Northern Rock
Northern Rock
The recent fiasco of the imminent supposed collapse of Northern Rock is a thing of wonder. That it has caught so many pundits off guard in such a offside way with the fall out off sub prime mortgages; yet it is not surprising as most economists see the market as a perfect operating system that is self regulating, self correcting and operates under a light oversight regime particular in the USA and UK. The ‘market’ is not independent of human actions. For some time the pressure that has built up to start the current fallout has been due to the over extension of credit in the USA, thus far aimed at the sub prime housing mortgages but inevitably the whole of the American economy that is bathing in debt, all supported by the propping up of the dollar. In the current climate the banks and these two governments must be held responsible for pushing money into the hands of un- credit worthy soles, all for the sake of keeping the confidence of the market high. Both governments must take the blame for allowing the financial system to operate in a way that paid little attention to the fundaments of good financial house keeping and the (adjusted) maxim, income over expenses nineteen and six- bliss, expenses over income twenty and six- sick.
It is little wonder that the reaction to withdraw money from NR has occurred. any reasonable person at risk of loosing any finance deposits over £32K would be mad to trust the espoused comment from the UK treasury that “your money is safe” (up to this limit) and implies but not explicitly stated that the rest will be safe, albeit that it will not let a bank default unless it has been rash in its business activities. This is clearly not good enough for savers with moderate funds when there have been many incidents that conclusively show one cannot trust governments. It is only now some 4 days after the bank run that a statement has been declared that ALL deposits will be guaranteed safe! (This time).
Northern Rock will go. It will be made to carry the responsibility of the debacle that has thrown that whole UK banking system into scrutiny and their bullish dealings in the expanding credit market.
So what happens now? The USA will reduce its interest rate to stave off any bad feeling about the economy and their housing market retrenchment. The UK will follow suit. Stock markets will rise for a while until it become clear just which banks are affected by potential housing market liabilities or where the bad debts have fallen. No doubt credit will be much harder to get on the cheap. This mean that the long suffering savers may for a change get a better deal instead of being ripped off by the system that rewards heavy borrowers with the past low credit cost, increased asset value beyond inflation, low inflation period and an economic policy that encourages spending to boost consumerism.
Both the USA and the UK government of the past 15 years have been unwise in ignoring the boom in un-serviceable credit and although in both countries the economics of housing has a distortion effect on their economies, giving way to the pressure by sectors of the market to bale them out with interest rate cuts is not a good thing. There has been a trend in the movements of interest rates that has pushed them up to counter ‘inflation’ however the greater pressure is the slow down in the world economy that will force rate much lower leading to a build up of a deflation period in 18 months.
In addition this current reluctance of interbank lending will inevitably start off a discussion on the strength of the dollar. If the US does not do something soon about its deficit, dollar holders will begin to wonder just how long they should continue to see the dollar as the global reserve currency. Now that will cause pigeons to fly.
10.9.07
The recent fiasco of the imminent supposed collapse of Northern Rock is a thing of wonder. That it has caught so many pundits off guard in such a offside way with the fall out off sub prime mortgages; yet it is not surprising as most economists see the market as a perfect operating system that is self regulating, self correcting and operates under a light oversight regime particular in the USA and UK. The ‘market’ is not independent of human actions. For some time the pressure that has built up to start the current fallout has been due to the over extension of credit in the USA, thus far aimed at the sub prime housing mortgages but inevitably the whole of the American economy that is bathing in debt, all supported by the propping up of the dollar. In the current climate the banks and these two governments must be held responsible for pushing money into the hands of un- credit worthy soles, all for the sake of keeping the confidence of the market high. Both governments must take the blame for allowing the financial system to operate in a way that paid little attention to the fundaments of good financial house keeping and the (adjusted) maxim, income over expenses nineteen and six- bliss, expenses over income twenty and six- sick.
It is little wonder that the reaction to withdraw money from NR has occurred. any reasonable person at risk of loosing any finance deposits over £32K would be mad to trust the espoused comment from the UK treasury that “your money is safe” (up to this limit) and implies but not explicitly stated that the rest will be safe, albeit that it will not let a bank default unless it has been rash in its business activities. This is clearly not good enough for savers with moderate funds when there have been many incidents that conclusively show one cannot trust governments. It is only now some 4 days after the bank run that a statement has been declared that ALL deposits will be guaranteed safe! (This time).
Northern Rock will go. It will be made to carry the responsibility of the debacle that has thrown that whole UK banking system into scrutiny and their bullish dealings in the expanding credit market.
So what happens now? The USA will reduce its interest rate to stave off any bad feeling about the economy and their housing market retrenchment. The UK will follow suit. Stock markets will rise for a while until it become clear just which banks are affected by potential housing market liabilities or where the bad debts have fallen. No doubt credit will be much harder to get on the cheap. This mean that the long suffering savers may for a change get a better deal instead of being ripped off by the system that rewards heavy borrowers with the past low credit cost, increased asset value beyond inflation, low inflation period and an economic policy that encourages spending to boost consumerism.
Both the USA and the UK government of the past 15 years have been unwise in ignoring the boom in un-serviceable credit and although in both countries the economics of housing has a distortion effect on their economies, giving way to the pressure by sectors of the market to bale them out with interest rate cuts is not a good thing. There has been a trend in the movements of interest rates that has pushed them up to counter ‘inflation’ however the greater pressure is the slow down in the world economy that will force rate much lower leading to a build up of a deflation period in 18 months.
In addition this current reluctance of interbank lending will inevitably start off a discussion on the strength of the dollar. If the US does not do something soon about its deficit, dollar holders will begin to wonder just how long they should continue to see the dollar as the global reserve currency. Now that will cause pigeons to fly.
10.9.07
posted by Renot at 8:27 am
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