In contrast to Bernanke’s foolish comment “risk of substantial downturn has faded” (see Things That Have Not Yet Happened) the Bank of England sees things differently.

Please consider Bank of England warns that credit crisis far from over as banks hoard cash.

Conditions in the money markets remain “stressed”, with banks reluctant to lend to each other for longer than a month, the Bank of England has said.

In a further sign that recovery from the financial crisis is still at a very early stage, the Bank used its quarterly examination of the markets to warn that many areas are almost frozen, as banks continue to repair their balance sheets.

My Comment: Recovery? There is no recovery?

It comes after Bank Governor Mervyn King warned that the crisis is not over, and amid fears that central banks around the world are preparing to raise their interest rates.

My Comment: Perhaps the ECB hikes, but I will be surprised if the Fed does. This is just another passing inflation scare as we stare into the biggest deflation abyss since the great depression. Nonetheless, it’s better to have a crash now than prolong the agony for a decade or more like Japan did.

Indeed, interbank borrowing rates have remained high in recent months, despite the Bank’s Special Liquidity Scheme to pump extra cash into the markets.

Concerns about tight credit have in some quarters been replaced by worries about the soaring price of oil, which recently peaked at just below $140 a barrel. The Bulletin acknowledged that the activities of hedge funds and other investors may have pushed it a little higher, saying: “Speculative activity was not widely thought by contacts to have been the primary cause of upward price pressures in energy markets, although it is possible that it played some role in the short run.”

My Comment: Concerns about the price of oil are misguided. Central bankers cannot do much about peak oil. And when it comes to wanting the price of oil come down, this may be a case of “be careful what you ask for”.

Falling oil prices will indeed happen if the world economy slows enough. The US is in recession and the UK and Eurozone are headed there. A nice rate hike or two should push both over the edge. It would be a good thing too, even though central bankers are foolishly attempting to prevent that from happening.

If there’s one thing this global economic mess needs, it’s a good flush. Rate hikes would probably do it.

Mike “Mish” Shedlock
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