Sep 15 2007
How to create banking problems
Step One: Before an election, government changes inflation targets - as a result interest rates are kept too low
Step Two: Government and monetary authorities watch as private sector borrows large sums of money at very attractive rates, to lend on and to create new funds. Monetary authorities allow plenty of cash to be available in the markets to allow this to happen, and fail to issue clear warnings.
Step Three After an election authorities realise inflation is going up too quickly, so they drive up interest rates to rein in credit.
Step Four: Chancellor gives interview accusing the banks of lending to people without checking if they could repay, and calls for a return to "good old fashioned banking" implying there is something wrong with modern banking.
Step Five Someone decides to publish the fact that a particular institution may need the lender of last resort facility at the Bank of England.
Step Six: Authorities watch TV to see queues forming as depositors ask for their money back.
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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...
I suspect Mervyn King would agree with a lot of that.
But for Broon the political problem is only just starting. Either Northern Rock becomes a run-off business, a mortgage version of a closed life fund, or its business is absorbed into a top tier bank; a cosy merger with another medium sized/provincial institution is out of question. That means no need for thousands of people sitting in offices in Newcastle or for trebles all round sponsorships for football, cricket teams etc etc.
Final thought, I wonder if it will emerge that after the BoE had explained what was happening to Treasury officials their immediate reaction was to talk dismissively about a lot of ‘grannies’
It would certainly be good if someone could read that list out to Gordon Brown and Alistair Darling during Prime Minister’s Questions. It would certainly make more than a few on the Government benches quirm.
You missed out
pump money into the economy for nil return thus creating short term ‘growth’ with no long term benefits
stand up every week proclaiming a miracle economy thus encouraging the public to think its safe to borrow huge amounts because the economy is on a never ending growth path
Just goes to show that no matter how many times Labour fiddle the figures to make their ersatz-economy look good the truth will eventually catch up with them. Labour’s pre-2005 election mantra of ‘The economy is good’ was a falsehood. Gordon Brown, the self-styled economics guru was in fact the plastic chancellor who decieved the nation with his slight-of-hand.
Another thing Brown did to help cause the problem is to separate the Bank of England’s function as lender of last resort from the FSA’s function as bank regulator and supervisor. Another thing he did was to regulate pension funds to favour fixed income which brought spreads in to unrealistic levels, giving the system the opportunity and the incentive to borrow more and take higher risk.
Reply: I agree - I have criticised both these moves in the Conservative Economic Report and suggested changes.
About 40 queuing outside my local branch this morning.
I smell a rat. When Barclays borrowed from the B of E the media attacked Northern Rock.
Now other high street banks are advertising for people who ‘have been affected by Northern Rock’ in their windows and are adding to the panic.
These same banks will be cap in hand should they get affected by what is happening.
If Northern Rock does go under lots of local jobs go and more people default on their mortgages, the cycle continues.
Perhaps the banks should be more supportive of each other in such times rather than trying to kick each other while they are down.
It wasn’t that many years ago that building societies provided the overwhelming majority of mortgage funds for people buying their own homes. Prices were therefore constrained by other people’s savings.
The Northern Rock model (freeing up mortgage funding by borrowing against the money markets) made a lot of new money available to lend, removing the “mortgage freezes” that some of us experienced in the late 1970s and early 1980s.
Unfortunately, by prioritising low interest rates and then handing control of interest rates over to the mandarins at the Bank of England, Gordon Brown’s policies have brought huge sums of money into the residential property market.
Gordon Brown’s policies have brought huge inflation in the property market, which is very good news for sellers but not for the ordinary British family who have had to borrow enormous sums of money in order to fund their accommodation.
The recent tightening of supply in the money markets means that very little new money is available to fund mortages and will surely have only one outcome: rising interest rates. Now Alastair Darling may be trying to limit these effects by telling the Bank of England to print extra money for Northern Rock, but this can surely only be a short-term solution.
If Alastair Darling’s gamble pays off, the Bank of England’s loan will provide enough stability for Northern Rock until either the money market stabilises or another institutional investor takes over their business.
There could be another outcome, however. If enough people lose confidence in the Northern Rock and choose to move their savings out of residential property into other areas (for example, the stock market), this would likely result in a shortage of mortgage funds which, if it were to continue, would result in a collapse of house prices.
My question therefore is, would a reduction in house prices, making them more affordable for the average British family, necessarily be a bad thing?
Never forget: “Gordon Brown has put an end to boom and bust”.
i’ve lost count if the number of times I’ve been told that.
May I precis your list into one sentence; print more money than the base economy can jutify.