Walter Bagehot Was Wrong

James Grant:

The governor of the Central Bank of Luxembourg raised some eyebrows when he questioned the integrity of the fast-growing balance sheet of the European Central Bank. Yves Mersch, a member of the ECB’s governing council as well as the Ben Bernanke of the Grand Duchy of Luxembourg, raised the issue at a gathering of the International Capital Market Association in Vienna two weeks ago.
Insofar as a currency derives its strength from the balance sheet of the issuing central bank, the euro is unsound and becoming more so, as Mr. Mersch did not quite say. We, however, will say it for him. In fact, we will say the same for most of the leading monetary brands, that of the United States not excluded. The mortgage mess is the immediate cause of the new debasement. A long-held article of central banking dogma is the remote cause.
Mr. Mersch landed on the front page of the Financial Times by acknowledging that the ECB is accepting a dubious kind of mortgage collateral in exchange for loans to the world’s liquidity-parched financial institutions. In so many words, Mr. Mersch charged that the commercial banks are gaming the central bank, a situation he called of “high concern.” Reading Mr. Mersch, we thought of Thomson Hankey.