would solve the liquidity crisis. He is said to share the view that the root of the liquidity problem lies in the commercial paper markets.

The resolution of the problem will bring pain to the people who indulged in past excesses. LIBOR rate have settled market rates 1.14% above base rate - they MUST pay it and the chips fall as they lie. If the system is not purged from this illusory credit, this money of the mind, everyone will suffer.

For the monent the shrewd OAP with his High Income Deposit account at the Skipton Building Society is the winner. Thrift wins.

If the BOE make credit available at preferential rates to the houses who punted these fraudulent parcels of credit , the senior offices should be taken out and strung from the lampposts in Threadneedel Street.