Liquidity and Euphoria

Abstract

Hanging on the wall of a senior official at the Bank of England, I once saw a framed copy of the ‘Advice to Bankers’ written in 1863 by Hugh McCulloch, at the time Comptroller of the Currency and later US Treasury Secretary. This pithy letter sets out nine basic principles. Not a line of his advice is wasted, either for his contemporaries or for today’s bankers. Among other trenchant counsel, he ordains, ‘Never renew a note merely because you may not know where to place the money with equal advantage if the note is paid.’

Excess liquidity dulls the banker’s sense of risk, encourages reckless growth and may even end in insolvency.

A. de Juan

Article published in the Spanish economic daily Cinco Dias on March 2007, four months ahead of the international liquidity crisis unleashed in July of that year.