There is something profoundly and depressingly self-serving in the arguments that the price of saving the little people and wider economy from rampant speculation in and irresponsible selling of financial instruments (exotic and vanilla) is to save, also, the prime instigators of the problems.

That argument is, of course, frequently advanced by Mr Greenspan (and lately by Mr Bernanke). Yet what we more accurately have here is a failure to action the axiom of William Martin (made famous by one of his successors, Paul Volker) that the job of central bankers is to take away the punch bowl just as the party starts to swing.

In contrast, by the time sales forces start hawking as serious investments great volumes of (for example) CDOs backed by car loans the party has begun to look a lot like a Mick Jagger groupie night in. The consequence has been pain amongst assorted hedge funds, miscellaneous financial firms and banks - pain which also menaces the ‘real’ economy.

All might untangle non-catastrophically if the current US central bank strategy of easing just as banks all tighten lending practices/standards to protect their balance sheets succeeds. There is cause for hope here as it has worked before as part of the standard Fed toolkit for crises over the last decade.

But, notwithstanding the prior successful use of such bridging liquidity by the Fed, it should be asked if this crisis is different and far more self-inflicted than growth worries (1996 cut), Asian contagion (1998 cuts) or 9/11 (2001 cuts) were.

Specifically, central banks - and the Fed foremost - failed to control the growth of credit caused by the quick, sharp 2001 cuts and leisurely hikes over the next five-odd years to June 2006. Hardly an external shock (though initiated by one); and further easing now risks perpetuating the same issues. That is an important difference from prior crises; and, although the likelihood of creating a structural problem does ultimately depend on how deep the Fed cuts this cycle, credit weaning is not a gimme.

Hindsight is marvellous of course. But as early (or maybe that should be 'as late') as 2004 there was widespread concern about credit growth. Below this post, for example, is a letter sent by an ordinary reader of this space to the Bank of England in 2004. Doubtless one of many that both Mr King and Mr Greenspan recieved that year it now appears particularly timely.

Yet still the punch bowl stayed out; and is out.

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Last night I had the strangest dream. I was on the sunny side of the street of a long and winding road. Abruptly, I looked round and - mercy, mercy me – Chairman Bernanke was next to me. I wanted to touch the hem of his garment but instead I said,
“Chairman, please don’t make me cry. Already the debt situation looks like a supermassive black hole. I know you’re not my slave but, for the love of the common people, now’s the time for some responsibility – do you really want to hurt me?”
He replied,
“Unbelievable - it’s the same old song as ever from you guys. Wasn’t 2006 a good year? Hell, it was a very good year. Sure, you want perfection. But we can't get there from here. We've many rivers to cross as we run through the jungle that is global finance. Look, I’m under pressure, man. There’s so much trouble in the world of economics: banks bawling for rate cuts – pump it, give it to me baby, easy money, it’s urgent yadiyadiyadiya; savers claiming I haven’t been loving them for the longest time, where is the love, call me cause I got the 1040 blues, dadidadidadida. The bottom line is that we are family and must solve things together. One love, okay?"

"Already I’m tired of being alone in this job - think I asked for this? Alan used to say it was nice work if you can get it but I'd rather be going home to Dillon – oh, Carolina. I always had a feeling – OK, it was more than a feeling – that Alan wanted to give it up for me. He said as much by telling everyone he was 'mad about the boy Bernanke'. But, hell, there ain’t no sunshine right now. Do I blame Alan? No, but some guys have all the luck. No scar tissue even when the market cuts like a knife and his every utterance received like it came from a burning bush."

"You say we got a huge asset bubble. I second that emotion – this baby’s got back – and every night I say a little prayer it don’t burst. Yeah, I’m keeping the faith. You don’t like it? Cry me a river.”
Awaking in a sweat I wished on the moon that it was just my imagination. Running away with me.

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UPDATE: the 21 Sep edition of the Daily Telegraph reports an example, perhaps, of the moral hazard banks (and N Rock in this case) engage in when knowing there is a lender of the last resort handy. Still want to fixate on Mr King?

Today the Governor of the Bank of England faces a Treasury Select Committee where, in the wake of the Northern Rock episode, he is not likely to receive a sympathetic hearing. Already the media characterise Mr King as an “academic” (a put-down, apparently) and “very difficult” when the chips were down.

Mr King is not a Sir Humphrey Machiavellian pragmatist. That is a description, for better and for worse, that can be made of Mr Greenspan and, on recent evidence, Mr Bernanke. Mervyn was never going to fudge it on moral hazard; and for this he is going to be made to pay.

Yet the fundamental issue is over-aggressive lending and investment practice in an easy money environment - not whether Mr King bowed to City, Treasury and Downing Street in such a way as to make their lives easier. It may be convenient to attack the “difficult” regulator when things tank; but it is nonetheless misplaced, hypocritical and profoundly unfair.

Still, Mr King does have a fault in this: governments will always protect bank deposits (ie votes) and Mr King perhaps did not grasp how overarching this truth is. Whatever the debate on deposit insurance schemes and the inherent moral hazard risks of a lender-of-last-resort policy no incumbent politician will permit, if it is possible, Zimbabwe-queue comparisons with his administration. For this reason Northern Rock savers were never in danger.

