"Yesterday something happened that I have not seen in my lifetime, a run on a major British bank."
Panic on the streets of Britain: Northern rocked, City shocked
Hamish McRae - The Independent (UK) - September 15, 2007
We do not know Mr Mcrae's age, but we do know that he became the Financial Editor of the Guardian in the UK back in 1975, so he has certainly seen as a knowledgeable adult the full span of the global "fiat-currency" era which began in 1973. Over that period, there has been no shortage of "bank runs" in the world - in Asia, in Africa, in Latin America et al. The difference is that THIS one, like the one which took place about a month ago in California, is taking place in one of the two "epicentres" of global finance. It is also taking place in an English-speaking nation, the group of nations from which came the theory that "modern" Central Banking and monetary "management" practices have made such occurrences impossible. Clearly, they have not.
The news about the run on the Northern Rock, a major British bank which has 1.4 million retail depositors and 800,000 mortgage customers, is all over the internet. British TV news programs ran pictures of customers lined up from the tellers' windows in some cases out into the streets. The bank is headquartered in Newcastle and has branches all over the UK. It is a MAJOR financial institution.
There have been interviews published with people waiting in line to withdraw their deposits. Many but by no means all of them are elderly, in their 60s and 70s. Typical of the "older" generation was a comment by a 75 year old man that he was "horrified" to hear about Northern Rock's request to the Bank of England for emergency funding. Another said this: "Why leave your money in a bank that obviously has major problems? I'm not young and I don't have a chance to make it back again".
On the other side of the issue was this quote from a 63 year old woman who used to work as a teller at a Northern Rock branch: "It's not like the 1930s, is it? Their money isn't actually sitting there. They shouldn't panic. It's just the way it is today. The Bank of England don't lend money to just anybody."
The two men quoted first who were pulling out their money are as yet in the small minority in every "developed" nation. To them, it seemed self-evident and obvious that any bank which required "emergency funding" by the Central Bank was in some kind of bad trouble. By self-professed definition, a Central Bank is the "lender of last resort".
The quote from the lady who used to work for the Northern Rock is a typical example of "warding off dark fears". Strip the verbosity out of any statement by any bank or financial official "assuring" the public that all is well and you will be left with something very similar to her quote above. It's true, for example that "the Bank of England (or any other Central Bank) "don't lend money to just anybody." A Central Bank lends money in extremis to financial insitutions in its care which can't get the money anywhere else.
And so, as the clock counts down towards September 18 and the meeting of the FOMC in the US, the global financial situation has taken another large lurch for the worse. The USDX - the $US Index - fell below the 80.00 level last Friday, September 7, and has remained there ever since. It fell as low as 79.34 on a spot future closing basis on September 12. On the same day, a US Senate panel very quietly approved an $US 850 Billion increase in the US Treasury's "debt limit", raising it to $US 9.82 TRILLION. This will be the fifth debt limit increase since Mr Bush first took office in January 2001. The measure still has to come before the full Senate and be signed into law by President Bush before it takes effect. As of September 13, the US Treausury's debt "subject to limit" stood at $US 8.929 TRILLION. That's $US 36 Billion below the current debt limit which still stands at $US 8.965 TRILLION.
The US Dollar has now been mired at all time lows on a trade-weighted basis for over a week. While claims proliferate from all over the world that there is no need to "panic" and that the global interbank lending freeze shows signs of "thawing", the actual situation grows steadily worse. This week, in response to the action by the Central Bank to bail out a LARGE financial institution, there was a fully fledged bank RUN in the UK.
Most Central Banks have merely stopped raising their official interest rates. Some are still raising them. In the first week of September, Sweden raised rates. In the week just ended, China did likewise. And next week? Well, on Tuesday, September 18, the Federal Open Market Committee meets. The Fed is universally expected to cut US official interest rates at this meeting. The only question is" How Much? Will it be 0.25 percent, or 0.50 percent, or as some have advocated, a full 1.00 percent?
What is being assumed, because few dare assume anything else, is that a rate cut by the US Fed will, not just ameliorate, but actually FIX the problem. After all, that's how the great boom in financial "assets" got started in the first place in 1982. And that's how any "short-circuits" in its functioning were overcome in 1987, in 1991-92, in 1998, and in 2000-02. To quote a financial official in a certain work of fiction:
"It'll work. It has to work. WE WANT IT TO WORK!"
The USDX is below the 80 level, the level which it has never been below except for a very short period in 1992 since the dawn of the fiat currency era. The US Senate has just completed all preliminaries for raising the US debt limit, at the urgent request of Treasury Secretary Paulson. Medium-term (2-5 year) yields on US Treasury paper are at record and near record "spreads" below the current US Fed Funds rate. In Britain, not only has the chaos in the "financial sector" spilled over into the "real" economy, it has triggered an old fashioned bank run. The same thing took place in the US a month ago and a repeat performance is waiting in the wings. And the US Fed wants to LOWER US rates????
The reason why this is still being tenaciously held as the cure-all for the current financial crisis is the simple fact that the vital connection has STILL not been made by the vast majority of the public - in the UK or anywhere else. To this point, the "problem" is seen in the fact that the banks have stopped lending and so have endangered "liquidity". The "solution" is seen as being simple, provide more "liquidity".
Unfortunately, the Bank of England tried that on September 14. It didn't solve the problem, it made it potentially MUCH worse. The vital connection which is still not being made is that every time any Central Bank injects "liquidity" into the system by any means - whether directly or by means of rate cuts - it erodes the purchasing power of the money which is already in circulation. It also hastens the day when the REAL valuations of the debt paper which form the ONLY "reserve" behind the system come to light.
When (not if) the Fed lowers rates on September 18, it will not make the situation better, it will make it worse. The Bank of England just tried to "unfreeze" the financial paper of one bank. We have seen the results. The Fed is going to try to "unfreeze" the financial paper of the entire global financial system. The end result of that will be the same. The first step is to want to try to remove one's money from the system. The next step is to realise that even if one's money is stacked under the mattress, it is losing purchasing power with ever increasing speed because of the machinations with the money which is still in the system. That leads to the final step, the desire to get rid of the money altogether while one can still exchange it for something of VALUE.
Gold has had a comparatively "quiet" week this week as the clock counts down towards September 18. Consider what happened on September 14 in the UK, though. With the run on the Northern Rock came an almost $US 10 jump in the Gold price in the UK between the AM and the PM "fix" on that day. Things "calmed down" later in New York, but not before Gold hit an intraday high of $US 718. The more the monetary authorities strive to put out the financial "fire" by pouring more "liquidity" on it, the higher the pressure will build under the Gold price.
And if a Fed rate cut on September 18 is interpreted as being - on a vastly larger scale - similar to the Bank of England bailout of Northern Rock, next week could be very interesting indeed. Stay tuned.
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