Will someone please inform the British Prime Minister…..

Arrived back in wifi territory from the Scottish highlands yesterday to read the headline in the Independent “World's central banks act to ease market strains”.    A critical issue of critical importance. It was reported, that major central banks from around the world were taking concerted action to ensure that banks had access to US$ should they need them.  And presumably unable to get them elsewhere.

I then went on to read other articles and in one the British Prime Minister, Cameron, referred to the intervention being in response to a “credit crunch”.  What!!  So that I am not misunderstood, he said that the Federal Reserve, Bank of England, European Central Bank, and the Central Banks of Canada, Japan and Switzerland, were intervening in the US$ market because there was a credit crunch.

Sir, that is not a credit crunch, it is a liquidity crisis.  They are two very different things.  Credit crunches happen often, every time there is a mild and of course a severe recession in an economy.  Maybe every eight years or so. 

They occur when banks and other lenders start rationing the available credit by, for example, raising the criteria for lending.  An example would be, instead of lending a 95% mortgage against the price of a home, they insist they will now only lend 80%.  Forcing a borrower to have a 20% deposit instead of just 5% to buy a home.  That is a credit crunch; self-imposed rationing of credit for any number of reasons.  Another example would be when banks in a system [say, USA] stop lending, or reduce lending,  to one particular sector, say transport, because the sector itself is in a recession even though the remainder of the economy may be doing well. 

The global market has in effect been in a credit crunch for about four years – other than for government induced lending.  For the latter look no further than the British government intending to support lending to small businesses in its Autumn Budget. But a credit crunch did not just happen this week, when the central banks intervened.

No, what the Prime Minister should have known [if someone was informing him correctly] is what we have is a global systemic liquidity crisis.  They happen very rarely, or about once every lifetime.  The latter period being about 75 years.  Which sits about right with the depression of the 1930’s.  Indeed contemporary financial systems are meant to be structured so that they don’t happen at all; at the bank level, at the country system level, nor regionally, let alone globally.  So this is a major and critical catastrophic event.

Even worse, what we have is a global sovereign systemic liquidity crisis.  That is even beyond what I mentioned in the last paragraph.

When Germany cannot raise sufficient funds to fill a bond issue, despite its rating, and in the face of a search by investors for lower risk assets, then we have a global [other than US$ it seems] sovereign liquidity crisis.  This is not a liquidity crisis limited to one bank say, because everyone knows it has lost huge money on its prop desk.  This is not a liquidity crisis, as occurred in 2008, within only some countries.  Eg Mr Prime Minister, your own when you had to take over your banks, and around the world governments issued guarantees on their banking systems.  This is not one of those.  This is a global sovereign and systemic liquidity crisis.  Underlined individually because each word has a specific meaning in finance. 

Mr Prime Minister [and media, for that matter] we are again in a critical financial crisis.  We have had three (3) liquidity events in the last three (3) years; each increasing in scale and severity; and academia will tell you we should only be having one every 75 years or so.  It is not a credit crunch.

Then I got thinking, how could someone who is so actively involved in apparently solving this crisis, have made such a fundamental mistake.  And I realised, that most of the people involved in doing so, are so young.  He is 43 years old, Merkel is 57 (so should know better), but these people have never worked their way through a financial crisis before, at the coalface.

They have no idea – they cannot even tell the difference between a liquidity and a credit crisis.  One reason being, unlike us older financial services specialists, they haven’t lived through them on the ground so to speak.  Whether it was the S&L crisis in the USA in the late 1980’s, the Asian crisis, the Latin American crisis, or any other fiscal and financial crisis. 

And that is what I am missing in all the reading that I am doing.  The serious analysis of what is actually occurring, what will happen next, and how to manage it.  It’s not physics (despite what bankers tell you), it has all happened before.  It makes you question if there is anyone at all with any experience in the governments who can step up to the plate and fix the problem.  The media reporting of this event was factual and dry, and today some actual opinion pieces occurr that drawer some attention to the unique and critical nature of this crisis. But not enough detail, nor of its severity and ramifications.   Where are all the grown-up professionals!!

Will someone please inform the British Prime Minister what is going on!!  Any comments would be appreciated.