If they can manage £50 billion now, why not before the run on the Rock?

THE £50 BILLION PACKAGE FOR THE BANKS WOULD HAVE SAVED NORTHERN ROCK IF INTRODUCED LAST AUTUMN.

If the government and Bank of England can make £50 billion available to the banks today to get the mortgage market going again, why couldn’t they have done that last September to prevent the Northern Rock crisis?

This latest move completes their extraordinary U turn from wrongly saying there would be no bail-outs or help for the banks last September, to now adding a £50billion money market package to the £100 billion nationalisation of Northern Rock. British taxpayers uniquely in the world have double trouble – we are paying for the credit crunch twice, just as we seem to pay twice for everything else this government attempts. We are likely to lose money on the nationalisation, and have very overstretched public accounts thanks to this double borrowing whammy. The irony of the UK position is the government is seeking to sort out overlending by the mortgage banks by overborrowing itself!

If £50 billion had been made available last September there would have been no run on Northern Rock. That unhappy institution would not now be owned by taxpayers, responsible for shedding at least one third of the staff and fighting a legal argument over competition law with the EU. It would not now be running its business down and struggling to repay a massive £25billion loan from the taxpayer. Instead confidence could have been restored with this kind of package last autumn.

The latest scheme – £50 billion of government debt to swap for mortgages – is a better way of helping than clumsy and expensive nationalisation. The reported timings are clever – one year bonds to avoid proper balance sheet accounting for the government, three year duration for the mortgage banks to get the government through the next election before the reckoning. The £50 billion scheme, if properly designed, will be better value for taxpayers than the nationalisation, and will help all banks in the UK, not just one. It is not without its dangers, but at least it does not make the taxpayer responsible for all the staff, loans and liabilities of all the other banks in the way we are for Northern Rock.

The history of the Northern Rock crisis can be followed on www.johnredwod.com, under the Northern Rock tab. Items are in chronological order.

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13 Comments

  1. Posted April 19, 2008 at 9:43 am | Permalink

    Explain why I should help a bank to survive a crisis of its own making please John, I though that was what shareholders were for.
    ( I didn't have the government throwing money at me when my small business was failing due to wrong decisions that I made ).

    Reply: The government should ensure the system works by its open market operations. Shareholders should take the pain for specific errors by their bank.

  2. tim holden
    Posted April 19, 2008 at 10:28 am | Permalink

    The government will print the money and fudge the inflation stats. Their predictable lies on the subject will be exposed and they will come out with an inevitable variation on the Ballsian theme of "so what".
    The new spindoctors will be busy – but that money is purely wasted on a problem that is already beyond control, and it is fairly safe to say that the level of detestation for the Brown clique is so great that things will change.
    The new sentiment of loathing has shifted the old sediment at the bedrock of Labour support. However, that portion of the electorate which is now so disaffected was never rational, and so we almost certainly need to worry about who they will vote for.

  3. Iain
    Posted April 19, 2008 at 11:07 am | Permalink

    The core of the problem is the lack of savings in both the US and UK, which has driven the need to securitse mortgage debt in order that cash rich countries would buy it, and so keep our consumer driven economies under written by a bubble housing market afloat. The bank of England stepping in to plug the mortgage supply gap, (the 50 billion is almost equivalent to the securitised mortgage portion of the market) isn't going to sort out this underlying problem, at best its a bit of sticking plaster, at worst its going to bloat our already bloated money supply yet further and put yet more structural inflation into our economy.

  4. Bazman
    Posted April 19, 2008 at 3:43 pm | Permalink

    The fact is that most houses are massively overpriced, so any 'crash' is really just a reality check. Should any government be propping up this farce with taxpayers money?
    You cannot 'make' money on your house and anyone who borrows money against their property to fund a lifestyle is a fool who deserves all they get.
    Who is in charge? The banks or the government?

  5. Robert
    Posted April 19, 2008 at 6:36 pm | Permalink

    John, I fear this will lead down a similiar path as the US Savings and Loans in the late 80s/early 90s. Andrew Lilico on Conservative Home – Centre Right has presented the Bank's conundrum with regard to this rescue package. Conclusion, the taxpayer will yet again bail people out as it seems both people and institutions cannot be allowed to face the consequences of their actions. i.e. Lending/Borrowing too much money at the wrong time of the cycle. It is differnet this time around is something I have heard from people who should know better! Or did you believe Gordon that boom and bust was over? The Banks need to improve their capital ratios by rights issues as I have stated before , come clean on their exposure and eventually the market will start to operate again. But mark my words the Banks business models will now have to change, we will not get back to the levels of irresponsible leverage that drove this global credit/asset boom.

    Reply: Of course the banks have to raise or generate new capital, and yes the models will be different. They will gradually reveal their losses. I always thought rates were too low and borrowing too high 2003-6 and warned about the very high levels of government borrowing as well.

  6. AngryTaxpayer
    Posted April 19, 2008 at 7:05 pm | Permalink

    There should have been no government intervention in the market before or after the NRock catastrophe! NRock should have been liquidated and depositors paid what they were owed under the FSA's deposit protection scheme, that is all.

    The government is intervening in the market by thieving from taxpayers to plug the losses made by banks. How can we call this a free market economy? It is much closer to communism.

