[FoRK] [IP] Crisis may make 1929 look a 'walk in the park'

Eugen Leitl <eugen at leitl.org> on Wed Dec 26 02:13:28 PST 2007

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From: David Farber <dave at farber.net>
Date: Tue, 25 Dec 2007 16:59:08 -0500
To: ip <ip at v2.listbox.com>
Subject: [IP] Crisis may make 1929 look a 'walk in the park' 
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Begin forwarded message:

From: dewayne at warpspeed.com (Dewayne Hendricks)
Date: December 25, 2007 12:29:19 AM EST
To: Dewayne-Net Technology List <xyzzy at warpspeed.com>
Subject: [Dewayne-Net] Crisis may make 1929 look a 'walk in the park'

[Note:  This item comes from friend Ken DiPietro.  DLH]

Crisis may make 1929 look a 'walk in the park'

Last Updated: 11:02pm GMT 23/12/2007
<http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/12/23/cccrisis123.xml 
>

As central banks continue to splash their cash over the system, so far  
to little effect, Ambrose Evans-Pritchard argues things are rapidly  
spiralling out of their control

Twenty billion dollars here, $20bn there, and a lush half-trillion  
from the European Central Bank at give-away rates for Christmas.  
Buckets of liquidity are being splashed over the North Atlantic  
banking system, so far with meagre or fleeting effects.

As the credit paralysis stretches through its fifth month, a chorus of  
economists has begun to warn that the world's central banks are  
fighting the wrong war, and perhaps risk a policy error of epochal  
proportions.

"Liquidity doesn't do anything in this situation," says Anna Schwartz,  
the doyenne of US monetarism and life-time student (with Milton  
Friedman) of the Great Depression.

"It cannot deal with the underlying fear that lots of firms are going  
bankrupt. The banks and the hedge funds have not fully acknowledged  
who is in trouble. That is the critical issue," she adds.

Lenders are hoarding the cash, shunning peers as if all were sub-prime  
lepers. Spreads on three-month Euribor and Libor - the interbank rates  
used to price contracts and Club Med mortgages - are stuck at 80 basis  
points even after the latest blitz. The monetary screw has tightened  
by default.

York professor Peter Spencer, chief economist for the ITEM Club, says  
the global authorities have just weeks to get this right, or trigger  
disaster.

"The central banks are rapidly losing control. By not cutting interest  
rates nearly far enough or fast enough, they are allowing the money  
markets to dictate policy. We are long past worrying about moral  
hazard," he says.

"They still have another couple of months before this starts  
imploding. Things are very unstable and can move incredibly fast. I  
don't think the central banks are going to make a major policy error,  
but if they do, this could make 1929 look like a walk in the park," he  
adds.

The Bank of England knows the risk. Markets director Paul Tucker says  
the crisis has moved beyond the collapse of mortgage securities, and  
is now eating into the bedrock of banking capital. "We must try to  
avoid the vicious circle in which tighter liquidity conditions, lower  
asset values, impaired capital resources, reduced credit supply, and  
slower aggregate demand feed back on each other," he says.

New York's Federal Reserve chief Tim Geithner echoed the words,  
warning of an "adverse self-reinforcing dynamic", banker-speak for a  
downward spiral. The Fed has broken decades of practice by inviting  
all US depositary banks to its lending window, bringing dodgy mortgage  
securities as collateral.

Quietly, insiders are perusing an obscure paper by Fed staffers David  
Small and Jim Clouse. It explores what can be done under the Federal  
Reserve Act when all else fails.

[snip]


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