Head of Bank of England Said In March 2008 That We Have a SOLVENCY - Not a Liquidity - Crisis → Washingtons Blog
Head of Bank of England Said In March 2008 That We Have a SOLVENCY - Not a Liquidity - Crisis - Washingtons Blog

Wednesday, December 15, 2010

Head of Bank of England Said In March 2008 That We Have a SOLVENCY - Not a Liquidity - Crisis

On Monday, the Guardian reproduced a Wikileaks cable dated March 17, 2008, stating:



Since last summer, the nature of the crisis in financial markets has changed. The problem is now not liquidity in the system but rather a question of systemic solvency, Bank of England (BOE) Governor Mervyn King said at a lunch meeting with Treasury Deputy Secretary Robert Kimmitt and Ambassador Tuttle.


Systemic Insolvency Is Now The Problem

King said that liquidity is necessary but not sufficient in the current market crisis because the global banking system is undercapitalized due to being over leveraged.

Top economists such as Anna Schwartz, James Galbraith, Nouriel Roubini and others have pointed out since 2008 that the Federal Reserve, U.S. government, and virtually all of the central banks and governments of the world are approaching the financial crisis completely wrong, as they are treating it as a liquidity crisis, when it is really a solvency crisis. See this, this and this.

The fact that the head of the one of the world's most powerful central banks told the Deputy Treasury Secretary and American Ambassador to England that the economic crisis was a solvency - not liquidity - crisis, shows that this was hardly a renegade visionary insight.

You restructure insolvent institutions. You don't prop them up with temporary liquidity.

As many top experts have said for years, we must let insolvent banks fail; if we don't, the insolvent banks will drag down the economies of their host countries and put them into sovereign debt crises.


  1. Certainly sounds like the treasury has made the wrong call. We are almost 3 years into the crisis with little to show for the billions of dollars given to the “insolvent” banks. http://financialrealityrevisited.blogspot.com

  2. A devil's advocate might assert that, given this was identified as a systemic solvency crisis, not just a solvency crisis for individually insolvent firms, the right prescription for individually insolvent firms didn't necessarily apply. Again, a devil's advocate.


→ Thank you for contributing to the conversation by commenting. We try to read all of the comments (but don't always have the time).

→ If you write a long comment, please use paragraph breaks. Otherwise, no one will read it. Many people still won't read it, so shorter is usually better (but it's your choice).

→ The following types of comments will be deleted if we happen to see them:

-- Comments that criticize any class of people as a whole, especially when based on an attribute they don't have control over

-- Comments that explicitly call for violence

→ Because we do not read all of the comments, I am not responsible for any unlawful or distasteful comments.