The dominant economic message from the Labour Party, ergo the Government, for the past decade has been, as we all know, "no return to boom and bust". This has been framed for the most part around interest rates. We are reminded almost daily that interest rates are low thank to Labour, and there will be no return to 15%.
Personally speaking, I have always believed that Labour's decision to bang on about this for so long has been a mistake, because low interest rates are not really a good thing. Low interest rates means easy credit, and easy credit means debt. This has also meant easy mortgages.
The news today that Northern Rock is being bailed out doesn’t surprise me in the slightest. If you had asked me three years ago what I thought of Northern Rock I would have said that they gave money away to easily, that they were irresponsible lenders, and that they would come a cropper one day.
The reason for that is because I used to have neighbours from hell in a converted terrace. They were with Northern Rock, they should never have been given a mortgage, they could never afford it, they even failed to pay their £250 solicitor bill which meant when they finally had to sell up to avoid bankruptcy, the property wasn't legally theirs on the Land Registry.
They were the freeholder and I was the leaseholder in the property, so I had an active interest in what was happening, and during that time I discovered that Northern Rock had the highest repossession rate, and was handing out self-certification mortgages to pretty much anyone who said "I can afford it honest".
The entire problem, in my mind, was driven by the low interest rates. This made it easier for people to buy, the prices started rising as supply fell and the phrase "it's a sellers market" was commonplace. As Property Ladder on Channel 4 showed, people were buying property, developing it massively over budget, and still walking away with huge profits.
The rush to get on the housing ladder meant that people who should not be taking mortgages started taking mortgages, all because it was so cheap to do so, not realising that interest rates would inevitably rise. In my view they should have risen much faster, much earlier to stave off the desire of banks and building society to lend money out to people who they ordinarily wouldn't dream of even giving an overdraft too.
Of course, many will say that this was because of the Bank of England, not the Government. Gordon Brown made them independent they decide the interest rate. However, they’re really only quasi-independent. They make their decision based on inflation targets set by Government, and the idea that the Treasury cannot exert pressure on them is risible.
Brown and Blair both made it a clear political goal to keep interest rates low, and by constantly reminding everyone of the fact that they had brought low interest rates, the Bank of England will have been well aware of what the message from Government was. The "independence" of the Bank of England can be taken away as easily as it was given after all.
So, as the Bank is now being forced to bail out Northern Rock, and the likelihood of other lenders finding themselves in credit crisis looms, it's worth noting that the Government's political obsession with Black Wednesday may actually see that day have a double hit on the economy. Sometimes the past really can weigh like a nightmare on the brain of the living.
9 comments:
You are too right - Northern Rock are well known for their desire to lend too much money to willing borrowers.
The problem with house price inflation and now the credit crunch, has been the banks desire to lend 4.25 joint income rather than the historic 2.5 joint income. The government have been tototally blind to this problem and deserve a good kicking at the polls. No doubt Crash Gordon will be able to weasel out of this problem as well.
It has been a long time coming
you are absolutely right Dizzy - Black Wednesday, ironically, will be Brown's downfall too. The gathering economic storm and the interest rate situation is going to put Labour out of action for a long time.
Northern Rock are apparently solvent. Whilst they haven't been sensible enough (as Chris Peston points out) their main problem isn't irresponsible lending.
Not that I'm long on sympathy for them anyhow.
Mountjoy, I wouldn't hold your breath. Sure, we can wait for Labour to hand power to the conservatives (after all, it has worked for the Democrats over here in the US, thanks to collosal Republican ineptitude) but I would prefer that the conservatives actually take power rather than wait to be gifted with it.
Actually Adam, you're wrong, they're main problem is irresponsible lending. Whilst they have not been really stupid and given out NINJA mortgages like in the US, what they have done is lend to almost any silly sod who has a job, irrespective of whether they can pay it off.
This wasn't quite so risky in the steep rising market a few years ago when repossessions came. But now it's not so good. Add then to the fact that they are not normal bank, they only have about 25% of their business in traditional banking, means they don't have significant backing in their own reserve fund to make the lenders on the money markets comfortable.
