Northern Rock is in trouble because it has financed its mortgage book by borrowing commercial money rather than taking deposits from customers. To do that it has issued ‘commercial paper’. And now no one wants it.
I’ve looked at that ‘paper’. I’m not surprised no one wants it. Most of this ‘paper’ is issued through a long series of special purpose vehicles which re named in its accounts.
Seriously, a decade later you’d think he would have grasped it.
That “commercial paper” isn’t in fact paper at all. Paper is, by definition, short term. It’s bonds, longer term. The Granite bonds are still paying out. They’re doing just fine in fact. I think Osborne made a profit in selling a chunk, didn’t he?
No, the gap in Northern Rock was about deposits. The model was, issue mortgages, attract deposits to finance them, get a nice pile of issued mortgages together then issue another tranche of Granite bonds. They got caught by not being able to attract deposits to finance mortgages already issued but before they could issue another tranche of bonds.
It wasn’t, at all, because of their securitisations that they went down. It was because they couldn’t get the deposits before the securitisations.
And more, of course. For Ritchie is telling us that not financing your lending through deposits makes you go bust. But he keeps also telling us that MMT is correct, that banks don’t need deposits to finance loans, they just invent the money there and then.
Stump thinking, they can’t both be true.