Liquidity, Central Banks and the fly trap

Who would be a central banker? Their choices today are awful. The problem facing the financial system come from one common place….credit and the excesses of easy credit with a corresponding decline in the punishment for getting it wrong. The problem stems from having too much money chasing too few assets. The result was that asset prices were bid up to ridiculous levels, investors were prepared to accept more and more risk to get returns and the system fed upon itself. All sorts of exotic sounding things sprang up…Derivatives, Credit default swaps, subprime junk…a literal explosion in the amount of liabilities out there…liabilities built on liabilities built on liabilities…all interconnected, held in increasingly complex webs built by PhD Mathematicians. It all looked great on paper.

The problem now is that those who took such huge risks are being bailed out with OUR money. They aren’t being allowed to fail. Sure, if they are allowed to fail, some jobs will be lost. Some millionaires will go bankrupt, some centuries old institutions that departed from sensible money and risk management, seduced by advanced mathematical models they didn’t understand that promised vast returns, will sadly disappear from our markets and life. It’s bad, but its not all that bad.

In saving these companies form their folly, the price we pay will be even greater. We will have to cover their losses. These losses can’t be recovered from taxation. That burden is already far too high. Instead, they will be covered through debasement of the currency. When we take away the cost of failure and reward excess risk taking with ordinary, hard working citizen’s savings, pensions and standard of living, I think it’s a price too high to pay. Let them fail.

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Tags: Credit Default Swap, Financial, Money Markets, Saving, UK Banks