Wednesday, February 4, 2009 2 comments ++[ CLICK TO COMMENT ]++

Sad state of affairs in Britain: Media being blamed for the financial crisis

You know the economies of the world are in ugly shape, and beyond government influence, when the media get blamed for the financial crisis. Although the British government may simply be doing a thorough investigation and looking at all theories, it does seem odd that some are blaming the media for the financial crisis:

Britain's leading financial journalists rejected accusations Wednesday that they were partly responsible for escalating the banking crisis in the way they reported events.

The five journalists, addressing lawmakers investigating the crisis, said the banks that went bust would still have gone bust even if their stories had been held.

“I am not sure the world would have been any different,” said Robert Peston, the British Broadcasting Corp.'s business editor, who broke the news that Northern Rock would receive an emergency loan from the Bank of England in September, 2007, as money markets dried up.

The morning after the BBC's story ran, customers lined up outside Northern Rock branches across Britain. Some bank shareholders, politicians and even journalists accused Mr. Peston of being partly responsible for the first run on a British bank for around 150 years.

“Had Robert delayed it for a couple of days, Northern Rock would still not be a solvent bank,” said Sky News presenter Jeff Randall, who previously held Mr. Peston's post at BBC.

Wednesday's hearing was part of an investigation by Britain's independent Treasury Select Committee into the country's banking crisis. Last week, the committee questioned hedge fund managers, and next week will hear from bank executives themselves.

The journalists said the problem was not the media, but Northern Rock's flawed business model relying on wholesale funding in its aggressive expansion drive instead of traditional savings, and the government's failure to immediately guarantee all deposits.

I don't think the government has come out and blamed the media directly but it remains to be seen what comes of these post-mortems. The problem with a financial crisis is that most financial firms live on trust and any news make shake the foundations. Some mistakeningly assume that financial crises are due to loose fiat money systems but many banks collapsed in the 1700's and 1800's under a gold standard, when many banks actually held huge quanity of gold to back their borrowing.


2 Response to Sad state of affairs in Britain: Media being blamed for the financial crisis

February 5, 2009 at 7:08 AM

I understand the problem in a "run on a bank" is the fractional reserve banking.

I think it does not matter if the reserve is Gold or just deposits in a fiat currency. What matters is the reserve as a fraction of what people might ask.

The problem is when the fraction is microscopic. Then any rumor will bring down the house.

If only 5% of the depositors get scared and withdraw, and if that exhausts the reserve, then the game is over.
Examples: Bear Sterns, Lehman Brothers.

February 5, 2009 at 10:16 AM

Yep, you are right specularbage. The issue is indeed the fractional reserve system. But fractional reserves are a part of any modern banking, including during the gold and silver eras.

If you had full reserves, interest rates will likely be far higher (since banks won't lend out money at lower rates.) I believe this was the case a very long time ago. The banks will also end up being more a custodial service rather than a modern bank per se.

The core problem, ignoring the fractional reserve issue, is leverage. It is crazy when you realize that the banks in Britain, for example, have liabilities greater than the country's GDP. Admittedly, GDP is an "yearly income" while the bank liabilities are "permanent balance sheet" issue but it still shows the real problem.

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