Soft in the middle

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Anyone who has recently tried to obtain a mortgage or loan will have known Northern Rock long before the current crisis broke - it was a byword for favourable rates.

The company's spectacular demise has sent shockwaves through the money markets, government, investors and general public, who all look on in amazement as something supposedly so good has become so bad.

No one can remember queues outside a British bank as investors struggled to remove their savings. Those scenes seem reminiscent of Weimar Germany or the US Depression of the 1930s. They seem to presage worse economic news to come.

The action of the chancellor in underwriting all investment in the bank and in other potentially failing banks has demonstrated the depth of the political crisis this can become. Gordon Brown, so media friendly and prominent over foot and mouth and the floods earlier this summer, has stayed in the background when a financial crisis exacerbated by his own policies has hit.

After all, Brown presided over the rise in easy credit which is so much a feature of British life. Money, it was thought, really did make the world go round. Successive Tory and Labour governments have encouraged financial deregulation, the demutualisation of the building societies and unheard of highs in the housing market. Saving is at a record low while debt is at a record high.

It is hardly surprising that people succumb to credit offers. Society defines people by what they wear, how big their houses are and how fast their cars are. Britain's combination of a low wage economy with a booming property market bought into by the majority of households has been particularly devastating. Cheap and easy credit, secured by houses whose prices have risen much higher than the rate of inflation, has substituted for decent wages.

The difficulty is that we're borrowing from our future low wages, a particular problem if we face recession or a fall in house prices.

None of this worried Northern Rock or the other banks who have made such fortunes in recent years, and who have been heralded as the future of British capitalism. Northern Rock lent far more than it could ever take in from savers and investors, borrowing also from other banks and financial institutions.

That worked until the banks became wary of lending to one another in fear of being saddled with high risk debt, much of it from the US housing market, hence Northern Rock's crisis.

The response of many financial experts is to express surprise that this could happen. In a way the surprising thing is that it doesn't happen more often. Finance and credit are based on gambling and trickery. When there is a crash, it seems all too obvious that such practices were at the very least reckless, yet when they are successful their perpetrators are hailed as successful entrepreneurs.

In the 19th century there were some big banking crises in Britain like when the Bank of Deposit and National Assurance stopped in 1861, owing customers £363,000 while it had £60 cash in hand. As one historian has written "Boards of directors of fraudulent or just ill-run joint-stock companies or family firms trudged through the dock at the Old Bailey one year after another."

These days bank directors are more likely to end up in the House of Lords than in prison. Even when companies go bust, their directors usually retain much of their wealth and perks. Not so those at the bottom of the pile. Financial experts have denounced "panic" withdrawals at Northern Rock. Yet these people are refusing to lend their money to the bank - just what many of the international banks are doing but they are just regarded as prudent.

Few are talking about the threat to jobs at Northern Rock, but redundancies look very likely if the bank is taken over. The cost of loans and mortgages may rise. It will become harder to obtain credit, and it will cost more.

We are certainly not at the end of this process. The fear is of a much bigger "credit crunch" which will do far greater harm to the whole economy. That will lead to job losses, closures, a fall in house prices-and a major political crisis. The British boom has been heavily reliant on financial services and on the housing boom. The Blair and Brown governments have been major beneficiaries of this boom.

Brown may now reap the whirlwind. He certainly has some questions to answer. The man who took tea with Margaret Thatcher the same week he told the TUC they had to hold down public sector pay was already facing an industrial revolt. It may coincide with a political and economic crisis as well.


Lindsey German is the author of Material Girls published by Bookmarks Publications