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December 14, 2007


Luis Enrique

Are banks holding on to their cash because they do not know their own positions, and worry they may need it themselves, or are banks holding on to their cash because they don't want to lend it to another bank whose collateral may turn out to be a turd parcel? Or both?

What sort of mechanism is going to reveal to banks the true nature of their own position (if that's the problem) or who is holding the turd parcels (if that's the problem)?

I'm thinking perhaps the offer of cheap money secured against a broader class of assets may ease both problems, because it doesn't matter so much to banks either what their own positions are, or that of those they lend to (if a bail-out is on hand in any eventuality).

But what if the availability of cheap money somehow just defers whatever the mechanisms are that's going to reveal the missing information? Does anybody know enough about banking to explain, if this line of reasoning is correct, what those mechanisms are? Is the announcement of write-downs enough?


"..when interest rates are low": maybe REAL interest rates are low, in the sense of nominal rates minus expected inflation rates.

Marcin Tustin

Hmm, if the carrot doesn't work, what about the stick?

Perhaps dearieme is right and the quantitative easing is driving down real interest rates. Similarly attempts to target growth by the Bank of England.

Perhaps a better response would be comprehensive deposit insurance, then have the central banks return to strict inflation targeting, combined with technical changes on allowable collateral (known mortgages with a loan-to-value of less than 1 as well as gilts and other sovereign debt.)

Trooper Thompson

I suggest we need to face up to the pyramid scheme logic of our current (world) financial system. As money is based on debt, we are grabbing onto an ever-rising balloon. How about getting rid of fractional reserve banking, and making the Government issue the currency, not a private banking monopoly?


Perhaps we'll find out if auditors can find out bad stuff and force the banks to value their less liquid 'assets" more realistically. In other words, now is the time for serious write downs, and then for confessions about how all this talk of better ways of pricing and sharing risk turned out to this years b*ll*x.

Shalom Hamou

We are not in a liquidity trap yet: central banks can still pump cheaper money but there is a limit to that exercise.

Today in order to be neutral short term rates should be 2% rather than their actual rates.

The present crisis is precisely the result of an experiment by the FED of trying to generate growth of long term rates through increase of short term rate.

As long term rates follow they downtrend since 1981 we will reach the dreaded liquidity trap.

What we must understand is that emitting money through credit is inefficient and dangerous.

What we need is an adjusted credit free free market economy.

It is more easily said than done.

But we have no other choice


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