    This is a disgusting affront to taxpayers who have managed their financial affairs prudently, while mortgage borrowers and banks have been taking enormous risks.

    The Labour government has nailed its colours to the wall: steal from the thrifty to give to the greedy!

  7. mikestallard
    Posted April 19, 2008 at 8:30 pm | Permalink

    Do you remember the story of the little girl who asked "Mummy, what is Lord Randolph Churchill FOR?"
    I now ask the same question about this government. What is it for?
    It is certainly not for helping the poor. It is no sense traditional Labour based on working class values etc etc. The late Gwyneth Dunwoody and Frank Field show that real old Labour is now a things of the past – worse luck.
    Judging from an outburst in the gym from a local factory worker yesterday, I do not think it is for helping the married, decent working man either.
    In finance, it is slow, gormless and ignorant. You have, again, proved that.

    PS did you like your mention in the Telegraph today under Craig thinggy?

  8. Steven_L
    Posted April 19, 2008 at 9:30 pm | Permalink

    So from what I'm reading, we swap bonds backed by the tax revenues of one of the worlds largest economies, for all sorts of funny instruments and things that most of us don't understand, backed by house prices and the ability of consumers to repay their debts – at a time when house prices look like they might start declining, consumers have record levels of debt and there is talk of recession?

    I can see why AngryTaxpayer above is angry. I read in the telegraph today the B of E is intending to take on their credit card debt as collateral for more loans. If there are the same issues with how this is rated as there were with the CDO's that's another few billion down the plughole.

  9. Posted April 19, 2008 at 10:17 pm | Permalink

    Haddock and other commentators, I get your point, but once the banking system has gummed up it's in everyone's interest to get it going again. Systemic banking failure would send us back to the Dark Ages (or at least the 1970s, if you can tell the two apart!)

    What's more important is that this time the banks are regulated and/or punished following this disaster. Bankers always spin these crisis like they're unforeseen once in a 1000-year events, but they're not at all. The US for instance seems to have a potentially fatal financial failure every decade (Savings and Loans in the early 90s, the Latin American default in the early 80s, et cetera).

    If regulation stifles financial creativity too much (and I accept it might) then banks should be compelled to pay a certain amount of their earnings into a secure fund, held off-shore in a mix of currencies and commodities, specifically reserved for bail outs at the government's discretion when the do go wrong again.

    You read it hear first: feel free to steal the idea, Mr Redwood, but post my comment first please.

  10. Matthew Reynolds
    Posted April 19, 2008 at 9:21 pm | Permalink

    Tax reform is crucial to bolster the savings ratio so that the banks get the cash to lend to business or to private individuals . By cutting personal taxation (i.e. raising the basic personal allowance ) people can make ends meet better without extra debt and by making ISA’s more generous there is more incentive to save. To tackle this problem people need more money ( owing to lower taxes) and then a decent incentive to save the extra cash. A higher savings ratio & less profligate behaviour on the part of consumers is called for so that banks have the funds needed to keep going without higher interest rates being needed to boost saving & deter higher personal debt. The bigger personal allowance & better ISA incentives can be funded by closing down enough QUANGO’s & reforming Housing Benefit to stop dodgy landlords ripping off the taxpayer . Lady Thatcher was right about the facts of life turning out to be Tory…..

  11. Bazman
    Posted April 19, 2008 at 10:39 pm | Permalink

    If you type the words "outsiders attitude" into Google you get 1-133 and if you do the same in Google UK you get 1-4. Interesting! As John said. All politics are local.

  12. Jonathan Stead
    Posted April 23, 2008 at 10:55 am | Permalink

    My apologies for this not being too intricate as i have never studied economics, but can anyone else see an emerging pattern extremely similiar to that of the great depression in America in the 1920's. The 50 billion injection would never have been in place before the Northern Rock crisis because the Northern Rock crisis was needed to orchestrate this entire project…history repeats itself. Before long our country will have no choice to enter the Euro as our economy will be on the brink of collapse and our society will request it as we will have been brought to this. Makes sense why we were given a priminister whose "talents" lay within economics. People need to stop looking at the current trivial events that are taking place and look at the bigger picture.

  13. Adrian Peirson
    Posted April 26, 2008 at 1:29 am | Permalink

    Who is in charge? The banks or the government?

    The Bankers are in charge, the Money Lenders have been in charge for centuries.
    The Global Elite, the Illuminati, te Bilderbergers operate our sham Parliament from behind the scenes, presenting us with the Illusion of Democracy.

    They Own the Bank of England and the Federal Reserve which is neither Federal and Has no reserves, IE no Gold to back up its currency, remarkably similar to our own situation after Brown sold off our gold to who was it ? see if you can guess.

    http://www.youtube.com/watch?v=OnwLgrSJZKs

    The only countries which Dont have central Banks now are Iran, Syria, Venezuela, Nth Korea, do these sound familiar.

    http://www.youtube.com/watch?v=0gk9sABtJxM&eu

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  1. […] to realise that bank failures are not once-in-a-million year events. As I commented recently on MP John Redwood’s blog, banking shocks are more like once-a-decade affairs. Somehow banks need to stump up some insurance […]

  • About John Redwood

    John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College, and has a DPhil from All Souls, Oxford. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.
    Published and promoted by Thomas Puddy for John Redwood, both of 30 Rose Street Wokingham RG40 1XU
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