Sep 14 2007
Credit crunch - will the Chancellor now change his words?
What a difference a day makes.
Yesterday morning I awoke to the Chancellor’s interview telling us banks had to live with the consequences of their business decisions.
Last night I heard that he had agreed to a loan from the Bank of England to Northern Rock.
I think his (and the Bank’s) decision was the right one.
It makes his statements even more silly.
The consequence of Northern Rock’s business model was that if the money markets tightened too much Northern Rock would find it difficult to obtain the substantial funds they needed at competitive interest rates. In the days of easy credit - encouraged by the UK authorities by low interest rates - the Northern Rock model worked very well. They had access to lots of money at competitive rates compared to more traditional mortgage lenders who obtained more of their money by collecting deposits from the public to lend on to people buying property.
There was plenty of comment around in the marketplace about the difficulties of raising sums from the shorter term commercial paper market. The authorities must have known about the position of Northern Rock. Why on earth did the Chancellor blunder in with his ill judged remarks so close to endorsing the decision for the Bank of England to make money available to them?
It is important that the authorities handle this situation well. Confidence is everything. I hope on this occasion actions will speak louder than words. Depositors with Northern Rock should be relieved that the UK authorities have gone to the aid of the company.
It leaves us asking the reasonable question, what business mistakes or problems will the Chancellor refuse to alleviate? Is he coming round to the view that these conditions in money markets are such a big change, created in part by a lurch in money policy from too easy to very tight, that it would not be right to starve financial institutions of cash? This would be an important change of tone from yesterday, and one more likely to reassure markets.
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John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
In light of these events, and your insightful comments thereon, I was surprised to read this in the news summary section of ConservativeHome: “The most striking finding is over a hypothetical but perhaps all too real question: If Britain’s economy were to face problems in the months or years ahead, who would you most trust to deal with it in the best interests of Britain?
JR: “Depositors with Northern Rock should be relieved that the UK authorities have gone to the aid of the company.”
Yes, but what about us tax payers? Why should we bail out a company that has developed a failing buisness model? Your party stopped supporting British Steel and the National Coal board in the ’80s, because we (the tax payer) were being skinned. Why is Northern Rock different?
Many of us had the choice to bank with Northern Rock, many declined the opportunity. Why should we now be forced to bank with them after all, especially when there buisness model is looking very flaky, and what’s worse, on even worse terms than if we had done so of our own free will when they looked like a good bet?
JR: “It leaves us asking the reasonable question, what business mistakes or problems will the Chancellor refuse to alleviate?”
Quite. One might put the same question to the Tory economic adviser too.
Reply: The Bank (and the Chancellor by implication) assure us lending to Northern Rock is a safe thing to do. They do not therefore need to make subsidy payments from taxation to the company in the way successive governments bailed out nationalised industries.. No-one is being forced to bank with Northern Rock. Any sensible person wants stability in the UK banking marketplace, which sometimes requires Central Bank intervention, especially after a big change from easy money to tight money such as the one we have recently experienced. My view is the authorities helped create the current conditions in financial markets by keeping interest rates too low for too long and then imncreasing them substantially. They do have a responsibility to help manage the change from such easy money conditions without doing too much harm to the rest of the economy in the process.
JR: