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Alistair Darling (the new Chancellor, in case you hadn’t realised) wants a return to ‘good old-fashioned banking.’
Banks have been lending too much money, recklessly. They need to stop and have a good look at themselves, and pull their socks up. Borrowers too, “need to ask themselves, ‘Can I repay this?’” he says. It’s as if Prudence had never gone away.
It’s good to see government ministers displaying their usual vigilance. After all, this crisis has only been building for the past five to ten years or so.
As it is, Mr Darling‘s warning came just as a major high street bank – Northern Rock – was scrabbling to arrange an effective bail-out from the Bank of England. We’re sure it wishes it had been doing a bit more old-fashioned banking too, but it’s a bit late for that now…
Just as Alistair Darling was admonishing banks for taking too many risks, Northern Rock was tapping the Bank of England for cash. The Bank has stepped in as ‘lender of last resort’ to the mortgage bank, agreeing to lend it an unspecified amount of money at a penal rate if needed.
The group – which has seen its shares plunge this morning – also issued a profit warning, saying that profits for both this year and next will be hit as it reins in lending and funding costs rise.
Northern Rock has been the bank most exposed to the credit crunch. The bank relies on the wholesale markets for most of its funding, rather than customer deposits. But this source of funding has dried up following the US subprime crisis.
Everyone is at pains to point out that these problems are down to short-term difficulties in borrowing. According to a statement from the government, written with the Bank of England and the Financial Services Authority, “the FSA judges that Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book.”
But one anonymous City analyst told The Telegraph: “This is a potential disaster… the big worry now is that it is not inconceivable that there is a run on the bank, with customers withdrawing their funds in fright.”
You might think that sounds like an exaggeration. Well, consider this – if a bank goes to the wall, the first £2,000 you’ve saved with them is 100% guaranteed by the Financial Services Compensation Scheme. The next £33,000 is 90% guaranteed. After that, you’re on your own. In other words, from a deposit of £35,000 or more, you’d get £31,700 back.
That’s not to say the bank is going to go to the wall – to be fair, the people who should be most worried about losing money are the bank’s shareholders. But the natural human reaction to seeing even a wafer of doubt hanging over your life savings, would be to shift them elsewhere – particularly if you have more than £35,000 in the bank.
So frankly, the government’s warning on debt comes a bit late. In fact, like all governments, it’s only taking an interest now that the catastrophe in the credit markets is threatening to utterly destroy New Labour’s hard-won (and ill-deserved) reputation for economic competence, and thus ruin Gordon Brown’s chances of remaining Prime Minister after the next election.
I don’t recall Mr Brown, Mr Darling or any other member of the government complaining about bank’s profligacy when it was fuelling a consumer boom. Nor did I hear the government worrying about rising house prices. Those were the result of a strong, low-inflation economy and upper-middle class Nimbys restricting supply in the South East. Nothing to do with banks basically doling out mortgages to people who’d never be able to afford to repay them unless interest rates stayed low for the rest of their lives.
As a letter in the Daily Telegraph this morning puts it, the past ten years of booming house prices and booming debt “has been spun as the ‘Brown economic miracle’. Now the chickens are coming home to roost.”
They certainly are. And unfortunately, it won’t just be the careless, the profligate and the reckless who suffer, it’s going to be the whole lot of us. Taxpayers will have to pay more to prop up our indebted government, and anyone with a mortgage is going to see it get a lot higher to prop up our indebted banks, regardless of what the Bank of England does to the base rate.
The only good thing about the coming economic slump is that everyone might stop gibbering about the environment for five minutes. Forget environmental taxes – the coming recession will help sweep away a ton of unnecessary consumption quicker than you can say the words “mass redundancies” and “soaring repossessions.”
Welcome to the Treasury, Mr Darling. You’re just in time to discover that boom and bust never really went away – it’s just been delayed.
Turning to the wider markets…
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In London, the FTSE 100 recovered from earlier losses to end up 57 points yesterday, at 6,363. Cable & Wireless led the climbers on a broker upgrade, whilst BP and Royal Dutch Shell made further gains as the crude price topped $80 once more. For a full market report, see: London market close.
On the Continent, the Paris CAC-40 closed up 57 points, at 5,565, as investors bought into defensive stocks such as Arcelor-Mittal. In Frankfurt, the DAX-30 was 62 points higher, at 7,535.
Across the Atlantic, stocks closed higher as better-than-expected weekly jobs data cheered investors. The Dow Jones industrials index was 133 points higher, at 13,424. The tech-laden Nasdaq added 8 points to end the day at 2,601. And the S&P 500 was up 12 points to close at 1,483.
In Asia, Japan’s leading Nikkei index broke through the 16,000 barrier to close at 16,127 – a 206-point gain – ahead of Monday’s holiday. In Hong Kong, the Hang Seng index was up 356 points to 24,893 at the time of writing.
Crude oil was 41c lower this morning at $79.68, having closed above $80 for the first time on the New York Mercantile Exchange last night. In London, Brent spot was down to $77.76 a barrel.
Spot gold had fallen back further from the 16-month high of $714.20 reached on Tuesday and was last quoted at $706.30. Silver, meanwhile, had slipped to $12.48.
In the currency markets, the pound had fallen to a 14-month low of 1.4523 against the euro this morning following the news from Northern Rock. The pound was also lower against the dollar, last trading at $2.02167. And the dollar was at 0.7199 against the euro and 115.03 against the Japanese yen.
And shares in Northern Rock had fallen by as much as 21.8% to 500p in early trading. Fellow mortgage banks Alliance & Leicester and Bradford & Bingley were also down by as much as 5%.
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