Tuesday, 7th October 2008

UKIP leader Nigel Farage MEP says the right kind of involvement in the banking system by the Bank of England could have helped to regain control of the financial markets and prevent the recurrence of a 1930s-style Depression.

As world markets digested government decisions to part-nationalise major banks, Mr Farage said one simple idea had been suggested that could have helped to solve the problem:

"Start from what is actually the problem we face at the moment. No, not falling house prices, the biggest problem at the moment is that the banks won't lend to each other. If this continues then companies out in the real economy will start to go bankrupt.

"The reason the banks won't lend to each other is that they're worried about what is called 'counter-party risk'. Quite simply, they're worried that the bank they lend to might go bust before repayment – even overnight, or over a weekend.

"A bank or two going bust because they made very bad bets on mortgages or other bonds is one thing, but if those credit markets dry up then we're looking at a re-run of the Depression." 

Mr Farage  said he recommended "a very simple idea" suggested by Willem Buiter, Professor of European Political Economy at the London School of Economics and a former external member of the Bank of England Monetary Policy Committee.

"If the problem is counter-party risk, then it should be the government (or the Bank of England) that gets involved to take it away. Instead of the banks lending to each other, then, they will lend to the Bank of England and the Bank of England will then lend to the banks. The BoE being in that loop means that there is no counter-party risk.

"Et voila! Banks are willing and able to borrow and lend to each other again, through the BoE, liquidity improves and we dodge a re-run of the 1930s.

"Our own Mark Wadsworth has been pointing out that this is already starting to happen, rather informally. All we need to is to make normal and open what is already happening."

Back to Latest News