There is a section at many chemists/pharmacies/drug stores called ‘Embarrassing conditions’ (or words to that effect). Here one finds treatments for conditions such as bladder weakness, wind, piles, scabies, fungal infections, body odour – just name it. The afflicted don’t want to shout about it. Or have the cashier call to the back of the store for the price of the medicine.

So when Thursday comes and one of the calls from the check out counter of the Anglo-French summit is for “full and immediate disclosure” of the extent of the banking world’s mortgage backed securititis it is a fair guess that a queue won’t be formed.

Transparency is obviously key - but so is confidence. Which financial wants to have a Bear Stearns style whispering campaign on its hands that is actually backed by some truth? If governments are prepared to pressure for transparency it only makes any sense as part of a recapitalization deal. That is, in order to define the level of assistance required. An Oh-my-God-let’s-see-how-bad-you-got-it cry in isolation is not helpful.

At its worst stress points the crisis has become a do-we-have-to-bail-them-out discussion. Yet various central bank spokespersons over the weekend were denying or, in the case of the more sensible European Central Bank, maintaining radio silence on plans to buy distressed mortgage backed securities.

The Bank of England’s (BoE) spokesman even said

"The BoE is not, however, among those reported today to be proposing schemes that would require the taxpayer, rather than the banks, to assume the credit risk."
It is all very disingenuous.

A working hypothesis is that internal central banker doubts about the string pushing credit infusion strategy have boiled over with a hesitant consensus now formed that it was always a long shot: the fundamental issue of degraded, poor quality assets sitting on (or nearby) bank balance sheets remains. Now a plan is taking shape and it will involve public money and recapitalisations (this is, remember, a ‘working hypothesis’).

The BoE’s utterance on not risking taxpayer money looks a pointless political hostage to fortune in this context. Where sovereign wealth funds buy or plan to buy equity stakes in financials the polemic is not about public funds in quoted companies but, rather, the wider concerns of insidious, creeping foreign political leverage. Central bankers may want to take note of the distinction and weave the idea of including sovereign wealth fund characteristics into the rescue plan discussions they are currently claiming not to be having.

And you won’t want to be caught short when they make an announcement.

A footnote: an interesting read on a similar (in some regards) crisis is the account of the Deputy Governor of Sweden’s Riksbank of his country’s experience in the early 1990s. The Cleveland Fed also has a useful external review of that same crisis.

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  1. Charles Butler // 3/26/2008 11:22:00 AM

    Noted the judicious use of the word 'when' and not 'if' in your conclusion. Also, the appropriateness of your advertiser.


  2. RJH Adams // 3/26/2008 12:02:00 PM

    Working hypothesis!

    Still, not much resistance to spending tax payers money on holding working breakfasts / lunches / dinners...(unfair, unfair, I know)

    Re: sponsors, Opal are a nice outfit to deal with - and I would have said that even if they had not taken up my offer.


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