Astonishing news: Bank of England changes the rules

I just heard this news an hour ago and frankly was astounded. The Bank of England will ,if necessary, guarantee all deposits held with Northern Rock. This a major change to the current depositors insurance scheme.

Wow! In a stroke they have just removed any risk from the banking system. They have in effect nationalised Northern Rock without actually doing so.

Actually this is a good thing since it further exposes the myth behind our banking system. Mind you they didn’t rush to bail out the depositors of BCCI  when that failed.

So where to from here? Well that’s anyones guess but this wont finish here even with the  blank cheque provided the the Old Lady.

Max Hastings writes a lovely piece here. Finally as the party comes to an end and the hangover kicks in, will there be some reason?

I hope so. It is a great opportunity to look closely at the money system we currently have. Do not look to our central bankers to provide the lead or even our politicians. We the people will have to provide ideas, answers and solutions on how to proceed. The monetary reform movement has been growing by the day and now it is time to stand up and be heard.

Panic on the Streets: Banking system under stress

I’m in Europe for a month, making my first trip back since heading to live in NZ nearly 6 years ago. Currently i’m having a lovely time in Southern Spain in a pretty little village called Benahavis.

Watching the UK news is so different: small soundbites, nothing too deep and its making me dizzy. But not as dizzy as those pictures of people queuing up at their local Northern Rock to get all their money out.

They seem so calm about it without quite realising the ramifications of their actions. A run on a major bank in the UK? Who would have thought it could happen in the modern well regulated era.

We have seen finance companies in NZ topple over like dominoes but the general public has taken the view that they were accidents waiting to happen and that people should have taken more care in what they were investing in. But a major financial institution would be a different story.

For money reformers the recent credit crisis was inevitable, a product of the incessant growth in the global money supply. How it will play out is anyone’s guess but there has never been a better time to expose the weakness and corruption at the heart of our money systems.

In the meantime people should check to make sure they do not have to much exposure to any single financial entity. What is amazing to me is how the stock markets have proved so resilient. There is lots of talk about the strength of the underlying economy but the effects of these recent months will take a long time to feed through.

I have a feeling this story has a long way to go.

Credit crunched

Another day, another finance company. Haven’t i written that before? Maybe but my memory is becoming blurred as groundhog day for the credit system is on a repeat cycle.

What we have now is an old fashioned run on finance companies. Clearly anyone who can read a balance sheet can see they don’t carry much cash so if you rock up asking for your money back you may be waiting for some time. Of course you should have checked that before you invested. As some argue this is a good cleaning out process which is long overdue.

Why should the RB bail them out? Well i would argue the RB is not worried about fnance companies going under but more concerned about the financial system freezing solid. So they opened their wallet and the banks were more than happy to plunder. But the poor finance companies can’t access this cash.

So here’s a story from a few years ago (verbatim from Fred Harrison’s “Boom Bust: House rices, Banking and the Depression of 2010″:

In 1794 “the City Council of Liverpool faced a complete collapse in the local banking system. On March 20, the Mayor reported that 58 merchants urged the council to secure a loan from the Bank of England to enable the City to survive “the distress which had engulfed the people”. Parliament issued a special Act which entitled Liverpool to issue negotiable notes for a limited period, to be lent at a rate of interest slightly below 4.5%. The citizens weathered the storm, thanks to what the Webbs described as “the boldest financial step recorded in the annals of English local government.

What caused this trauma? Speculation focused on the rent-yielding opportunities presented by canals”.

Oddly enough the same thing happened in 1812, 1830, 1848, 1866….and on and on.

As Samuel Taylor Coleridge wrote in 1817, in his Lay Sermon booms and bust seemed to occur “at intervals of about 12 or 13 years each {as a result of} certain periodical Revolutions of Credit”.

Thanks Fred for this great piece of research. Let’s hope the central bankers read it and then weep voraciously.

Fed comes to the party…..again

So the Fed yielded to pressure and cut the discount rate. Come borrow more they say….so much for a prudent approach to banking. But really they have no choice. They will just keep flooding the market with dollars for as long as it takes.

