How the US housing slump could cost British jobs

Not one UK bank has taken up the Bank of England's offer of £10bn of extra funding. So is this the end of the credit crunch? Far from it - in fact, the pain could soon be felt by UK consumers in the form of job losses.

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Banks have been given the chance by the Bank of England to bid for £10bn of funding.

And not one of them has taken it up.

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But what about all those hysterical pleas for extra liquidity that we were hearing only weeks ago? Well, some analysts reckon that the credit markets have improved enough so that the Bank's auction terms were unattractively expensive.

This might be true of large banks - some of whom can borrow from other sources - but the reality for smaller banks is different.

They might need the money - they're just scared to admit it

No bank has taken up the Bank of England on its offer of up to £10bn of three-month money. There's a good reason for that. Everyone knows that all eyes will be on any bank that feels the need to bid for the money. The recipients might be anonymous, but a few gossipy City voices would soon see the names of those in need leaked to the press (who already have their eyes on a few likely candidates anyway). And before you can say Northern Rock', there'd be queues on the High Street again.

Nobody wants to see that of course. As Richard Lambert of the CBI said yesterday: "That a [bank run] should have happened in a mature and prosperous country like the UK is almost unimaginable." It's something you should only see in a "banana republic" he said.

Of course, Ponzi schemes like our very own housing market are something you'd normally associate with banana republics too, but let's not be picky here.

In his speech, Mr Lambert politely cast plenty of blame for the run on everyone involved, from Mervyn King to Alistair Darling. And it was indeed a dreadful mess. He criticised the lender of last resort system, saying that "no institution will ever go down that route again if it remains unchanged. What happened to Northern Rock is just too grim a precedent."

We're not sure though, what any bank that finds itself in Northern Rock's position in the future could do otherwise. Northern Rock was unable to meet its debt obligations - that's why it called the lender of last resort'. Beggars can't be choosers as they say.

And everyone seems to be losing sight of the key issue here - Northern Rock had a highly unusual and very ill-advised business model. No other bank (even the likes of Alliance & Leicester, which saw its share price come under a lot of pressure at the time of the crisis) had anywhere near the same level of dependence on the short-term money market.

For all the sentimental northern evangelising about the bank that's been going on, it was badly run. The fact that the bail-out was badly organised is a distraction from the real issue. We should be asking why an institution that takes ordinary people's savings was allowed to adopt such a high-risk lending strategy in the first place. For more on the issues involved in the Northern Rock crisis - and what we think you should be investing in as fear grips the financial system, see last week's cover story: Northern Rock - who's to blame?

Anyway. Seeing as no one's taken up the Bank of England's £10bn offer, does that mean everything's settled down now? Well, no - money market auctions in Europe earlier this week were very busy, "in part driven by UK banks accessing these facilities through their subsidiaries on the continent," says Chris Giles in the FT. So we're not out of the woods yet.

And as credit conditions tighten, the first to feel it will be companies looking to borrow money, it seems. The Bank of England's latest credit conditions survey suggests that "lenders expected to impose stricter covenants, raise collateral requirements and reduce maximum credit lines over the next three months" for corporate lending.

The main problem for banks is that it's simply become too difficult to sell packages of loans and mortgages into the markets. That's crimping the availability of money for them to lend, as they need all the funds they can get to cover their existing commitments, say Chris Giles and Gillian Tett in the FT. And it looks like the vast majority expect things to get worse before they get better.

The harder it gets for companies to borrow, the harder it gets for them to invest in expansion, and the more likely it is they will run into cash flow problems, and potentially go to the wall. As every small business person knows, the definition of a bank is, someone who wants to lend you an umbrella when it's sunny, then takes it away again when it starts to rain.

There's a downpour on the way, and true to form, the banks are demanding their brollies back. Small businesses are a huge employer in the UK, so any pain in this sector will rapidly feed through to consumers if job losses mount.

Seems unfair that troubles at Northern Rock and with US sub-prime mortgages should end up hammering small businesses in Britain. But then, that's the joy of spreading risk through derivatives everyone gets to share the pain.

Turning to the wider markets

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In London, the FTSE 100 closed at 6,433 - a 36-point gain - yesterday, although the blue-chip index fell back from an afternoon peak of 6,484 due to selling in the final hour and a half of trading. Mortgage bank Northern Rock led the FTSE risers with gains of over 11% on bid hopes. However, electrical goods retailer DSG International made the day's biggest losses as poor results for peer Kesa and negative broker comment on the electrical retail sector hit sentiment. For a full market report, see: London market close

Elsewhere in Europe, the Paris CAC-40 was up 49 points, at 5,690, and the Frankfurt DAX-30 added 34 points to end the day at 7,804.

Across the Atlantic, stocks closed higher as GM motors struck a deal with striking workers, ending two days of industrial action and raising expectations that other automotive companies could cut healthcare costs. News that Warren Buffett is considering a stake in Bear Stearns gave the asset manager - and the market as a whole - a late boost. GM - which saw gains of over 9% - led the Dow Jones industrials index to a close of 13,878, a 99-point increase. The tech-heavy Nasdaq was up 15 points, at 2,699. And the S&P 500 was up 8 points, at 1,525.

Asian stocks were boosted by strength on Wall Street. The Japanese Nikkei was up 396 points to end the day at 16,832 and the Hang Seng was up 634 points, at 27,065.

Crude oil was over 1% higher this morning, at $81.31. And Brent spot was at $77.60 in London.

Spot gold had slipped again this morning - to $727.50 - having fallen by over $2 in New York yesterday. Silver, meanwhile, was was steady at $13.36.

Turning to the currency markets, the pound had recovered from a 14-month low it hit yesterday against a basket of currencies thanks to better-than-expected UK house prices figures from Nationwide. Sterling was at 2.0223 against the dollar and 1.4306 against the euro, whilst the dollar was at 0.7072 against the euro and 115.61 against the Japanese yen.

And in London this morning, the aforementioned survey from Nationwide showed that house prices rose 0.7% in September, up from 0.6% in August and more than the 0.3% predicted by analysts. However, year-on-year growth of 9% is the weakest for 11 months. Nationwide economist Fionnuala Earley said that prices are 'seemingly shrugging off the unsettled events of the past month.'

And our recommended articles for today...

A new way to invest in diamonds?

- The luxury goods market is booming thanks to Asia's growing spending power. And that means increased demand for the most luxurious good of all: diamonds. Hence the appearance of a new way to gain exposure to the precious stones. For more from Garry White on whether there's any future in diamond futures, click here: A new way to invest in diamonds?

How to ease the pain as mortgages go up

- For those homeowners who fixed their mortgage payments on cheap two-year deals back in 2005, things are about to get (or may already be) a lot more difficult as they revert to much higher interest rates. If you're faced with the prospect of much higher monthly repayments, click here to read Merryn Somerset Webb's advice on how to cushion the blow: How to ease the pain as mortgages go up

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.