Panic Builds in the Banking Community
International news is buzzing with fears that the US sub prime market will bring down the global mortgage and housing market. Despite assurances from the Treasury, the Bank of England, the Financial Services Authority, the British Bankers' Association and Northern Rock itself that there was no reason for mortgage-holders and savers to panic, long queues of worried customers yesterday continued to gather outside branches throughout the UK for the second day in a row, according to the Sunday Herald.
The turmoil in US money markets over the risky mortgages struck Britain last week. Both Prime Minister Gordon Brown and Chancellor Alistair Darling are concerned that the panic does not spread. Two things need to happen to keep the UK’s banking economy strong, continued lending, and consumer confidence that their money is safe.
People are already flocking to Northern Rock. They are removing their money in fear that the pending takeover and 30% drop in stocks will put their savings and pensions at risk.
Downing Street is reinforcing the message that the economy is still strong, fed by high growth and low inflation, the signature achievements of the government.
The swift takeover of Northern Rock is not due to their instability or lack of assets, which stand at £115 billion. A quick takeover will ensure that the wider banking community remains in good health.
One Tory economic adviser said yesterday: "The tower of debt that is keeping the British economy afloat, and has done during the decade of Gordon Brown's watch, is now looking more shaky than ever. We are at risk, and we may be seeing only the tip of iceberg."
However, this view is not shared by many in the financial community who see the debt mountain as the fundamental foundation that is preventing the UK banks from being pulled into the US downward spiral that closed 70 of the largest US banks last year.
Published on September 23, 2007
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