Why should savers have to bail investment banks out?
The Northern Rock crisis has brought home the reality of Labour's 'economic miracle' and everyone's looking for a scapegoat. But don't blame the Bank of England for refusing to pump even more money into the system.
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It's set to be another interesting week on the markets. That's interesting in the sense of the old Chinese curse, "may you live in interesting times."
The US Federal Reserve's interest rate decision is due on Tuesday. Almost regardless of what happens, that's bound to lead to turmoil. With many now expecting (or hoping for) the base rate to be cut by a full half-point, there's plenty of scope for disappointment if the Fed doesnt cut that far, or panic at the scale of the crisis if it does.
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Meanwhile, the big four investment banks in the US are due to report their third-quarter results, giving the first real insight into how badly they've been hurt by the sub-prime crisis. Nobody's expecting another Northern Rock - but it could be very nasty all the same
While the Fed is wondering what it should do - or what it can do - about the credit crunch, the man who got the US economy into this mess in the first place is busily indulging in a spot of reputation management.
Alan Greenspan, the man they once called the Maestro, has increasingly been coming under fire in even the most mainstream media outlets as the credit crunch has unfolded. We've been writing for some time about how Mr Greenspan's trick of cutting interest rates in the face of every problem to hit America was storing up trouble for the future (see this cover story from the start of 2006, for more details: Alan Greenspan: the savings saboteur.
Mr Greenspan really has an incredible ability to hold two apparently opposing points of view at the same time. In his near-20 years as the world's foremost central banker, there was never a crisis too small that it didn't justify a rate cut to fuel another asset bubble.
And yet, as Ambrose Evans-Pritchard points out in The Telegraph, in 1966, he blamed the Great Depression of the 1930s on loose central banking policy during the early twenties. "The excess credit which the Fed pumped into the economy spilled over into the stock market, triggering a fantastic speculative boom by 1929 the speculative imbalances had become overwhelming."
This isn't the view of his successor Ben Bernanke, or many mainstream economists, who mostly believe that the problem was that monetary policy wasn't loosened quickly enough after the bubble burst. But as Mr Greenspan's own experience shows, if you cut rates after a credit-fuelled bubble blows up, you just create another one.
So why didn't he take his own advice while he was in office? Well, at the end of the day, no one likes to be unpopular. Political expediency and the pleasures of constant ego-stroking from an utterly ignorant financial press probably helped.
After all, why take the hard decisions today if you can take easy ones then leave the mess for someone else to clear up? It's a question that the Bank of England governor, poor old Mervyn King, must be asking himself right now.
Already the knives are out for him in the City, and the politicians are looking for a scapegoat too, as Northern Rock's collapse brings the reality behind New Labour's economic miracle' crashing all too vividly onto the High Street.
He should've acted earlier, they say. Why hasn't he done what the European Central Bank and the Fed have done, and pumped more money into the system, they demand.
But I can't recall when any of the voices now calling for King's head suggested that perhaps basing an entire business strategy on one risky form of credit arbitrage as Northern Rock did - wasn't such a good idea.
The Bank of England was right to bail out Northern Rock in the way it did. The bank has a flawed business model and now it will most likely be sold off and bought up in pieces - as long as another bank or banks with the spare cash can be found.
It could have been left to go to the wall, of course. But its depositors - who after all, are among the few people who have actually been saving money and acting responsibly in the last few years - shouldn't have to suffer.
And the limited bail-out means that the rest of the banking sector is still left feeling the pain resulting from careless lending. Sure, they don't like it but why should the Bank cut rates or flood the system with even more money - which ultimately, by encouraging inflationary pressure, is a tax on savers - just to protect the special interests of a single business sector?
Roger Bootle puts it really rather well in his column in The Telegraph this morning, when he points out that having "indulged in a mad wave of greed-driven, purblind, herd behaviour," much of the City is now "calling for a disguised form of state aid."
"You can imagine what they would have said in reaction to the idea of bailouts for car manufacturers, shipbuilders or miners. Now that the pain is close to home they whine with a tone of righteous indignation."
Let's hope that Mr King remembers to point this out when he's pulled in front of the Treasury Select Committee this week.
Turning to the wider markets
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In London, the FTSE 100 ended Friday 74 points lower, at 6,289, although off an intra-day low of 6,209. Northern Rock was by far the heaviest faller of the day with a share price slump of over 31%. Fellow mortgage banks Alliance & Leicester and HBOS were also lower. And concerns over the potential knock-on effect of higher borrowing costs on the housing market hit housebuilders such as Barratt Developments and Persimmon. For a full market report, see: London market close
Elsewhere in Europe, France's benchmark CAC-40 index was down 27 points - at 5,538 - and the Frankfurt DAX-30 was off 38 points to end Friday at 7,497.
On Wall Street, stocks ended the day with gains despite the turmoil on this side of the Atlantic as investors were cheered by stronger-than-expected consumer confidence data. The Dow Jones was up 17 points, at 13,442, despite having fallen by as much as 80 points in early trade. The tech-rich Nasdaq was one point higher, at 2,602. And the S&P 500 closed a fraction of a point higher, at 1,484.
In Asia, the Japanese markets were closed for a public holiday today. In Hong Kong, the Hang Seng hit a record high earlier in the session, only to fall back 186 points to 24,711 on profit-taking.
Crude oil had fallen a further 55c to $78.55 a barrel this morning. Brent spot was down to $76.48 in London.
Spot gold leaped to a 16-month high of $717.00 on Friday on safe-haven buying, before falling back to $707.30 in New York. But the yellow metal had risen again - to $710.60 - in Asia trading today. Silver, meanwhile, had edged up to $12.60.
Turning to the currency markets, the pound had fallen to its lowest level against the dollar since October 2006 - $1.9989 - this morning as Northern Rock's troubles made a Bank of England interest rate hike seem less likely. The pound was also down against the euro, at 1.4413. And the dollar was at 0.7209 against the euro and 115.01 against the Japanese yen.
And in London this morning, Northern Rock shares had fallen by a further 34% to a seven-year low in early trading as branches across the country were besieged once more by customers wishing to withdraw their savings. Lenders Bradford & Bingley and Alliance & Leicester - which, like Northern Rock, rely on financial markets more than customer deposits to fund home loans - were also down by as much as 7.7% and 6.9% respectively.
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