Sep 17 2007
Who told us that Northern Rock might borrow from the Bank of England?
I usually favour open statements so investors, savers and voters can make their own judgements. On this occasion it seems clear that the decision to make a public statement about Northern Rock’s possible borrowing from the Bank of England caused many to want to take their money out of the institution.
Directors have to make sure their companies can pay the bills for the next year so they may continue trading. If the Directors of a bank feel they need a back up loan facility from their banker, the Bank of England, as well as relying on money from money markets and depositors, that may be prudent against the background of incredibly tight money conditions in the money markets. Did anyone need to make this public? It is not usual for banks or other companies to provide a running commentary on how they will borrow money, or how much they may need day to day. It is left to Directors, with their financial advisers, bankers and auditors, to sort these matters out. An absence of any statement to the contrary means we know that each business does have credit facilities and cash in place to meet its obligations.
We need to know whether there is now going to be regular commentary issued by the authorities on the financial state of the banks they supervise and assist? How could this be managed without occasionally repeating the scenes of the last few days?
The result of the authorities actions and words over the last few days has been to force them tonight to announce a guarantee on the deposits of all savers with the Northern Rock. We will need to see the small print of what this means, as the Chancellor’s statement was very short on detail.
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
The Chancellor’s internvention this evening seems to me bizare.
I understood the rules to be that the frist
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This story appears to have been largely driven by the BBC’s Robert Peston. The BBC, when reporting, should always behave judiciously and has no responsibility to protect financial institutions that have behaved unwisely. They should, however, not incite mass hysteria which I believe could have been foreseen from the tone of the reporting.
I’m a little bit suspicious of the whole affair. Has the government used the shareholders of a bank as sacrificial lambs in an attempt to keep a lid on rampaging house prices? There has been numerous interest rate rises and still no significant slowing and the government’s got form for paying scant regard to shareholder’s rights with Railtrack. By leaving house prices out of the inflation figures, that determine interest rates, have they inadvertantly neutered the effectiveness of rates rises in quelling house price inflation?
A guarantee on all savings seems somewhat rash and a dangerous precedent setter. If it transpires the Directors have been not entirely candid, with regards to the bank’s solvency, I could well imagine them reneging on this seemingly generous pledge. There would also need to be some clear statement on time-frame for me to have any trust in it. If we’re going into a period of high inflation and it takes years for the payouts to be made the savings eventually paid out will be worth substantially less in real terms.
Reply: The Regulators assure us the bank is solvent and are clearly satsified with the Directors conduct. There is no stated time for the guarantee. I don’t think we are going into a period of high inflation.
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A bit off topic …
In his recent interview with the Telegraph (17/09/2007) Alan Greenspan noted that “Britain must overhaul its flagging education system or risk being left behind by other vibrant economies around the world”.
Secondry schools in Wokingham Borough are all comprehensive. The nearest grammar schools are in Reading Borough. Wokingham schools have fairly decent gcse/a level results. But the Ofsted reports for some schools are rated “Satisfactory” and mention a “disruptive minority”. And as you noted in your post on giving a talk on Economics at a public school, pupils at comprehensives don’t seem to have the same self-knowledge, drive and ambition as public school pupils.
What concerns me is a “cheerful mediocrity” where brighter pupils are not stretched and made aware of the opportunities available to them. Will a “grammar stream” in comprehensives rectify this and enable our pupils to compete internationally. Or possibly selection at 13 based on exam, interview and pupil inclination. (Many people feel that 11 is too early which maybe accounts for the unpopularity of the 11+).
Also, maybe too many schools have chosen “Maths and Computing” as a speciality. (Does Computing mean mucking around with Microsoft Powerpoint)? Why not some true diversity with specialities in music, mandarin, hard science and technology, food arts and other crafts.
Reply: I agree we need to lift the performance of state schools, and make things more challenging for the able pupils. yes, I think grammar streams and sets would help, as would different types of school. I do not think maths and comuting is a soft option.
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John, what do you feel about Labour’s promise to bail out any financial institution that is hit by problems of liquidity? Do you consider this to be an open encouragement to further wreckless borrowing?
Reply: No I don’t. I see it as a necessary last lurch after the authorities have got so much wrong in trying to run money policy. They created the sloppy credit conditions a few years ago. They then overtightened this summer causing the stresses we now see. I don’t think the current problem is reckless borrowing - the current problem is a shortage of money and credit. Overborrowing is last year’s hangover. Today financial instititutions around the world are more likely to be teetotal and occasionally cannot even find all the water they want without help.
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As a regular saver, who currently has money on term deposit with Northern Rock I feel completely stuffed by the Treasury & Bank of England’s handling of this matter. I cannot queue to obtain savings from a postal account! I certainly do not blame those who can queue - not after BCCI, Barings, Equitable Life, endowment shortfalls and pension fund collapses.
The public should be able to safely place their savings with a UK based, London Stock Exchange listed bank without fear of loosing some or all of their savings - if we cannot do this why bother saving!
What I want to know is what Northern Rock has been allowed to get into this position - what is the point of the FSA if it does not enforce capital adequacy rules and why did the Bank of England not move quicker to ensure liquidity in the London Interbank market for UK-based banks. The behaviour of both these organizations needs to be investigated by Parliament and appropriate action taken.
From my point of view the FSA needs to focus on what really matters - a stable and well managed financial system, not layering bureaucracy on surrounding money laundering regulations - which simply make it harder for the public to move their money around.
Reply: I agree there needs to be an enquiry into why the government and Bank allowed liquidity to dry up so dramatically in the London market this summer.
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