Bank of England's Failure at Handling of the Financial Crisis

By: Nadeem_Walayat

Having watched and written about the increasing failure of the Bank of England to act throughout the crisis that broke way back in September 2007 as the run on Northern Rock Bank began, having always acted too little too late that was most recently evident during the summer of 2008 when the BoE was paralysed by the fear of inflation into a state of inaction on interest rates, the MPC members basically sat twiddling their thumbs whilst the economy burned. It took until a frustrated Gordon Brown effectively took away control of Monetary policy from the BoE on the eve of financial armageddon on 8th of October when he announced the first 0.5% cut in interest rates at the Prime Ministers question time despatch box.

Now with interest rates at 2% and on target to hit 1% next month, the buzz word starting to appear is ZIRP and Quantative Easing, which basically means monetizing debt by printing money, i.e. a repeat of what happened during the 1930's Great Depression!

Meanwhile Sir John Gieve the Bank of England's Deputy Governor now admits the obvious in an interview with the BBC for the Panorama programme.

Sir John Gieve told the BBC that the Bank knew "crazy borrowing" was taking place and the price of houses and other assets was rising unsustainably.

But the Bank thought this problem was less serious than it turned out to be. The Bank relies too much on interest rates to control the economy, he added.

The get out clause is that the Bank of England now needs new powers to deal with the crisis as cutting interest rates is not enough ! New powers? smells a lot like U.S. style Quantative Easing!

"We need to develop some new instruments, which sit somewhere between interest rates, which affect the whole economy... and individual supervision and regulation of individual banks," he told the BBC.

"We need to develop something which bridges that gap and directly addresses the financial cycle and prevents the financial cycle and the credit cycle getting out of hand."

"A raft of essential policy measures, beyond what the MPC can do, continues to be targeted towards returning the banking system to normal functioning," , "This remains a high priority."

Britain was on the tip of an Iceland style financial crash that would have seen the British Pound crash and FREEZE as foreign investors refused to hold sterling that appeared to be heading for financial meltdown in favour of the worlds reserve currencies the U.S. Dollar and then the Euro. Though that's not to say that the action taken has stopped the crash, as the Pound is still heading for near imminent parity to the Euro. Which means the crash in house prices forecast in August 2007 (imminent update - subscribe to our always free newsletter) is many magnitudes larger when converted into Euro's or Dollar's which is evidence of the degree of relative economic mismanagement by all concerned that includes the UK Government, Bank of England and FSA (regulator), that has doomed the country to many years of stagflation following deflation as a consequence of the exploding public debt mountain.

Recent analysis has highlighted the path towards bankruptcy that Britain increasingly found itself upon as the below selection of articles illustrates whilst the Bank of England's officers twiddled their thumbs whilst most of the major UK banks headed towards bankruptcy.

• 11 Dec 2008 - British Pound Heading for Parity Against the Euro
• 04 Dec 2008 - UK Interest Rates Forecast to Crash to 1%
• 28 Nov 2008 - Bankrupt Britain Trending Towards Hyper-Inflation?
• 25 Nov 2008 - LIBOR Still at Credit Crisis Extremes as Banks Refusing to Lend
• 20 Nov 2008 - UK Real Retail Sales Deflationary Trend Continues
• 06 Nov 2008 - UK Interest Rate Cut by 1.50%
• 23 Oct 2008 - UK Economic Crash Follows Housing, Stocks and Sterling Over the Cliff
• 15 Oct 2008 - UK Unemployment Soars by 10%, Forecast to Rise to 2.5 million
• 27 Sep 2008 - Bradford & Bingley Nationalised Another UK Bank Wiped Out by Tulip Backed Securities
• 17 Sep 2008 - Hedge Funds Crash Halifax, HBOS Rescued by Lloyds TSB
• 09 Sep 2008 - BANKRUPT Banks Wiped Out by Tulip Backed Securities, Is China Cheap?
• 06 Sep 2008 - Credit Crisis Phase II - The Economic Crunch
• 15 Jul 2008 - Inflation Surges to 3.8% as Bank of England Loses Control of Monetary Policy
• 27 Jun 2008 - UK Housing Bear Market Threatening Economic Deflation
• 08 Apr 2008 - UK House Prices Plunge Over the Cliff

On a related note, Robert Peston in the BBC1 Panorama programme to be broadcast at 8.30pm today, covers how close Britain came to Financial Armageddon in early October, it will be interesting to see how far the BBC programme makers were able to edit out the 'covering of backs' that the participants will undoubtedly have engaged in as excuses for the gross failure to competently manage Britain's economy and financial system.

Quoting Peston's blog -

"It's a suspenseful story told in interviews with a quartet of the leading actors: the chancellor, Alistair Darling; the deputy governor of the Bank of England, Sir John Gieve; the chief executive of the Financial Services Authority, Hector Sants and the chief executive of Barclays, John Varley.

I hope the programme also gives a sense of the shocks generated by this near-catastrophe and the tumultuous year that lies ahead.

For me, what stood out when interviewing this quartet was the revelation about how Royal Bank of Scotland and HBOS were - in October - only hours away from being unable to open for business.

Inevitably, in a 30 minute documentary, many fascinating contributions from interviewees hit the cutting-room floor (such as John Varley's remarks on how it will take between one and two years for the contraction of lending to stop "

Concerning HBOS, analysis of Mid September deemed that the bank was hours away from Bankruptcy, infact we had a prelude to what was in store for HBOS in March 2008 -

• 01 Oct 2008 - HBOS Risk on Speculation of Lloyds TSB Takeover Bid Resistance
• 18 Sep 2008 - UK FSA Bans Hedge Fund Short Selling After Attack on HBOS
• 18 Sep 2008 - Lloyds TSB Takeover of HBOS for £12 billion, £2.32 per share
• 17 Sep 2008 - Hedge Funds Crash Halifax, HBOS Rescued by Lloyds TSB
• 15 Sep 2008 - Hedge Funds Target Halifax, HBOS as Shares Crash 30%
• 09 Sep 2008 - BANKRUPT Banks Wiped Out by Tulip Backed Securities, Is China Cheap?
• 19 Mar 2008 - Halifax (HBOS) Hit by Hedge Fund Short Selling and Emergency Funding Rumours

By Nadeem Walayat
http://www.marketoracle.co.uk

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Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

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