Oh dear – now the taxpayer is on the hook for big money

Wrong, wrong, wrong.

The latest decision to guarantee most of the liabilities of Northern Rock is a clanger.

There is no statement to Parliament, no statement of how much is now at risk, and no statement on how long our money is to be at risk.

Why cannot the government understand that it has to be tough bank manager to Northern Rock, lending the least it can get away with, imposing strict repayment timetables, and monitoring cashflow daily to ensure that all surplus cash is used for debt containment or repayment?

This government seems to think the taxpayer is made of money. Although Northern Rock is not a huge bank by international standards, judged in relation to the size of the Bank of England it is a collosus, and in relation to the UK public sector it is large.
Guaranteeing maybe ??100 billion is the equivalent of one fifth of stated total public debt, the same as the annual NHS budget, and almost one fifth of total public spending. They are crazy to do that.

Every one percent of error or loss on the whole Rock balance sheet is ??1 billion! Before this move 1% of taxpayers exposure was a mere ??250-300 million, already large but just about within the government’s command.

Northern Rock is too large to nationalise, and too large for us to guarantee all its liabilities. Unfortunately you cannot help some people – they are just determined to get it wrong.

Additional comment: we are now learning that maybe so far we are “only” guaranteeing ??60 billion. It is outrageous that Parliament and markets cannot be told how much is being guaranteed, and on what basis. The authorities lecture other banks about the need for transparency, and then commit the taxpayer to these large risks and vast sums without any proper explanation of how much, for how long, and on what basis.

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  1. Matthew
    Posted December 18, 2007 at 6:23 pm | Permalink

    I don't think the

  2. Steve Horgan
    Posted December 18, 2007 at 9:56 pm | Permalink

    I quite agree that this was the wrong decision, and the only conceivable reason why it was taken is that the haemorrhage of funds from Northern Rock has continued unabated. Not surprising really, their credit rating has been downgraded and as short term paper falls due there must be a dearth of new lenders. Without this guarantee we can assume that the two remaining bids would have failed, and bank failed shortly thereafter. Will it work? Well we will have to wait and see, and the answer should come quite quickly. If lenders do not come forward despite this guarantee then Northern Rock faces administration or nationalisation, probably the latter now that the government has such a high degree of liability. How did we ever get into the situation that such a large proportion of the British government's working capital ends up invested in a mortgage company just as house prices start to tumble?

  3. Matthew
    Posted December 19, 2007 at 1:14 am | Permalink

    Thanks for the reply, and the one below.

    Certainly some of your readers seem to think that

  4. Matthew
    Posted December 19, 2007 at 1:15 am | Permalink

    Also, question 2) – What's your view on George Osborne's (apparently sensible) view that the State should have more powers?

    Reply: In what field?

  5. Bazman
    Posted December 19, 2007 at 9:50 am | Permalink

    Corporate Welfare at it’s finest.

  • About John Redwood

    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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