Michael Kosares: Northern Rock hints at years of bailouts ahead


By Michael Kosares
Centennial Precious Metals, Denver
Saturday, September 15, 2007

The bailout of Northern Rock by the Bank of England shows once again the depth of the crisis now prowling the world financial system.

No sooner had the governor of the Bank of England, Mervyn King, declared that bad practices in the banks should not be rewarded than Northern Rock collapsed -- and in rushed the Bank of England with everything it had.

This is the institutional equivalent of eating one's words, and it can't be positive for King or those in central banking who adhere to monetary policy's old school. That the bailout came only a couple of days after King's declaration shows that when push comes to shove, not even the old school can hold up anymore.

Rather than let this go by as simply another event in the ongoing credit crisis, we should try to determine how the Northern Rock bailout is going to affect behavior of the other major central banks. In my view it has a deeper meaning, and it will have a wash-over effect on others charged with monetary policy.

The bailout makes it look like the policy of the Bank of England that was articulated by King -- to stand aside and let things take their course -- though true to free-market fundamentals, is not in tune with the circumstances posed by the credit crisis and the perceived responsibilities of a central bank. The policy King articulated is the conservative approach of the "monetary hawk." But look what happened as soon as pressure was applied.

King's sudden capitulation likely will be noted by Federal Reserve Chairman Ben Bernanke and European Central Bank President Jean-Claude Trichet. It will encourage those in monetary policy circles who have been in favor of opening the money spigots full-blast -- the "monetary doves" -- and make them look correct.

If anyone was seeking justification for bailouts, it has arrived in the form of the Bank of England's treatment of Northern Rock.

We now may expect deep interest-rate cuts on this side of the Atlantic and a redefinition of the discount window. What has just happened in Britain will be claimed as justification for the financial socialists' equivalent of a free lunch.

The commercial banks that act as franchisers to the hedge funds and other speculators (as franchisees) will get the Federal Reserve's blank check.

In other words, the financial shenanigans of the past several years will be rewarded and their losses will be socialized. So we need to absorb the implications of Treasury Secretary Henry Paulson's remark that this crisis could go on for another two years or more.


Michael Kosares is president and founder of Centennial Precious Metals in Denver and host of the USAGold.com Forum.

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