Sunday, September 16, 2007

Crunch Time

I am not a customer of Northern Rock. But if I were, I too would be withdrawing my money. For the elites to criticise those who feel their savings are at risk is stomach churning. John Redwood explains the problem HERE. He says the way this has been handled will have done considerable damage to people's confidence in the UK. Fraser Nelson reckons that the government has exacerbated the problem.

59 comments:

thermalsatsuma said...

Haven't they seen "It's a Wonderful Life"? Where's George Bailey when you need him, eh?

Anonymous said...

Couldn't agree more. The sight of financial experts and politicians saying don't panic inspires the opposite.
Nobody trusts them. If Gordon Brown and Alistar Darling were standing in the queue tomorrow to put all the cash they have into the Northern Rock then that might help a little.
I'm no expert but sure it might have been fine with help with the Bank Of England, but does that still hold if all the deposists go out?

Tony said...

I could not believe the way Ken Clarke's comments have been used in the BBC article to undermine Cameron's sensible comments on this problem:

But not everyone in the party agrees. Ken Clarke, the last Conservative chancellor, said the problems at the bank should not lead to tough new restrictions on borrowing.

"I think the development of ready access to credit is one of the best ways of boosting a market," he told , told BBC Radio 4's Broadcasting House.

"So I do hope the reaction to the recent nonsense is not that we need a great flood of new regulation, that everybody gets hair-shirted again"


Only a fool would argue that access to credit should be available to people who cannot afford to pay. Tough restrictions should not be necessary, but ensuring that borrowers can genuinely afford to pay back what they borrow, is. Too often we see banks lending to people with a questionable ability to pay, often backed by mortgaged property. This is a risk on a huge scale.

Credit is supposed to be a short term aid, not the central pillar of growth in this country as it has been under Labour. If Clarke cannot see that, then there is no hope for him.

Anonymous said...

One of the strange things about this story is how the news was released. As if it was designed to create a major problem for Northern Rock! There was not the same coverage or leakage over the Barclay's Bank loan!!
strange forces are at work!

Anonymous said...

teOne of the strange things about this story is how the news was released. As if it was designed to create a major problem for Northern Rock! There was not the same coverage or leakage over the Barclay's Bank loan!!
strange forces are at work!

Anonymous said...

Robert Peston has some good information on this in his blog.

As you say, it is easy to criticise people for 'panicking' - but would you be able to sit on your hands when you know that the 'everything will be fine message' given out last week will have materially been changed by the events on Friday and Saturday.

Clearly it is the case that things could have been worked out if all the customers 'behave rationally'.

Once they do not [and one cannot blame them] the situation changes and the undertakings given before the queues started have to be reviewed in that context.

Tapestry said...

Everyone is referencing Redwood. He has Gordon Brown sewn up. He is the top financial blogger in all parties.

When he and Osborne joined forces recently they both looked better than when they operate alone. Redwood seems more contemporary alongside Osborne, and Osborne acquires gravitas, which otherwise his relative youth denies him.

There is the added bonus that Redwood clearly usettles the BBC and other media. In their view he is a corpse buried long ago, which they successfully vilified to death, along with Thatcher. How com he's still alive and talking more sense than anyone on Britain's economy? They are quite clearly rattled, and need to see more of him.

If it pleases them to show his singing in welsh again, is is them and not him who look stupid.

Anonymous said...

I'd be taking all my money out because there are some astonishing rates elsewhere for 6month and 12month term accounts - retail savers can get well above base rates. Although its understandable, its as irrational to be concerned now about risk to funds as it is to have all you life savings (well in excess of £35k) in one financial institution and all in cash when it should have been in diversified assets and institutions. There is a chronic lack of financial awareness amongst the general public.

Anonymous said...

Iain,

The point is is that there isn't that bad a problem with Northern Rock, (The BoE wouldn't lend if the business was insolvent or badly run) but that a panic withdrawal of their funds could cause such a problem. The fact that the FSA guarantees all deposits up to £32,000 means that there is no real reason for people to do this.

Anonymous said...

Iain,

JR doesn't go far enough.

The ultimate cause is the fiat monetary system itself.

simonh said...

