14 September 2007

Mediocracy in banking: the mess spreads

Further to this, the current credit crisis is still expanding rather than contracting. The commercial paper problem has not gone away. There is something odd going on with German banks. And now we have the first British bail-out: Northern Rock.

As Willem Buiter writes,

It is clear that the conditions for a justifiable bail out ... were not satisfied. ... I can only conclude that the Bank of England is a paper tiger. It talks the ‘no bail out’ talk, but it does not walk the walk.

Talking the talk, but not walking the walk. Also known as 'style over substance', or 'appearance over content'. A key characteristic of mediocracy.


paulus said...

The Northern Rock crisis demonstrates how vulnerable financial markets are to the interdependence of their institutions. It would appear that NR was not directly affected by the sub-prime crisis; they had not invested in any of the dodgy derivatives that are causing such problems.
However NR decided to expand their mortgage book (I understand by +50% in the first eight months of this year), a risky strategy in a housing market which had already seen such an enormous rise in prices. And NR did this by borrowing from banks which have been caught up in the sub-prime crisis.
These banks are suddenly finding big holes in their assets and can lend no more – and they too can be accused of acting recklessly. They may argue that they have abided by the rules but this is not an excuse. They have made dodgy investments using our money. Only constant vigilance by fund managers when they buy securities will prevent them falling into traps set by the greedy. They must look at what lies beneath.
I have written a simple explanation of how we got into this mess on this post:


Simon Clark - Formerly The Cynical Libertarian said...

Incentives matter. When everyone knows you will bail them out when they cock up, what sort of incentive is that?

The Prince of Truth said...

the Bank of England...hah! Another corrupt and exploitive institution, began when Cromwell was funded by bankers, and usurped by Rothschild during Napoleonic Wars.

Dr. James P. Holdren said...

Absolutely right. I warned people months ago to get out.