How your money could bail out Northern Rock savers
Will assurances that the taxpayer will bail out Northern Rock be enough to disperse the queues - and restore investor confidence? And where, in these turbulent times, can you confidently invest anyway?
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The queues outside Northern Rock didn't disperse yesterday, despite all the public reassurances from the government and the regulator.
As Gordon Brown watched the television screens, witnessing a sight that most people would associate with 1930s America, rather than glorious noughties Britain, centre of the financial universe, he must have had a sinking feeling.
A couple of months ago, there was talk of a snap election. Now he'll want to put as much distance and time between the queues at Northern Rock and the queues at the polling station as possible.
But in the meantime, who can he turn to to bail him out of this mess? Why, the people hes always turned to, of course - the taxpayers
That's right. All those people queuing up at Northern Rock, and all those people now wondering whether they should be forming lines at Alliance & Leicester too, needn't worry any more. That's because the rest of us are going to pay for their savings if their chosen bank goes bust.
Hmm. For Northern Rock alone, that could mean a bill for the taxpayers to the tune of £21bn, according to The Telegraph. That's quite hefty. It's a good thing that Gordon Brown managed to salt away a huge surplus of taxpayers' money while times were good. After all, we've had 60 or so consecutive quarters of economic growth here in the UK, and massive tax receipts from all these companies that have been doing so well during our recent boom years, not to mention the huge stamp duty and inheritance tax take, so there must be something in the pot to shell out for emergencies like this one. Isn't there?
Ah, there's the rub. Mr Brown must have been asleep in Sunday school when they were reading out the bits about Joseph telling pharaoh about the seven fat cows and the seven thin cows. Because while he was Chancellor, Mr Brown wasn't putting anything away during the years of plenty. In fact, he was borrowing more, mainly to feed that very British, massively overweight sacred cow, the NHS. And now that we're heading for the years of drought - that's falling house prices, rising inflation, and higher unemployment - there's no cushion to fall back on.
Consumers don't have any cushion either - in fact, all they've got to fall back into is a great £1.3 trillion-deep abyss. And yet the government is happily promising away what little money they do have.
"As the government's attempts to shore up public confidence in the banking system became increasingly desperate, the Treasury said it would also act as a guarantor for any other lenders that got into similar difficulties, leaving it open to an almost limitless financial liability," says The Telegraph.
In short, it's a big gamble. If the queues don't now clear up at Northern Rock, there is a chance - particularly following yesterday's share price plunges throughout the banking sector - that the panic will spread to other banks. "Then life will get very difficult," as Peter Spencer of the Ernst & Young Item Club think tank put it.
It's by no means all bad news of course. The FTSE 100 may have taken another big knock yesterday, but in fact, the sectors that MoneyWeek has long been big fans of are doing really rather well. As Tom Stevenson points out in The Telegraph this morning, the big mining stocks and energy stocks have seen decent gains since August, when the credit crunch began in earnest.
And with analysts at Goldman Sachs raising their year-end target to $85 a barrel - with spikes to $90 a barrel - oil majors certainly look extremely cheap at the moment.
We'll be delving into the Northern Rock story in more detail and looking at who's really to blame for the credit crunch in this week's issue of MoneyWeek, out on Friday. But in the meantime, if you want to read more about a sector that's worth putting your money into, rather than one you should avoid like the plague, why not read our most recent oil cover story: Why oil investors are still smiling
Also, before I go we have a live webchat on inheritance tax on the site at 1pm this afternoon. Inheritance tax experts Jason Witcombe and Anne Young will be answering readers' questions on this complicated but hugely important topic. If you'd like to ask a question, or simply find out what they have to say, click here: Webchat - IHT
Turning to the wider markets
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In London, the FTSE 100 ended yesterday with heavy losses - down 106 points to 6,182 - as Northern Rock and peer Alliance and Leicester tumbled by 35% and 31% respectively. The broader FTSE indices were also lower. For a full market report, see: London market close.
On the Continent, the Paris CAC-40 fell 99 points to close at 5,439. And in Frankfurt, the DAX-30 was 17 points lower - at 7,479 - as financial stocks came under pressure. However, it was a good day for utilities RWE and EON.
Across the Atlantic, US shares closed slightly lower following a subdued session ahead of today's interest rate decision. The Dow Jones was 39 points lower, at 13,403. The tech-heavy Nasdaq was down 20 points, at 2,581. And the broader S&P 500 was off 7 points, at 1,476.
In Asia, the Japanese Nikkei fell 325 points - or 2% - to close at 15,801 today as credit concerns resurfaced. In Hong Kong, the Hang Seng was down 57 at 24,542.
Crude oil futures closed at a new record high in New York last night, at $80.57, and had edged up even higher - to $80.75 - this morning. In London, Brent spot was down to $77.11.
Spot gold had fallen to $716.00 this morning, having rallied to $719.65 - its highest level since mid-May 2006 - yesterday. And silver was down to $12.73.
In the currency markets, the pound was 1.9947 against the dollar, having risen from a one-month low of 1.9882. And the pound was at 1.4387 against the euro. Meanwhile, the dollar was at 0.7212 against the euro and 115.14 against the Japanese yen.
And in London this morning, the Office for National Statistics revealed UK inflation fell to its lowest level since March 2006 in August. Consumer price inflation was down to 1.8% from 1.9%, adding to hopes that the Bank of England will keep interest rates on hold for the foreseeable future.
And our recommended articles for today...
Why this crisis will play out in slow-motion- The current crisis of confidence is likely to last longer than any of the financial shocks of the last two decade, says Martin Spring. However, there is one place that should still be safe to invest. To find out why the trouble could last for another two to three years, click here: Why this crisis will play out in slow-motion
What will the Fed do? - All eyes will be on the US Federal Reserve as they announce their latest interest rate decision today. Jeremy Batstone of Charles Stanley considers what effect recent economic data is likely to have on their deliberations - and what effect their decision will have on the markets: What will the Fed do?