Don’t Panic!

The Fed. today joins the US government and much of the financial sector in complete panic mode. They feel the need to print themselves more money since their housing bubble (or should I say pyramid scheme?) collapsed. Like the last desperate gamble in a Hollywood epic, it may even work – subject to suitably adjusted expectations. The losers will be those who didn’t benefit from the bubble, but did expect to benefit from their own prudence.

The UK authorities panicked when they threw unlimited billions into Northern Rock. Just a few short months later, they’re into damage limitation, where damage dwarfs the bailouts of lame-duck heavy industries in the 1970s. And the only reason the government is getting off so lightly in the blame game is that too many people – including opposition politicians – supported the intervention that created the problem in the first place. They, and their paymasters, were panicking too.

I have a suspicion that Mervyn King, governor of the Bank of England, would have done a much better job if he hadn’t been put under political pressure to throw good money after bad. We’ve already committed to the biggest round of inflation for a generation: let’s hope he can resist the pressure to make it far, far worse than it already is. His current speech sounds like a worthwhile attempt to defend against the worst of it.

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p.s. yes of course Northern Rock should have been allowed to go bust! That would have triggered an automatic injection of public money under the depositor protection scheme, but on a less staggering scale than what has now happened. And the other institutions bidding for its assets could have done so with clarity, as opposed to trading taxpayer-funded sweeteners for political expedience, and not even really knowing who they’re dealing with.

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p.p.s Another “told you so” moment, as George Soros, in an interview this morning, points out that house price inflation was driven more by excess money supply than by housing supply-and-demand.