The banking crisis

The current banking crisis was caused Western governments massively expanding the money supply in a time of economic boom, and compounding that policy error by leaving interest rates too low for too long. This gave bankers the opportunity to use leverage and a bull market to expand their balance sheets completely out of line with their core capital and to use opaque contracts to do so. This was aided by inept regulatory systems with divided responsibilities working on prescriptive principles acting as a form of nationalisation ‘lite’. Bradford & Bingley, a demutualised building society, acquired aggressive and inexperienced management and went adventuring in the credit markets to over expand the business, based on the illusion of ever upward house prices. These debt positions will now have to unwind. Market forces are telling us this by the prices of bank shares and currencies. Western Governments are issuing so much Sovereign debt to fund bank bailouts that sooner or later there is a very strong chance that one will default. The answer to this is either inflation to erode the value of the debts, or a massive cut in state spending and a reduction in taxation. As cutting taxes and spending are completely counter to Socialist thinking they will not happen under this current administration, and because they are also counter intuitive it is unlikely that the UK voter will elect a Government committed to such policies. Hence more banks will fail and many innocent, thrifty and genuinely prudent citizens will suffer. Rules are for the guidance of wise men and the strict observance of by fools.