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Thursday, April 17, 2008

The South Sea Bubble and Todays Central Banks: FRB, BOE, ECB

The South Sea Bubble was one of history’s worst financial bubbles. There are also a very important lessons to be learned from the South Sea Bubble. Strangely, nobody seems to have learned them…

In 1711, the British government converted 10 million pounds of its war debt into the stock of the newly established South Sea Company, which had been granted exclusive trading rights in Spanish South America.

At the time, there were a few brave souls out there that dared argue that this was NOT a good idea. After all, the government really shouldn’t be making risky, speculative bets with your hard earned money. We all know what happened. It is called the South Sea Bubble after all.

Fast forward to today…

The Bank of England is about to start to accept MBS as collateral in exchange for Government Bonds. Read the full article here.

“It is understood that the Treasury about to finalize a scheme under which the Bank would allow lenders to swap their mortgage-backed assets for government bonds rather than cash. Lenders would be able to use the gilts as collateral for loans from other banks. It is hoped that the move will ease the seizure in the credit markets and lead to a drop in mortgage rates for homeowners.”

Once again, only a small minority has dared question these actions. Once again, this isn’t likely to end well for the same poor bastards: You, the taxpayer.

As I said in a recent post: Dammit, why won’t you learn?

If I thought it would make a difference, I would buy the damn pamphlets and send the originals to ‘Swervin’ Mervin King of the BOE and ‘Helicopter’ Ben Bernanke of the FRB. Then I’d make ‘The Maestro’ Alan Greenspan eat them in public for being the first real serial bubble blower.

Ye Olde Credit Crisis: 18th-Century Warning for Sale (Update1): “The Bank of England should take care when it invests public funds in risky or money-losing ventures, according to documents being sold by Christie's International.

The warning is no reference to the U.K. central bank's role in the rescue of Northern Rock Plc. The London-based auction house said it refers to what might be called “ye olde credit crunch” of 300 years ago.

The 1715 pamphlets “The Ruine of the Bank of England, and All Publick-Credit Inevitable” and “The Directors of the Bank of England, Enemies of the Great Interest of the Kingdom” may fetch as much as 20,000 pounds ($40,000) in a London sale on April 30.

The forecasts of doom were written by John Holland, co- founder of the Bank of Scotland, who criticized the British government for converting the national debt into the stock of the ill-fated South Sea Company.”

Of all the central banks, who is the BADDEST?

Fed Accepts Dodgy Collateral in Race to Bottom: Caroline Baum: “The Fed isn't alone in broadening the range of collateral it is willing to accept in response to the credit crisis. In December, the Bank of England added asset-backed securities to its eligibility list. The European Central Bank, which has extended the term of its loans in recent months, has always accepted a range of marketable and non-marketable assets as collateral.

The European press is abuzz with stories about Spanish banks tendering boatloads of asset-backed securities as collateral for ECB loans.

So the Fed is in good company in the race to the bottom on collateral quality.”

Well, the race to the bottom is just getting started. However, Bernanke is definitely leading with the Bank of England not far behind. The more cautious Jean-Claude Trichet over at the ECB is making up the rear.

Related Posts:
Dammit, Why Won’t You Learn?
The TED Spread, LIBOR and EURIBOR = Scary Bad
Mortgage Insurers (Quietly) Downgraded: CDS Spreads Scream Trouble


Anonymous said...

The more cautious Jean-Claude Trichet over at the ECB is making up the rear.

Don't know about that, based on what I've heard about what Spanish banks have been giving the ECB:

Spanish banks are issuing mortgage securities and asset-backed bonds on a massive scale to park at the European Central Bank, using them as collateral to raise money at favourable rates from the official credit window in Frankfurt.

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