Ex-post the Financial Services Authority, in concert with the Treasury and the Bank of England, will doubtless move to justify their existences by kicking off debate on the deposit insurance scheme front. However, this is an entirely political exercise and there is enough evidence (think back to the Savings & Loans debacle in the US) suggesting that such regulation is in itself a source of moral hazard (in both banks and customers) that contributes to crises. Not that this will ever make such protection other than a political given.

And so Mr King will carry the can for not pulling with the "team". This scribe sincerely hopes during today’s cynical Select Committee confrontation that he gives better than he gets.

Postscript: Cynical it was; yet Mr King held his own with a clever legislative defence. Moreover, it was Deputy BoE Governor Sir John Gieve who was given the real working over by the Chair, John McFall MP, with a hysterically frenzied series of questions surrounding his holidays and which concluded with the rush to judgement "You've not been doing your job".

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Maxed out on the fed funds and discount rate cuts - very bold. Hat and salt this way, please.


Still, can't get one line of the Shame and Scandal calypso out of my head: "your Daddy ain't your Daddy but your Daddy don't know" (c/f previous post).

Postscript: By popular demand, the Madness cover


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On general release from tomorrow, 18 September and...



...it might just blow heads clean off shoulders.

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Prudent financier:
Chancellor, are you not concerned that by authorising the effective bail-out of Northern Rock Building Society you will be seen to be tacitly endorsing the reckless lending and off balance sheet shenanigans that many in the UK’s banking sector have been engaging in?

Chancellor of the Exchequer:
We must be absolutely clear about this, and I would be quite frank with you. The plain fact of the matter is that at the end of the day it is the right, no the duty, of the elected government in the House of Commons to ensure that government policy, the policies on which we were elected and for which we have a mandate, the policies after all for which the people voted, are the policies which finally when the national cake has been divided up, and may I remind you we as a nation don't have unlimited wealth, so we can't pay ourselves more than we've earned, are the policies... I'm sorry, what was the question again?

(With thanks to Yes, Minister circa 1982)

And so it begins. Were the BoE and Mervyn King serious about moral hazard earlier this week?

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With the Fed decision on Tuesday it is a shame the CPI data will not appear until Wednesday. Still, the latest retail sales and industrial output/capacity utilization numbers will be here tomorrow.

But will the picture for these change much from what is already known?

Exhibit 1: Retail and Capacity Utilization trends

It does look like CPI will soften on this trend. Yet going forward commodity prices are a wild card - seen the level of the Baltic Dry Index recently (ie record high)?

The view that infrastructural bottlenecks are behind much of the BDI price increases in ship borne goods is valid; as is the idea that centrally-controlled China is boosting demand in a way the free market would not. But inflationary pressure is inflationary pressure, whatever the reasons.

On the other hand, try telling that to Mr SPX currently riding the crest of hopes for a 50 basis point cut in Fed funds next Tuesday.

Greasing the system's liquidity is one thing but how will the uncomfortably leveraged take such respite? As a dodge-the-bullet breathing space to deleverage? Or as a signal that moral hazard is no more? What the ECB is doing, for example, injecting record billions to reduce the rate differentials on short term interbank and longer term 'official' lending rates surely only punishes the prudent whilst encouraging the foolhardy. The Fed has also been at this - does it really want to continue?

Secretly the scribe wishes the Fed would use its other monetary tools instead of bailing the imprudent with the FF rate under cover of maintaining market order. But the best he should hope for is a mere 25 bps drop - and maybe, on a close look at Mr Bernanke's record and pronouncements, that is not as outrageous as the futures markets imply.

Even so, that may still only delay a worse day of reckoning when central banks will bail no more and commercial finance houses suddenly find absorbing asset losses is simply beyond some of them. That is not the case today; and they should take, or be made to take, their medicine whilst able to.

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Exhibit 1: Gone Daddy Gone - where is the Love?

Buy the dips still?

Maybe. But as US model indicator after model indicator of the scribe's has clicked into bear stance only one (but to many the most important) is now left tottering positive: the main US market stock indexes. A stubborn legacy, perhaps, of a lot of easy money.

Alternatively, the model is shite.

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Foreign undergrads at universities in the American South will detect cultural differences: ask for a rubber in a crowded lecture hall and chances are an eraser will not be forthcoming; despite an agricultural appearance three country boys in a pickup truck asking where the hoes are will not be referring to farming implements; and members of the law enforcement community generally do not appreciate the benefits of healthy debate.

But learn about clipping, pass interference and pre-game tailgating and all is forgiven. Well, most.

Such are the ties that bind some to listen to a college football game until 03h30 Western European time. Course, when it’s a win between the hedges over previously condescending Georgia fans defending a ranking of 11 it is worth the trouble; and it is misfortune for the scribe that so few Georgia alumni are available locally for abuse. Still, they’ll probably recognise the Spurdawg as their Daddy without further reminding of his long dominance of them.

Post-game retirement to Group for celebrations as in previous years was not an option. But a recent photo of the establishment from a friendly native reassures that its decor is as inviting as ever. No doubt the broken bottles underfoot, the stench of well-stale bodily processed beer defending a 10 metre perimeter around the offending toilets and the diplomatically-challenged bouncers still complete the same charming debauched formula.

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