This is the end for Northern Rock and it's hard to say they don't deserve it.

And, leaving aside any blame that may be imputed to the Gov for all this, I wonder how the public would feel about having spivvy young G Osborne at the helm in a banking crisis?

Anonymous said...

Where's Gordon?

Ed said...

Of course the mass withdrawal will only make it more necessary for the BoE to bail them out.

HMG have effectively underwritten people's savings so NR is probably the safest place for your money to be now. They will also be offering some nice deals to get savers back.

Anonymous said...

Can a debt-fuelled house price bubble survive a credit crunch like we are now starting to experience or are we heading for an almighty house price crash?

Brown will soon be seen as public enemy number one IMO

Anonymous said...

It is a North-East bank where 99% of MP's are Labour.

Do you really think Gordo is going to let it go out of business?

Anonymous said...

Oddly enought, the BBC website is showing that today is the 15 anniversary of 'Black' Wednesday.

Entering the ERM at an inflated £-DM rate was entirely supported by the shadow chancellor at the time.

When is a research monkey at the Conservative's HQ going to find the quotes?

Anonymous said...

John Redwood criticises the Government for revealing the name of the Institution.
David Cameron calls for mor transparency.
Which is it Ian?

Anonymous said...

Don't think much of Redwood's typically high-handed and pompous "explanation". I am not surprised that this guy makes enemies.

He criticises the "The UK authorities" who "decided not to intervene in the 3 month money markets." By using this vague expression he deliberately confuses the Bank of England, which is independent, with the Government. If he thinks that the Bank of England has made technical errors, then he should communicate his thoughts to the Governor, not imply that the Government is at fault (though I suspect that Mervyn King can manage quite well without advice from this quarter.)

If there was any effect on “confidence in the UK” then people would be selling sterling. This has not happened.

Donal Blaney said...

Iain: if you had savings with Northern Rock the first £2,000 is 100% guaranteed and the next £33,000 is 90% guaranteed. It's hardly a BCCI case!

Anonymous said...

What is the name of the Jilted John song

Anonymous said...

The government has clearly screwed up in both the long and short term. The long term problem is the economy's dependence on consumer debt, which is something that the government should have addressed much earlier. Instead, it actually fanned the fire by discouraging saving by its ludicrous means-tested benefits, by castigating the financial services industry, by destroying the private pensions industry and by undermining private pensions schemes, especially through abolishing the dividend tax credit.

In the short term, since the only reason the BoE is prepared to back Northern Rock is that is has deemed the business solvent, there should have been no publicity. The Bank should simply have lent to the Rock at a higher interest rate and the Rock should have told its shareholders that profits would be lower since accessing funding had now become more expensive, something that would have been entirely consistent with it obtaining funds privately and would not have prompted a run on the bank.

Anonymous said...

there's nothing funnier than Iain's understanding of economics.

I sincerely hope you start talking about tax cuts soon.

http://www.timesonline.co.uk/tol/comment/columnists/daniel_finkelstein/article585454.ece

Manfarang said...

There was a run on the Sussex Building Society years ago.It was taken over by the Leeds.Expect Northern Rock to be taken over within the next few days.

Tuscan Tony said...

Good measured piece by John Redwood.

Off topic, reckon you picked the right week to visit Italy on the weather front....

Anonymous said...

I don't see the relevance of your first two sentences to what follows. Why would you withdraw your money? I have yet to hear one person interviewed who is withdrawing money provide a rational reason for doing so.

Anonymous said...

BBC4 News reporter to lady in queue at Northern Rock yesterday:

"Why do you want to get your money out when the Chancellor says everything is OK?"

Customer:

"That's what the Captain of the Titanic probably said!"

James Higham said...

Why stop there, Iain? Withdraw from all financial commitments involving institutions or credit and all will be well. The space under the mattress used to be quite popular.

Anonymous said...

It is the shareholders who have most to lose. Savers with less than £35,000 in Northern Rock won't lose a penny.

PhilC said...

