From Volume 6, Issue 50 of EIR Online, Published Dec. 11, 2007

Global Economic News

Panic in the City of London

Dec. 7 (EIRNS)—There is clear evidence of panic in British banking circles, following the Bank of England's cutting of interest rates. Some headlines from the London Daily Telegraph: "Market fears that Bank has 'lost control' "; "The rate cut ... that failed to dispel fear"; "A money market that is beyond control"; "One rate cut is not enough."

Financial commentator Anatole Kaletsky argued in the Dec. 6 London Times that the British must follow the example of the Federal Reserve and further cut interest rates, or else. Kalestsky warned that "the British banking system is on the verge of collapse, with total catastrophe only avoided by the biggest financial support operation ever offered to any private company by any government anywhere in the world."

A commentary in the Telegraph points out that the markets didn't respond to yesterday's interest rate cut as they are "supposed" to. Money market rates went up, and the stock market went down. The BoE's Monetary Policy Committee is learning fast, that all it can do, is to "throw the textbooks out the window," writes Edmund Conway, who declares that the central banks have, at least for the moment, "lost control over monetary policy." The money markets are acting of their own accord, not following the MPC's directions, and "credit markets are consumed with fear." The banks won't lend to each other because they are paranoid about the state of each other's balance sheets.

EC Okays Giant Bailout for Northern Rock

Dec. 6 (EIRNS)—There are, after months of rumors and delusions, no buyers for the European banks ruined by speculating in the U.S. mortgage bubble meltdown, so they are likely to be bailed out by governments on a huge scale. A spokesman for European Union Commissioner Neelie Kroes, a radical deregulator and privatizer, stated in Brussels yesterday: "We come to the conclusion that the measures [to save Northern Rock bank] are in conformity with the guidelines for state help."

A comment by German Finance Minister Peer Steinbrück in the Financial Times Deutschland, explains why the EU allows state bailout in this case, while it has adamantly forbidden state aid for industry in recent years. It is not a question of single institutions, Steinbrück said, but of preventing systemic risks and the spreading of a crisis. Steinbrück spoke shortly after a meeting in Berlin yesterday, with European Central Bank governor Jean-Claude Trichet.

The EU decision, which okays a bailout of up to 50-60 billion euros for Northern Rock alone, opens the way also for a possible state bailout of IKB, the former Mittelstand bank (serving productive small and medium business), turned into a conduit, where the single-biggest shareholder, with 38%, is the government's Kreditanstalt für Wiederaufbau (Reconstruction Finance Agency). The bailout for IKB will come up soon: German newswires report today that numerous private banks that have expressed interest in buying a stake in, or all of, IKB, have lost interest, because of the apparently high exposure of the bank in other banks' unrecoverable SIV investments. An unnamed banker is quoted in the German edition of the Financial Times as saying that he was surprised to find out that IKB no longer is the Mittelstand bank he was looking for, but has turned into a mere vehicle for speculation.

U.K. Interbank Market Crash: 'Shock to Financial System'

Dec. 3 (EIRNS)—The British pound sterling interbank market has collapsed at the fastest rate in modern history, Daily Telegraph financial editor Ambrose Evans-Pritchard wrote Dec. 3. Even the Milton Friedmanite monetarists are panicking and desperately demanding rate cuts by the Bank of England. "This is one hell of a shock to the financial system. A market that has taken 30 years to build has completely imploded in a matter of months. Lenders have been squeezed savagely. We've moved into a different era," the Telegraph quoted Friedmanite Prof. Tim Congdon of the London School of Economics saying. Total sterling assets have dropped by about half a trillion pounds, just since mid-August, from 3.244 trillion to 2.876 trillion pounds, according to the Office for National Statistics. The volume of market loans in the banking system fell from 640 billion pounds in August to 249 billion pounds by end-September, showing that British banks have been hit even harder than U.S. banks, despite claims that the "subprime crisis" is a U.S. problem.

Even the U.S. bank Morgan Stanley is warning about the British credit crunch, and advises clients to get away from Britain's debt-laden economy. Morgan Stanley warned that the FTSE—London's leading stock market index—could fall by 16% over the next year, and that house prices could go down 10%. The U.K. budget deficit is now near 3% (one of the worst in the OECD), and household spending is 97% of disposable income—as it was in 1988, before the last housing price wipeout in Britain.

Guardian economics editor Larry Elliott is even more blunt—he wrote Dec. 3 that a housing price "free fall" could soon wipe out 50,000 pounds—25%—from average house "values." Britain "has its own sub-prime time-bomb ticking away.... Things are going to get very nasty indeed."

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