The market rallied as expected but it’s hardly a vote of confidence in the system. There will be an expectation of a cut in the funds rate at some point if credit woes continue. The problem is that the last few weeks have been so volatile that for many the opportunity to liquidate positions has not been possible.

Flight to quality has seen the $ rally except for that old favourite $Yen which has taken a pounding.

Who would want to own $? This flight to quality argument alway amuses me given the world is awash with $ and $ assets.

The volatility in the fx markets has been extreme reminding me of the Stg ERM debacle. It just shows that the leverage in the market creates an instability in the system which causes wild swings.  The range mileage in KiwiYen on Friday was the biggest i;ve ever seen in any currency pair…22 big figures in 24 hrs….thats 27.5% in absolute terms of up and down movements.

You would need Kevlar pants to trade that pair. I’ve been trading small amounts but cannot imagine much volume getting through at any reasonable spread.

This is market dislocation. The Fed can cut rates all they want but it wont help people who are under water whether owners of houses on 100% mortgages or funds with boatloads of credit on their books.

Another wild week beckons so expect more central bank ministrations.

Credit Boom ……..Busts

The credit inspired boom of the last 15 years is now over. Markets are in severe dislocation and whilst underlying economies are very sound there is a serious problem in global banking liquidity.

On the good side we have record low unemployment and company profits are in good shape. But the driver of that has been consumption driven by an expanding money supply which has driven up asset prices and created a wave of paper wealth.

Interest rates have been hiked up to halt this boom. It’s too late. The record low rates in the US over the last 5 years created easy money that was too good to refuse. As rates were jacked up people realised they hadn’t done their sums properly.

Wave after wave of derivative offers, capital guaranteed notes and other “too good to be true” offers have come pouring forth. There is nothing so easy as making money out of money.

But mathematics will always intervene. Compound interest takes no prisoners in its tsunami like advance across personal and corporate balance sheets.

The central banks now have no option but to step in and sort this mess out. The risk of systemic crash is clearly a possibility now, not just in stock markets but banking systems.

Whether markets can recover from here is a moot point. They always do eventually whether its months or years.

If the consumer goes to sleep expect a recession plain and simple. It wont matter where you are or what you do.

The important point is that our financial systems need a serious revamp. The gross expansion of the global money supply, condoned by the global central banks, needs a full inquiry.

Nothing less will do.

The Great Lolly Scramble

For those not in New Zealand a lolly scramble comes at the end of the party when you throw heaps of sweets amongst the children and watch them go beserk. Of course once they have gorged themselves they fall in a heap as the sugar high follows by a big crash.

What we are seeing in the global markets is nothing short of a major fiasco. Banks wont lend to each other so the central banks have flooded the market with cash.

Come and get it they say. This is now starting to get silly.  They were at it again last night as well. When is it going to end?

Goldman Sachs came in with a $3bln bailout for a fund last night as well talking the deal up as a winner. Well of course there will always be distressed sellers in a credit crunch. We’ve seen it here in New Zealand with finance companies going bust with alarming regularity over the last couple of years.

The problem is that we haven’t even started to see the real pain. The real economy is quite strong globally as the spin offs from the asset price boom feeds through in consumption. But how long is that going to last. In New Zealand we are seeing housing activity level off and prices come off the top. Today we saw weak retail sales.

What I observe here is that many properties remain unsold as people will not take lower prices. This is not reflected in the data. Many properties are withdrawn unsold or just sit around in the hope some mug will pay up for them.

So at the moment we are in the distressed phase of the market sell down. People who have to sell must sell and we are starting to see that. The question is whether it slowly spirals out in the main market. We are clearly at a turning point in the economic cycle. Years of asset price increases, consumption driven higher on the back of that wealth effect, central banks with no control over the money supply, late to raise rates, now hammering rates rises home as prices peak, people locked in at high prices and high rates, wages and labour very tight………it’s a recipe for recession.

This is why the central bankers are still talking tough on inflation. They don’t want to start talking in worrying terms in case they “cause” a slowdown.

So expect the lolly scramble to continue.

But there will be a price to pay afterwards.