Friday, September 14, 2007

Tyler's Morals Hazarded

Do I look like an arrogant opinionated brilliant Dutch economist?

I've just watched Prof Willem Buiter on C4 News laying into the Bank of England's intervention to prop up Northern Rock. Prof Buiter is one of the world's leading monetary economists*, and an ex-member of the Bank's Monetary Policy Committee.

He reckons the Bank was pushed into its move by Brown/Darling, and warns:

"Moral hazard has received a boost in the UK banking sector and in the UK financial system as a whole. We will all pay the price in the years to come, when the next wave of reckless lending washes over us. Let's hope that the collateral requirements and penalty rate charged on the credit line will be tough enough to limit the damage."

Who could disagree? (See this morning's blog).

But moral hazard is a slippery beast.

As mentioned this morning, Tyler has a small deposit with NR, the residue of a somewhat larger deposit moved out earlier this year on concerns that NR was heading for the shredder (phew!). What that means is that he could switch funds in again very easily- no need for any account opening admin etc.

Now, pre the Bank's bail-out it made no sense to do that- far too risky for the return on offer.

But now, it makes perfect sense. Strapped-for-cash NR is currently offering 6.71% on a one year fixed rate bond- far higher than you can get on such an investment most other places on the cyber high street. And it's effectively guaranteed by the Bank of England.

What a snip! Even if taxpayers are being forced to subsidise the whole thing.

Not for the first time, Tyler's morals are in the hazard.

*Footnote- The splendid Buiter turns out to have his own blog where he lays out his trenchant views on the NR support operation. Many years ago- as we may have mentioned before- he ran macro economics seminars for students on the LSE's Masters course. Tyler attended, and was somewhat taken aback at the first session by Buiter's characterisation of the course- the course he was supposedly teaching- as "Micky Mouse economics". B didn't really help anyone through the exams, but he certainly opened a few eyes to fear and loathing among academics.

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