Shouldn't all good free marketeers be lambasting the government for bailing out a private company? If Northern Rock cocks up then the market will make it pay the price. Sure a few people will lose their homes but, you know, that's tough because that's economic liberalism for you. If this was a government dept you would be all over this like a rash. The 'elites' thing is a nonsense, it's the same old nonesense that state intervention is bad until a private company needs it.

Johnny Norfolk said...

This reflects over 10 years of of labour controlling the economy. It shows the myth of an indepenant Bank of England. Labour has borrowed too much just like Northern Rock.
Northern Rock today . The country tomorrow?.

I hope Cameron waves his green policies goodby and keeps with this.

Anonymous said...

Which 'elites' are these, tinfoil helmet? Your Eton educated boss?

Anonymous said...

It's relatively safe to leave your money in, except why would you take the chance. So the queues will form every day until all the punters have their money back. Black Wednesday will be nothing compared to this.

Anonymous said...

Oi! Where's little Gio? Did you go on holiday without Gio?

Anonymous said...

this goes to show experts know nowt and sharks always win they got in got out took the money and this is the result.If the so called experts knew so much they would be rich and they aint.
Me i paid all my credit cards off and now only got a very small mortgage left cant wait to go to the bankruptcy auctions gonna get some bargains.

Anonymous said...

Iain, this is pretty irresponsible - the simple fact is that Northern Rock have problems getting liquidity from other banks.
They are now covered for the shortfall courtesy of the BoE and other agreements (NB They have not even had to use any of the BoE's money yet, either.).

Even if they do collapse, the first tens of thousands of pounds of people's savings are insured - the vast majority of savers are insured to at least 90% of the value of their savings.

The ONLY danger of NR falling over is if people withdraw their savings due to scaremongering news reports and blog posts like this - you are helping to make the panic worse, and thus endangering the bank and savers' money.

Anonymous said...

I do not think Labour have exacerbated the problem, I believe Labour have caused the problem.
Remember "Just Gordon, not Flash" , a short term pre election slogan put out by Brown. As I have said before it should be "Just Gordon,and Northern on the Rocks".
Cameron will have it handed to him on a plate as the Economy goes on the rapid slide led by more runs on our banks and a massive Property Crash affecting the Whole Economy.
I however, do not feel Cameron is man enough to go for it!

Anonymous said...

To be fair Iain, most of the IFAs I've spoken to have made it clear that the mass hysteria of people withdrawing cash is idiotic. And given the way Brown has put the screws on IFAs, most of them are far less "elite" than you are. People should get a bloody grip.

Wrinkled Weasel said...

Nobody believes official spokesmen, or ministers for that matter..Darling was party to the WMD and the 45 minutes scam..why should they?

There was Equitable, Enron, Farepak, Black Wednesday, Barings,Mirror Group etc, and they all maintained, till the end, that everything was ok.

The little people have been f£$%ked before and they will be f£$%ked again.

I blame nobody for protecting their money.

Jane Mark said...

Surprising for you, you are following the herd, and you know what you could tread in when you do that.

As a long time Northern Rock customer, I have no intention of taking my money out, and I am not alone - in the main Newcastle branch, there wasn't even a queue on Friday lunchtime [sometime after 1 pm], but of course the TV isn't going to show that.

The Bank of England wouldn't give Northern Rock an open-ended credit line if there was the slightest chance of them going down. These people who have taken funds out are just creating a problem - watch them squeal if they succeed in getting NR taken over and then the new owner shuts their call centres in Britain and sets them up abroad like all the other banks, taking jobs from Britain.

Everybody, including the BBC, seems to have forgotten about Barclays, who actually had to rush to the Bank of England twice in the last month, desparate for £1.9 billion - NR hasn't even touched their Bank of England facility.

Ralph said...

A cynic might think Brown has put a lightweight that's no threat to him as Chancellor and this is the result.

Anonymous said...

To some extent I agree Iain. I don't think there is a fundamental problem with the Northern Rock, and would not advise people to take there money and run, but if I am being honest I would not leave my money there either, particularly if it is large sums.

Anonymous said...

So Redwood suddenly knows more than the FSA, Bank of England and the Treasury does he?

If anyone is exacerbating the problem it's people like Redwood, Fraser and you - people who all think they know better than those who really do.

Kevin said...

