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Bank of England stripped of independence, 	ordered to gush cash

Via NY Transfer News Collective  *  All the News that Doesn't Fit
 
Gold Anti-Trust Action Committee 

The Telegraph (UK) - Sep 20, 2007
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/09/20/cnuturn120.xml

Bank of England stripped of independence, ordered to gush cash

By Ambrose Evans-Pritchard and Philip Aldrick

The government has forced the Bank of England to relax lending
standards in a dramatic U-turn, effectively stripping the institution
of its independence for the first time since the new monetary regime
was created in 1997.

In a bizarre move, the bank shifted tack abruptly yesterday by
agreeing to flood the capital markets with L10 billion of three-month
money and widen the asset classes it will accept as collateral
against the loans.

The change in policy came despite vehement objections from top bank
staff, including Governor Mervyn King, who said a week ago that
lack of liquidity was not the root of the problem and that opening
the short-term credit spigot "encourages excessive risk-taking and
sows the seeds of a future financial crisis."

In a humiliating climbdown, the bank said it is now acting "to
alleviate the strains in the longer-maturity money markets." Eligible
collateral will now include mortgage debt.

The new measures had little impact on the British markets yesterday
since optimism was returning worldwide as a result of the Federal
Reserve's half-point rate cut on Tuesday. The FTSE 100 was up 176.7
points to 6460, moving in lockstep with Japan's Nikkei and European
bourses.

Political sources told The Daily Telegraph that the pressure came
directly from Chancellor Alistair Darling. Labour is furious that
the crisis at Northern Rock was ever allowed to reach the point of
mass panic by depositors, with contagion effects spreading on Monday
to Alliance & Leicester and other lenders.

The decision to intervene in credit management has left the governor
in an untenable position. It risks destroying, overnight, a decade-long
experiment in monetary discipline that has won praise across the
world.

"This is a 180-degree turn," said Danny Gabay, an ex-official at
the bank and now with Fathom Financial Consulting. "I don't think
this U-turn was of the bank's own volition. My feeling is this has
the dead hand of the Treasury all over it."

Tory MP Peter Viggers, a member of the Treasury Committee, said Mr
King had been right to resist calls for extra liquidity. "This
places the bank in a most difficult position. Was the bank put under
pressure and if so by whom?" he said. Mr Viggers and fellow Tories
intend to probe the affair aggressively at a grilling of Mr King
before the committee today.

Mr Darling believes the Northern Rock debacle could have been avoided
if the bank had agreed to accept mortgage collateral at its lending
window earlier, copying the Federal Reserve and European Central
Bank. Bank officials insist that this would have made no difference
to Northern Rock, which got into trouble through over-reliance on
short-term funding from the capital markets.

Relaxing collateral rules merely loosens standards for the entire
system, encouraging moral hazard. It is hard to see how it can be
justified at this late stage, as the crisis abates.

The Financial Services Authority was more open to the idea of
relaxing rules, though informed sources deny reports the FSA took
a strong stand. Relations between the FSA and the Bank have now
become poisonous.

Bernard Connolly, global strategist for Banque AIG, said the bank
may have been slow in seeing the gravity of the crisis, and insisted
that Labour is using the issue as a pretext to force a loosening
in monetary policy: "The governor is being burned at the stake by
the government. This dispute has macro-economic implications."
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