Sure, this problem is not insolvency, it's a liquidity problem. And yes it started with the collapse of the sub-prime market. But the fact that it has hit Northern Rock before anyone else is because of the manner in which they go about their business. The lender on the market look at them and see Countrywide whatever from the US.
Hello,
My name is Norman Rock.
My recent application for a large loan from the Bank of England seems to have caused a few financial jitters in the banking world and I'd like to say a few words to reassure everyone and confirm that there is no need to panic.
You see I do not operate in the same way as other people. Conventionally, most people go to work every day and receive what is known as a salary and, out of this, they pay for their living and entertainment expenses.
The Rock family also pay for these expenses but only work for a couple of weeks in the year. The main source of income comes from credit cards. Indeed, I have a large portfolio of these spread world-wide and these have stood me in good stead up to now. I am very proud of these and have developed quite a bond with them. I even call them my "Bonds", but of course they are not what most bankers would accept as such.
Now that the credit card companies have put a limit on my cards I find myself in need of a cash injection but this is just temporary, I repeat, just temporary. You see these matters are very complex. So complex, that I could not even give you a value of my portfolio at the present time.
So, no need to worry, it's BUSINESS AS USUAL. Indeed, this weekend, I shall be purchasing a flat screen HD television and a Jet-Ski.
The problems they have in preserving liquidity aren't because they've lent all their money to people that will default, they're because it's much harder to get money for everyone, because of the subprime disaster.
The biggest failing (amongst several) of Northern Rock was to have a business model that depended on lenders being willing to lend as before based on a certain business strength; even without some of their more marginal loans (that are not, so far as I am currently aware, close to the ridiculous loans that were given here in the US), they'd be in trouble. Because the mood of lenders is out of their control, they should have been able to deal with it when it changed according to their business plan. It's not defaults on their loans that are creating the problem, which is the case in the US -- they may indeed take a hit from increased defaults, but that sounds more like a 'make less than expected profit' rather than a 'going bust so no one will lend them money' issue.
Irresponsible lending is not their primary problem, it's overoptimism in their general business plan.
Adam, you're missing the point. The people that lend them money on the money markets are still lending money to others. They're just not lending to Northern Rock right now and they reason or that is when they look at them they see a business that has not been making sound decisions. I didn't say it was default on their loans that was causing them trouble, I said that their irresponsible lending has bitten them on the arse because they're not see a good person to lend to anymore.
As an aside, the Government should not have bailed them out.
Hello, Norman Rock here again,
Well, what a hectic few days it has been and no mistake. The old credit cards have really taken a hammering. Not sure what Mrs Rock and I can do.
Had a word with my golfing buddy, Loyd, to see if he could buy some of my "Bonds" but the old lady at the end of street has advised him against it. She has put her foot down rather firmly I thought, but still.
There is a glimmer of hope on the horizon. Last night, I was having a drink in our local with Nick Lee's son ( he used to work for a ball bearing manufacturer ) and he gave me the name of the Dutch guy, known to his friends as Inge, who helped sort out the mess in the Bearing Factory; caused in no small measure by Nick Lee's son himself.
But who am I to talk. Anyway, fingers crossed that Inge can help. Meanwhile I'm off to pacify the queues of angry punters, outside the Rock residence, who are waiting to collect anything of value they can find. Good job I stashed away the Jet Ski, and more, in my "Charity Box"!
Only just saw this as it had dropped off the page.
Dizzy, the point is that Northern Rock, which doesn't have that much from depositors, has to go to the lending markets more than many other mortgage firms do. Thus it is more exposed to problems in the credit market. The lenders are still lending to others, but at higher rates; the amount of pain that causes depends on the amount to which you have to depend upon borrowing from lenders.
In any case, the response to their request is somewhat bizarre, because according to the Bank of England, they are still solvent. It has, however, exacarbated the problems that Northern Rock faces; without the recent government intervention, one could imagine them going bust (maybe they still will) over the reaction to the problems (problems which in themselves were eminently survivable).
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