Iain, whoever you had standing in for you was a 'tard, and couldn't even spell properly.

Anonymous said...

One can only hope that this will redound to the disgrace of Labour but it's just as likely that this would've emerged with a Conservative government. Let's give a heave-ho to Central Banks and move back to the gold standard. See the Ludwig von Mises Institute for some original thinking on central banks.

Anonymous said...

Why do some people keep repeating this spin that the first £2k of your savings is guaranteed 100% by the FSA and the rest upto £35k guaranteed 90% if your bank goes bust.

This eyewash came out when the thought of a major bank going bust was inconcievable and has never been tested on a large scale upto now.

The FSA's liability would run into billions if/when Northern Rock (or Bradford and Bingley/HBOS/Alliance and Leicester)collapse as looks increasingly certain.

You try getting £31,700 back in those circumstances. Not a cat in hells chance. The FSA scheme would fall apart amidst weasel words from Brown's monkey, the useless Darling.

Get your cash out and put it somewhere safe or risk losing it.

CityUnslicker said...

yep, they are screwed, but someone else will buy them.
probably barclays in the end.

Anonymous said...

The difference is that Barclays are not stuffed. They simply wanted to borrow money as part on-going operations. Northern Rock has a problem because their business is built on borrowing money and then sending it out of the door as loans. Due to the structure of what they were doing, they are loosing more and more money - worse, the potential risk is escalating even faster.

Check out their share price over the last few months.

Anonymous said...

Are you insane? It's backed by the Bank of England. Iain, have you lost your mind? Do you keep your money udner the bed? Are you actually a Conservative at all? You of all people, someone who has a clue about business, should be phlegmatic about this. Looks like emotional incontinence is what counts this season...

The Military Wing Of The BBC said...

It is now 12 o'clock on Sunday Evening.

The Bank Of England has not announced that NR have been bought by a larger Bank, as they could over the Barrings w/e in 1995, when heads were banged together until a deal was done.

Be afraid, be very afraid because this means there is a total lack of understanding within the government and its regulators.

The crisis management has fallen between the two stalls of the Gordon Brown designed twin Banking regulators of the FSA and the Bank of England. (The idiot went against advice and split the Bank in 1997 - his first act).

During the first Foot and Mouth outbreak in 2001, the Media Flotsam and Jetsam that is the UK Government, was not even able to work out that it had a crisis on its hands, let alone how to manage it.

Now the same shower are still in charge but this time its a full blown, rewrite the text books, how the Fuck did they let that happen?, Banking crisis, and once again they don't get it.

By not forcing a closing sale on NR this weekend the government is going to allow the Market to have its way all week.

At the height of the Panic, all they'll be doing is looking around for somebody else onto whom they will attempt to pin the blame.

I suppose the long term benefits will be that the public will work out that its new elite are incompetent swine, not to be trusted with anything.

M. Hristov said...

There are already lessons to be learnt from this situation. The greatest is the public trust in politicians has evaporated. There is not much more trust in The Bank of England or in the financial institutions (eg FSA). The second lesson is that the lack of trust is not just a psychological problem or a problem which causes low voter turnout. It can cause practical problems, such as the "run" on The Northern Rock. David Cameron and Menzies Campbell would be well advised to think about ways to win back this trust.

The future does not look rosy. We may well be heading for a major problem in the already sluggish housing market. Gordon Brown should dump Home Information Packs now, as there is evidence that they slow down the housing market. The housing market is probably going to contract markedly, as a result of the "credit crunch". "Buy to let" mortgages are likely to dry up and then prices will have to fall, as first time buyers will not be able to afford the houses on the market. Not least because they will not be able to get the salary multiples that they could get before the crunch. The availability of "buy to let" mortgages has artificially inflated the prices of "starter homes". Such homes will probably to suffer a sharp price correction downwards

David Lindsay said...

By the time that the mutual building societies were turning themselves into banks, our lords and masters had heard of trade unions and knew that they hated them (none more so than those who were financially dependent on them), but had no concept of co-operatives, credit unions, mutual guarantee societies or friendly societies.

They certainly had no idea that the building societies were part of this wider movement, including the unions, and entirely consistently built into the fabric of the extension of property ownership.

