Head of Bank of England Said In March 2008 That We Have a SOLVENCY - Not a Liquidity - Crisis

George Washington's picture

Washington’s Blog

On Monday, the Guardian reproduced a Wikileaks cable dated March 17, 2008, stating:

SUBJECT: BANKING CRISIS NOW ONE OF SOLVENCY NOT LIQUIDITY
SAYS BANK OF ENGLAND GOVERNOR

 

***

 

Since
last summer, the nature of the crisis in financial markets has changed.
The problem is now not liquidity in the system but rather a question of
systemic solvency, Bank of England (BOE) Governor Mervyn King said at a
lunch meeting with Treasury Deputy Secretary Robert Kimmitt and
Ambassador Tuttle.

 

***

 

Systemic Insolvency Is Now The Problem

 

King
said that liquidity is necessary but not sufficient in the current
market crisis because the global banking system is undercapitalized due
to being over leveraged.

Top economists such
as Anna Schwartz, James Galbraith, Nouriel Roubini and others have
pointed out since 2008 that the Federal Reserve, U.S. government, and
virtually all of the central banks and governments of the world are
approaching the financial crisis completely wrong, as they are treating
it as a liquidity crisis, when it is really a solvency crisis. See this, this and this.

The
fact that the head of the one of the world's most powerful central
banks told the Deputy Treasury Secretary and American Ambassador to
England that the economic crisis was a solvency - not liquidity -
crisis, shows that this was hardly a renegade visionary insight.

You restructure insolvent institutions. You don't prop them up with temporary liquidity.

As many top experts have said for years, we must let insolvent banks fail; if we don't, the insolvent banks will drag down the economies of their host countries and put them into sovereign debt crises.

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Thanatos's picture

One day we will wake up and all have a real problem. A kind of problem that doesn't go away and can't be ignored.

Only then will things be recognized for what they are (were) and improve.

The rest is just nervous chatter about minutia while we wait for the problem to manifest for true.

AnAnonymous's picture

The issue with this approach: okay, it is a solvency crisis (was my opinion from the start) so what now?

 

Back to debt basics: debt is a bet against the future. The bet is that the act of consumption taken right now can be repeated in the future.

Two agents A and B. A had resources to perform an act of consumption.

B thinks he will have gathered the resources to perform the same act of consumption in five years.

No interaction between the two. Five years later, B has indeed enough resources to perform the act of consumption.

Between the two, a sustainable debt scheme could have happened.

B could have borrowed from A and pay him back five years later.

Now, what if the act of consumption does not exist in the future?  Well, the debt scheme is unsustainable. Sustainability of a debt scheme does not derive from interests. A no interest debt scheme can be totally unsustainable. A fractional debt scheme can be.

Telling that it is a solvency issue brings nothing. Okay, the debt can not be repaid. There is not enough resources left to the future to repeat the act of consumptions  performed on the ground so far on the ground it would be possible to repeat the same in the future.

But what now? Admitting a solvency issue will not better the economy.

tony bonn's picture

short sweet and to the point.

all of you usaf readers need to turn your eyes away and go watch a bambi movie. and turn in this website to reichmeister.

blindman's picture

http://gonzalolira.blogspot.com/2010/12/want-to-ruin-your-own-country-assume.html

.

http://gonzalolira.blogspot.com/2010/12/want-to-ruin-your-own-country-assume.html#more

.

that word systemic implies deep problems.  very deep.  solvency

crisis, systemic appears to be a currency crisis, a fraud crisis,

an ethics crisis, a property rights crisis, a justice crisis  ,.... all

wrapped into a moment in history that is poised to test the

soul of man, generally speaking. 

we have a paradigm crisis requiring everyone rethink and reevaluate

everything .......

is that possible?   if it were more simple than this i think someone

would have figured it out and spread the word by now?   

lieto's picture

Mitchman,

Amen brother!

The poewer elites in politics and banking would completely impoverish the other 99% in pursuit of their own self interest.

The justification being that what is best for them is best for the other 99% and if not oops we f.... up.

So sorry, suffer.

JustACitizen's picture

Seriously, you protect the first $100k of deposits. (If you had more than that in a savings/checking account - perhaps you weren't protecting your assets either) The investors in the insolvent banks lose their investment. The creditors of the insolvent banks take a haircut. The management of the insolvent banks gets tossed out on their asses and the ordinary banking business is restructured/sold off etc.

Perhaps we might find some folks interested in ordinary retail banking...geez - it's a license to steal. (It's just that the way things have been - it wasn't nearly as lucrative as stealing on the Wall St. scale.)

Mitchman's picture

It's not that they're approaching it the wrong way.  It's that they fully understand the nature of the problem but are unwilling to restructure the power base that the insolvent banks represent that is the real issue.

theprofromdover's picture

I think Mervyn King fully understands the true reality, and has known all along. His failure is to think that he has to behave like a gentleman and not read the riot act. He seems uncomfortable with conveying blunt facts, and would rather deal in nuances.

There is no point being right, if you can't  enforce the necessary change. So Merv. you are part of the problem too, not part of the solution. Way past time to get down and dirty.

YHC-FTSE's picture

I agree that Mervyn is part of the problem since he has yet to walk the walk, but I also think we're extremely lucky to have such a man at the BoE, and I can't begin to imagine the political pressures that must weigh on his shoulders.

Over the past year, he has been forthright on a number of occasions on issues as diverse as fractional lending, derivatives trades, and food speculation. Looking further afield for examples of central bankers, we could easily have had a faceless drone regurgitating the latest platitudes from TPTB. Recognizing the problem as a solvency conundrum and taking steps to do something about it (Which can only have one outcome: involuntary liquidation of the banks) are two different things. I would not want to be in his shoes.

halvord's picture

Wikileaks is not all bad: some people come like real statesmen. Like Mervyn King.

Enkidu's picture

"Wikileaks is not all bad" ??? WikiNews is essential - what is the use of SpinNews now we can have WikiNews. Julian Assange is courageous. He is a publisher of things that were written. How can this be 'bad' in a democracy. What is it about the truth that elites can't stand. Free speech (and transparency) are the very cornerstones of democracy (such that it is)!

breezer1's picture

“If you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State.” the goebbels news empire, most often referred to as the main stream media.