Wednesday, January 23, 2008

Rock and a hard place?

I don't understand why people are attacking the decisions taken over Northern Rock. Yes, I think that it was appalling that because we are in the EU the Commission wouldn't let the Bank of England organise a quiet deal with big banks which would have meant that the run on the bank wouldn't have happened.

The Government has spent no money - repeat, spent no money - on Northern Rock.

When you get a loan from a bank they charge you interest. They make money from you. The Bank of England has extended a loan at a penal rate to Northern Rock. Northern Rock will pay the loan back in full, plus the interest payments, over time. So, like Natwest would benefit from loaning money to someone, the public finances will benefit from this.

The interest rate charged to Northern Rock will be above the market rate.

So when David Cameron was just bawling out Gordon Brown asking him how much the tax payer will be paying for Northern Rock, the Prime Minister wasn't not answering, because it was a question by someone who doesn't seem to understand how loans work. Which is not surprising, given that he probably never needs to get a loan out.


Mark Wadsworth said...

I must admit, I tend to agree with you. But kicking The Goblin King is always good.

Clunking Fist said...

Read it and weep: the chance of the "loan" being repaid are low. A bank will not extend a loan to you if the chance of repayment is "low".

Mark Wadsworth said...

NR have got £120 bn of mortgage "assets", even if these are all 100% mortgages and house prices crash by 30% (which they will) the total loss would be in the order of £36 bn. In truth, the total loss will be a fraction of that, £10 bn, maybe?