So they just let the building societies go, assuming that they were just another, if quirkily British, part of capitalism anyway. They were not. And the effects of this ruling ignorance are now being felt in earnest.

Rush-is-Right said...

The panic by NR depositors is another example of the emotional incontinence (Diana, Maddie) that is the determining characteristic of the Great British Public these days.

NR is as safe as safe can be. I think all this hysteria is just pathetic.

Alex said...

I added my words of "wisdom" to this thread yesterday, but they seem to have disappeared into the ether.

Redwood's reading of the situation is poor - but Guido has read it right, but then Guido was a trader and Redwood was an investment analyst, so Guido probably understands these things better, even if he probably did where white socks.

Redwood implies that NR's problems come from the BoE leaving the discount rate too high - but if this were the case it would create systemic problems for all lenders, which apparently is not the case. Alternatively there could be problems if there was a mismatch in the "basis" of funding (i.e. fixed vs floating), but this could happen at any time and does not appear to be the issue here.

Ministers have told banks to lend prudently, but again that does not appear to be a problem especially for NR. The may have grown their loan book at fine rates of interest, but they aren't reporting serious write-offs and nobody is accusing them of imprudent lending policies - or at least no worse than any other bank.

As Guido points out, the issue is a classic case of liquidity risk. NR funded itself through the wholesale market, using short term commercial paper in particular, to a much greater extent than other banks who finance themselves with a more stable deposit base. Other banks may have very large demand deposit bases, but the sheer number of depositors ensures that they don't all their money back at once, unlike commercial paper programs which have a nasty habit of being repaid in large amounts.

If NR has problems, that is the fault of their management and to a lesser extent their regulators, but it is hardly the fault of ministers.

So Guido has it right, ministers have it wrong (but with this lot you don't expect much), and to a certain extent Redwood and Fraser Nelson are wrong too.

The Military Wing Of The BBC said...

Well Mr Rush is Right, no doubt you'll be putting your life savings in so that you can Heroically and single handily to bail it out?

Anonymous said...

Alistair Darling this morning on Radio 4 sounded like some minor council official trying to explaine why you couldn't have a bypass. It was the usual political guff - the sort that becomes background noise after the first two sentences. Why spin a load of rubbish like that. Short answers are needed in this situation. I imagine more people downed their cornflakes and headed off to the nearest branch after that.
You can tell me it's safe until the cows come home, call me irrational, even mad if you like but if I had any money in the Northern Crock I'd be in the queue.
To me it is a whole new ball game and Alistair Darling might be convinced himself that all is well but what events might occur even before dinner time.
If you think it is ok then go down and put your money in - all your money!

Johnny Norfolk said...

How do they get away with it ???

If the Tories had been in power when this happened. They would have been attacked mercilesly by the media led by the BBC.

Labour however are basicly left alone to give their reasons as if it is nothing to do with them.

I just dont understand it.How do they get away with it.

Madasafish said...

What is clear is:
NRK borrowed short term and leant long term. That business model ALWAYS fails.. eventually. It has to.When markets move irrationally every 7-12 years, it fails...

The BOE is CLEARLY not Independent. Otherwise why does Draling state he "authorised" the BOE to lend NRK money.

Any politician expecting to be believed in a crisis must remember Lamont and earler "Crisis, what crisis?".. By Callaghan.

And the more they say it, the less credible...

NRK on its way to 270p,,, or 37p

Anonymous said...

I am a NR saver and a shareholder. Whilst my shares are clearly screwed, I am not going to join the lemmings queuing up outside the nearest branch (not lease because I have a job, and so can't afford to stand around sucking up to BBC interviewers all day).

At the moment, my anger is directed towards all these spineless people, who are simply make a difficult situation even worse. How long before savers at other former mutuals start taking all their money out and so precipitate a complete panic? I appreciate most of these people (from what I can see on tv) are oaps who would probably much rather keep their cash under the bed in any event, but they shouldn't be encouraged by scaremongering from people who really should know better.

tgf ukip said...

"Where's Gordon?"

"His powers of levitation would make a fakir stare, and when you reach the scene of crime - Macavity's not there!"