20 November 2007

All for nought

John Maynard Keynes once said that if you owe the bank £100, you are in trouble, but if you owe the bank £1,000,000, then the bank is in trouble. And if that bank owes the government £24,000,000,000 I suppose we're all in trouble. But it does at least allow us to enjoy the irony of watching some of the biggest defenders of free market capitalism suddenly discovering the joys of government protection. But that's quite an expensive joke to enjoy.

Given the rather cocky and aggressive investment strategy that landed Northern Rock in this position, I suppose we should expect a little chutzpah after the fall. Even with a government bail-out only someone with as big a brass neck as the chief shareholder in Northern Rock, an organisation called RAB Capital, could be quite as phlegmatic about where blame should lie. RAB's Chief Executive, Philip Richards, this week announced: "We believe that's been caused by the way the Bank of England handled the interbank market after the crisis broke in the summer."

The "that" in that last sentence is credit lines. And the genius business model that couldn't fail, based upon not actually lending your own money, but money that you borrow from someone else and call your own money. Given that all the other major banks have also sustained losses caused by the sudden tightening of credit, it seems everyone was borrowing from everyone else, under the economic principle of hubris: the greater fool theory. Presumably, therefore, to keep Mr Richards happy, the Bank of England should have "handled the situation" by lending everyone £24bn to keep the merry-go-round going.

I've been trying to work out what the difference is between "a short-term funding problem" and a pyramid scheme. Probably the difference between owing the bank £100 and £24,000,000,000.

1 comment:

PW said...

Keynes also famously remarked, of course, that "in the long run, we are all dead". Maybe this has been the view taken by everyone involved in the crackpot borrowing/lending cycle. It will all come out in the wash, but only in the long run. By which time...