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Generational Dynamics Web Log for 14-Sep-07
London Times says "There's no need to panic."

Web Log - September, 2007

London Times says "There's no need to panic."

UK's Northern Rock Bank is drawing worldwide attention on Friday, after asking for and receiving a bailout of unspecified size from the Bank of England, acting as lender of last resort, the first such bailout in over 30 years.


Depositors queuing up in front of a Northern Rock branch.  Notice that almost everyone in line appears to be elderly. <font face=Arial size=-2>(Source: BBC)</font>
Depositors queuing up in front of a Northern Rock branch. Notice that almost everyone in line appears to be elderly. (Source: BBC)

Depositors -- especially elderly depositors from the generation that grew up during the Great Depression -- queued up in front at Northern Rock branches across the country. According to the BBC, some just wanted reassurance, while others withdrew their deposits.

European stocks fell on Friday morning at the news. However, as usual, Generational Dynamics is less concerned about the ups and downs of the stock market and more concerned about the level of anxiety exhibited by masses of investors and, in this case, of depositors as well.

The bailout of Northern Rock, which is also a mortgage lender, is considered "shocking" by commentators, because they had assumed that the credit crunch was caused by depraved Americans, and that they were immune to it. It now turns out that Rock followed many of the same depraved schemes, and investors are wondering whether other UK banks and mortgage lenders are going to follow the same path.

There was widespread commentary from newspapers and government officials, telling people not to panic.


Alistair Darling, UK Finance Minister <font face=Arial size=-2>(Source: BBC)</font>
Alistair Darling, UK Finance Minister (Source: BBC)

Alistair Darling, UK Finance Minister, told the BBC:

"Britain has a very strong and stable economy. We also have a very strong and stable banking system. And the reason that Bank of England has provided facilities is because the Governor and I are determined that that should be maintained. We have a Bank of England, that is a lender of last resort, precisely to deal with difficulties like this, to ensure that where there are short-term difficulties in getting money -- and there is a lot of money in the system -- it's just that people are reluctant to lend to each other at the moment -- where you've got that difficulty, the Bank can step in to allow Northern Rock to carry on doing business.

Under the headline "No need to Panic," London Times commentary was as follows:

"With queues of anxious savers forming outside some Northern Rock branches this morning, the No 1 priority for the bank and its regulators is to restore confidence that depositors' money is safe.

Which, by the way, it is.

The Bank of England has made plain that it is ready to provide whatever liquidity is necessary to get the bank through its present difficulties.

Northern Rock may not be one of the four or five banks at the heart of the UK financial system, but it is close enough for it to be unthinkable that it would be allowed to fail its depositors.

So there is no reason for the hundreds of thousands of savers with 24 billion of deposits in Northern Rock to panic."

This "no need to panic" message is repeated in many UK newspapers, and undoubtedly in radio and television news programs.

As we discussed on Thursday, there is evidence that the level of investor anxiety and fear has been growing steadily at least since the beginning of the year.

On Wall Street on Thursday, anxious investors felt euphoric because of their certainty that the Fed will lower interest rates next week, and thus save the world. On Friday, as this is being written shortly before the markets open, stocks are expected to open lower, "with news of U.K. mortgage lender Northern Rock's difficulties reigniting concerns about U.S. banks," according to http://wsj.com. A poorer than expected retail sales report is also raising concern.

This talk of the need to avoid panic is new, and reflects a continually increasing level of anxiety and panic. With the stock market overpriced by a factor of 250%, it can't be too much longer before this level of anxiety translates into action. (14-Sep-07) Permanent Link
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