Financial crisis? Put it on your credit card
Cause of current credit crunch: increased lending while ignoring risk. Way to end current credit crunch: increased lending while ignoring risk. The solution devised by the world’s central banks looks remarkably like the problem.
The US Fed, Bank of England, ECB and Canadian and Swiss banks are pumping £50 billion of cash into the banking system in the hope the banks re-lend it to other banks, corporate borrowers, house-buyers, shoppers and anyone else who will revive the global economy.
But the central banks are lowering the quality of collateral they will accept. The Bank of England for the first time will accept mortgage-backed securities and covered bonds. Even credit-card receivables are now acceptable assets.
And the Bank has scrapped the minimum 1 per cent premium it previously demanded above its official base rate.
So, to unfreeze the markets, the Bank will accept riskier assets and scrap the risk premium. That sounds just like the policies that got us into this mess in the first place. OK, they are lending to apparently sound banks and the security is still probably good – but these are the subtle differences that turn a plus sign on a credit rating into a minus sign – or turn an A into a B – and for which the borrower expects to pay extra.
Expect Northern Rock to be first in the Threadneedle Street queue. It has no need to pay a premium now everyone else can borrow at cost.
Desperate times demand desperate actions, but let’s not pretend that the world’s central banks have not had to bend their own rules.
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