Bagehot Was Wrong (?)

Interesting piece by Jim Grant, from his usually subscription only Grant’s Interest Rate Observer:

"Nowadays, the consensus of belief has it that America fills the
bill of a "market-based system," whereas Europe is closer to a
"bank-based system." But the truth is that the worldwide mortgage mess
has pushed America away from markets and Europe away from banks. Both
systems are moving closer to a state of government or central-bank
control. And both the dollar and the euro are, therefore, moving even
further away from an orthodox notion of soundness (not that either was
within hailing distance of it before the credit clouds rolled in last

A Grand Comeuppance

In the United States this election year, the galloping socialization
of the mortgage market proceeds with hardly a peep of discussion, let
alone protest. Thus, mortgage originations by the government-sponsored
enterprises reached 81% of overall originations in the fourth quarter
of 2007, up from 37% in the second quarter of 2006. In the first
quarter of this year, Fannie copped a 50% share of originations, double
its take in calendar 2006. But in comparison to the biggest GSE, Fannie
and Freddie might as well be standing still.

The entire discussion might strike some as a bit wonky, but if you have any interest in how Bagehot’s "Principles of Banking" (1867) applies to today’s credit crunch and central banking’s response, its worth your time to read this.



Walter Bagehot Was Wrong
JAMES GRANT, Grant’s Financial Publishing Inc.
June 19, 2008

Bagehot’s Lender


Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. VennData commented on Jun 19

    At the end of the day it was the triangle of 1) free-wheeling private firms that co-opted the 2) individual mortgage buyers whose neurosis of homeownership and the get-rich-quick American Dream of property wealth overseen by the 3) politicians who peddle “free markets” that are the cause, not the GSEs.

    There’s a reason there’s a triangular pyramid on the dollar bill, and it’s not that they couldn’t get a picture of Mr. Ponzi at design time.

  2. Alfred commented on Jun 19

    Grant wrote a brilliant piece if it only would not be spiked with flaws and political resentment. By reading between the lines I would say he was right with one (not mentioned) observation: It was Trichet who saved the world from financial Armageddon, by early recognizing not to apply the sledge hammer and slash IRs but rather complying with the ECB’s role as the lender of last resort. Bernanke only recognized this in the last minute after he had already done damage with interest rates.

    To Grant’s point:
    “A measure of the difficulty of that work is the huge volume of lending that the Bank of England and the ECB, especially, have chosen to undertake; over the past 12 months, the balance sheets of the ECB and the Bank of England have grown by 21% and 19.4%, respectively. (In comparison, the Fed is a model of restraint.)”

    This is simply false. In its latest Flow of Funds statement (release Z1 from June 2008) the Fed list under assets $156 billion in bank loans n.e.c (not elsewhere classified, which is another way of saying that this are illiquid assets possibly MBS), for the first time ever on its balance sheet. The size of the Fed’s balance sheet is about $900 billion. The $156 billion mark is 17% of the total. This is somewhat lower but don’t forget the Fed came late to the action as lender of last resort. In the meantime they have loaned out plenty of government paper in exchange for ABS paper.

    We all would prefer Hankey on the helm of all central banks but then we also would need Mellon and Hoover to purge the rottenness out of the system.

  3. Chris Noyes commented on Jun 19

    I hope the retards that run congress do not give 300 billion more to housing. Do they give IQ test for Congress? Seems like everyone on the hill is fucking retarded.

  4. Spu Moni commented on Jun 19

    At the end of the day it was the triangle of 1) free-wheeling Fed bank and grossly irresponsible NeoCon capital gains tax cuts that enabled the 2) individual fund & mortgage brokers who pandered to a natural human desire for home ownership with their dog’s death get-rich-quick ARM R/E sales pitch, ignored by 3)regulators, banks and Congress who will peddle any talking point to increase their campaign contributions and baaksheesh, rather than earn the tax dole salaries that we pay them, that are the cause, not GSEs.

    Let’s call a spade a spade on our fiscal death beds. Time will tell if it was a credit.con neutron bomb, lost as we are already in a peakoil.con speculation scam.

    Then all will be forgotten, a few perps will do the cake walk, and our overall taxes, fees, surcharges and tariffs will push slowly over 50% like the Mississippi surging over the levees, drowning US all, in this Land of the Pay-or-Die Unhealthy and Home of the Pay-or-Fry Uneducated, but certainly with Freedom of Self-Medication and Liberty to watch Game Show TV for all!

    Is this a great country, or what!?

  5. David Davenport commented on Jun 19

    Do they give IQ test for Congress?

    No. It’s like posting on the Internet.

  6. Foo commented on Jun 19

    The lenders of last resort are lending at *bonus* rates now, not penalty rates.

  7. Automated Robot commented on Jun 20

    not the GSEs

    You jerk off to the Federal Register, don’t you VD?
    Government is Love, as long as those wascally wepublicans are out of power.

  8. OhNoNotAgain commented on Jun 20

    “Government is Love, as long as those wascally wepublicans are out of power.”

    Check out the employment figures for the last 20 years ? See any pattern ? Every time we’ve had a Republican in the White House we’ve had:

    1) Huge deficits due to runaway defense spending and tax cuts
    2) Combined with asset bubbles and crashes due to lax regulation
    3) Followed by recessions
    4) Followed by large spikes in unemployment

    Yeah, the Republicans are just getting picked on, poor bastards. Thank God you’re here to defend them from such scurrilous attacks.

  9. DavidB commented on Jun 20

    I was just thinking about that last night. The Fed is no longer the lender of last resort. That is supposed to be their function. They are supposed to be the last option before the nuclear bomb. Now they hemorrhage money any time a banker’s kid’s gerbil gets the sniffles

  10. kennycan commented on Jun 20


    2)Combined with asset bubbles and crashes due to lax regulation
    3) Followed by recessions
    4) Followed by large spikes in unemployment

    It’s govt spending that’s criminal and then rose thru Rs and Ds practically every year for the last 76. How we finance it, taxes now (raise tax rates) or taxes later (debt and raise taxes later) is irrelevant as it all has to be paid for somehow. So your pt 1 is not germaine.

    Also conveniently the cutoff was @ Bush I. Ignore that Reagan jobs expansion.

    Points 2-4 – it was during the Clinton Administration that we had the dot com bubble and bust.

    Also we had a credit bubble that burst with the LTCM disaster. Or did you forget that one. Asia bubble and bust. Clinton in the WH again. See a pattern?

    Kinda blows your whole point, don’t it?

    But hey, now we’re gonna get the Messiah and everything will be better. Because he’ll have a D after his name in the papers.

    Stop rooting for your team and start reading some eco textbooks. Preferably by Rothbard, von Mises, Hayek or Friedman.

  11. Karl commented on Jun 20

    “Check out the employment figures for the last 20 years ? See any pattern ?”

    I just see someone who doesn’t know how many branches of government we have or what causation is. (Try reading the Black Swan). And stop being a sheep while you’re at it, like kennycan said.

    I enjoyed the Grant Piece. Great post. I love seeing old financial history as told by people alive at the time. It is true what Galbraith says: What is celebrated as innovation is the reinvention of the wheel, often in a more unstable form.

Posted Under