Bill Gleeson: Northern Rock - a plague on all our houses?

Sep 19 2007 by Bill Gleeson, Liverpool Daily Post

THE fatalistic among us must be having a field day with recent events in the money markets.

The crisis enveloping Northern Rock has a biblical feel. It’s like one of the punishments inflicted on the Egyptians in Exodus. Plagues, rains and famines were visited upon the Pharaoh and his people until they got the message it was time to free the Jewish slaves.

We have had the rains and the floods in July, the pestilence of foot and mouth refuses to go away and now, on top of everything, the world’s money supply is running dry as banks stop lending to one another.

With Northern Rock customers withdrawing their life savings, the Government has been forced to say a few words of reassurance. But don’t those words sound a bit like the football club chairman offering his full support to the team manager?

The problem for Chancellor Alistair Darling is that he couldn’t say nothing, because that would cause some people to worry that the Government had decided to let Northern Rock sink. Yet, at the same time, by telling us we shouldn’t be worried, Mr Darling has alerted many who were otherwise not worried that there might now be a good reason to worry.

It’s a perverse sort of logic, but why else would the Government tell us not to worry?

What is worrying is that by underwriting every penny deposited at Northern Rock, the Government has, in effect, changed its policy about banking failures.

When, thanks to the rogue trader Nick Leeson, Barings collapsed 12 years ago, the Government and the Bank of England chose not to rescue Barings because its failure didn’t represent a “systemic” risk to the rest of the banking industry or the UK economy. While the Bank of England and the Government don’t actually publish the details of which financial institutions they will and will not support, it was widely thought in the credit ratings industry that only the very big names would be rescued from trouble: Barclays, NatWest, LloydsTSB etc. The likes of Northern Rock wouldn’t have got a penny of help.

Now, however, billions of pounds are being made available to support the banking system. Does this apparent change of policy mean they know something the rest of us don’t?

Probably not.

Instead, it is much more likely that the present crisis will clear up before Christmas. It doesn’t matter what it is, the threat of Sars, bird flu, petrol shortages or almost anything else. We fret about it for a few months and then it drops out of the spotlight.

What is more, the fundamentals of the global economy aren’t altered by recent events. The Chinese and Indian economies, for example, will continue to grow.

The Chinese, in particular, won’t suffer any banking crisis, if only because all their banks are state controlled. They will continue to accumulate huge sums of cash from the massive trade surpluses they have been running up for the past two decades. Much of this cash pile is held in international currencies and the Chinese don’t leave this money, thought to be worth around $1trillion, languishing in bank accounts doing nothing. Instead, they actively invest it. As a result, there will continue to be demand for investment opportunities in the West and it is that which will save the day, even if everything else fails.

Sadly, the one thing we can be sure of when this crisis passes is that the lessons won’t be learned. Of course, there will be a temporary lull in the general policy of free money for all, but human nature being what it is, we will return to indulging our traditional greedy behaviour of borrowing to the hilt and spending as if there is no tomorrow before too long.