Monday, September 17, 2007

Dramatic guarantee of the Northern Rock

I have to say I am flabbergasted that the chancellor Alistair Darling has said that the government will guarantee the deposits in the Northern Rock.

This is a stunning change on the position of this morning where only the first £2,000 were guaranteed in full, and 90% of the next £30,000.

George Osbourne has backed the move, whilst rightly criticising the underlying issue of the unchecked growth in personal debt which both the Conservatives and Liberal Democrats have banging on about for ages.

However I am not sure that this bailout is a great idea. It may be, and it may stop the rot, but the problem I have is that the government has effectively underwritten the mortgage lending of the banking sector, and thereby house prices. If there is serious negative equity ahead then there is going to be a large hole in the banks assets which are not apparent today.

Also I note interview with people in the queues. There main reason for ignoring government assurances thus far is that they just do not believe the government. I wonder if this "unequivocal" guarantee will steady nerves. I suspect that Northern Rock employees are hoping it will.

Meanwhile the Bank of England has now the problem that it is hemmed in on interest rates. It surely can't raise them to combat inflation, yet prices will rise as the output of China grows in price. This could leave us in a bit of an ugly situation.

The BBC has this.

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