Leading article: The urgency of the crisis demands radical action

Share
Related Topics

Anyone who thinks that the United States is the land where the free market is allowed to let rip while Britain is the home of regulation and state intervention should study the different reactions of central banks to the crisis in the money markets that has been with us since September.

Last week, the value of shares in Bear Stearns dropped from $61.58 to $54.28 in one day, as the market sensed trouble in one of the US's largest banks. When its staff turned up to work on Monday morning, the crisis was over. Their stricken bank had been bought by JP Morgan Chase for $2 a share with loaned money by the Federal Reserve, and with the Fed carrying the risk. The Fed has also opened a "discount window" for the first time to give other securities firms access to credit that previously was only there for banks. For good measure, they have cut interest rates again.

Last August, Jean-Claude Trichet, president of the European central bank, was relaxing in a French fishing village when news reached him, via his BlackBerry, about the crisis in the US sub-prime market. He instantly flooded the eurozone with liquidity, a decision which inspired the Financial Times to name him as "Person of the Year 2007". How very different from the tortoise-like behaviour of the Bank of England and its Governor, Mervyn King.

On 12 September, Mr King submitted a memo to the Commons Treasury committee on how British banks should behave. He emphasised the principle of "moral hazard", which says that enterprises that act recklessly and run into trouble must be left to suffer the consequences of their folly, without any help from Government, as a salutary lesson to others. If the Government rescued the reckless, there would be no incentive for anyone to act responsibly, he feared. On that principle, Mr King proposed that the Bank of England should not lend money to banks that could not borrow from one another during the credit crunch, because "the provision of large liquidity facilities penalises those financial institutions that sat out the dance, encourages herd behaviour and increases the intensity of future crises".

In the six months that followed, we have seen Mr King reluctantly eat his own words. He knew when he wrote that memo that a storm was about to break over Northern Rock. The rest of the nation found out two days later, and the UK witnessed the first run on a bank for more than a century. After six frantic months, the Government had to throw the principle of "moral hazard" overboard and take responsibility for Northern Rock's debts. In the past week, Mr King has also had to make £10bn worth of liquidity available to other banks, in the teeth of his own warnings about being fair to those who "sat out the dance". Yesterday he met executives of the five big High Street banks, to be told it was not enough.

In normal circumstances, Mr King would be right. Over the long term, his caution may even be vindicated. But the crisis is too urgent and too severe to sit back and wait for the market to penalise the reckless and let the lessons be absorbed. We are all going to find it harder to borrow money. The days of the 100 per cent mortgage are dead. We are in danger of being dragged into an economic vicious cycle.

In these dire circumstances, the overriding duty of the Bank of England is to send out the signals that instil confidence. Mr King should ponder the warning made by the former US Treasury Secretary Larry Summers that "the world has at least as much to fear from a moral hazard fundamentalism that precludes actions that would enhance confidence and stability as it does from moral hazard itself".

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

Opilio Recruitment: QA Automation Engineer

£30k - 38k per year + Benefits: Opilio Recruitment: An award-winning consume...

Opilio Recruitment: UX & Design Specialist

£40k - 45k per year + Benefits: Opilio Recruitment: A fantastic opportunity ...

Opilio Recruitment: Publishing Application Support Analyst

£30k - 35k per year + Benefits: Opilio Recruitment: We’re currently re...

Opilio Recruitment: Digital Marketing Manager

£35k - 45k per year + benefits: Opilio Recruitment: A fantastic opportunity ...

Day In a Page

Read Next
A Pokot woman holds a razor blade after performing a circumcision on four girls  

The campaigns to end FGM are a welcomed step, but they don't go far enough

Charlotte Rachael Proudman
Our political system is fragmented, with disillusioned voters looking to the margins for satisfaction  

Politics of hope needed to avert flight to margins

Liam Fox
Homeless Veterans Christmas Appeal: ‘We give them hope. They come to us when no one else can help’

Christmas Appeal

Meet the charity giving homeless veterans hope – and who they turn to when no one else can help
Should doctors and patients learn to plan humane, happier endings rather than trying to prolong life?

Is it always right to try to prolong life?

Most of us would prefer to die in our own beds, with our families beside us. But, as a GP, Margaret McCartney sees too many end their days in a medicalised battle
Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night - is that what it takes for women to get to the top?

What does it take for women to get to the top?

Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night and told women they had to do more if they wanted to get on
Christmas jumper craze: Inside the UK factory behind this year's multicultural must-have

Knitting pretty: British Christmas Jumpers

Simmy Richman visits Jack Masters, the company behind this year's multicultural must-have
French chefs have launched a campaign to end violence in kitchens - should British restaurants follow suit?

French chefs campaign against bullying

A group of top chefs signed a manifesto against violence in kitchens following the sacking of a chef at a Paris restaurant for scalding his kitchen assistant with a white-hot spoon
Radio 4 to broadcast 10-hour War and Peace on New Year's Day as Controller warns of cuts

Just what you need on a New Year hangover...

Radio 4 to broadcast 10-hour adaptation of War and Peace on first day of 2015
Cuba set to stage its first US musical in 50 years

Cuba to stage first US musical in 50 years

Claire Allfree finds out if the new production of Rent will hit the right note in Havana
Christmas 2014: 10 best educational toys

Learn and play: 10 best educational toys

Of course you want them to have fun, but even better if they can learn at the same time
Paul Scholes column: I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season

Paul Scholes column

I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
Lewis Moody column: Stuart Lancaster has made all the right calls – now England must deliver

Lewis Moody: Lancaster has made all the right calls – now England must deliver

So what must the red-rose do differently? They have to take the points on offer 
Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

Sol Campbell cries foul at Labour's mansion tax

The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

Sarkozy returns

The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
Is the criticism of Ed Miliband a coded form of anti-Semitism?

Is the criticism of Miliband anti-Semitic?

Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

Ouija boards are the must-have festive gift

Simon Usborne explores the appeal - and mysteries - of a century-old parlour game