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Last Updated: Monday, 17 September 2007, 22:09 GMT 23:09 UK
Northern Rock: Expert views
Queues outside a Northern Rock branch
Will queues still appear at Northern Rock branches?

The share price of some of the largest UK lenders have slumped and queues have formed outside branches of the Northern Rock as savers look to withdraw their money.

As the difficulties in the UK banking sector accelerate, the BBC asked four economic experts to express their views on the crisis and how it might develop.

MARTIN WEALE
NATIONAL INSTITUTE FOR ECONOMIC AND SOCIAL RESEARCH

The economic expansion of the last ten years has been underpinned by rising house prices.

However the current crisis will make people nervous about future prospects for housing.

The next couple of years are unlikely to be boring
Martin Weale, NIESR

This in itself will probably lead to a downturn in demand and thus to weaker prices.

The effect is likely to be particularly marked for buy to let owners who need rising prices to make their investments viable.

Even without the crisis there was every reason to think that next year the economy would grow slower than this year.

The crisis is likely to lead to higher saving and may lead to growth markedly below trend.

However, house prices could not have risen indefinitely in the way that they have for the last ten years and the economy has to adjust at some point.

Obviously with a better regulatory and macro-economic framework this situation would not have arisen.

The question now is how smooth the adjustment is rather than can adjustment be avoided. The risk that it may not be smooth is enhanced by the fact that the UK economy has become disproportionately biased towards financial services.

The government supported this and indeed in the monetary union tests the only specific industry it was concerned about was financial services.

As the cheap credit bubble of the last few years there is a risk that financial services will contract particularly rapidly.

The next couple of years are unlikely to be boring.

DR EAMONN BUTLER, ADAM SMITH INSTITUTE

My economics teachers used to say that the days of a 'run on the bank' were long over.

It might have caused problems in the 1930s, but modern banking controls and accounting had consigned bank runs to economic history's dustbin.

Gordon Brown's chickens are coming home to roost.
Eamonn Butler

But despite the assurances of politicians and regulators, here we have a run again.

What on earth can be happening? Well, the first thing is that people no longer believe what politicians tell them.

Their years of putting spin over principle has shattered any respect we might have had for them. Sadly, Alistair Darling's word is just not enough.

And people don't believe the regulators either.

Their vast bureaucracies have not spared us from failures and foul-up. Just ask the millions who have lost their company pensions.

If, within the regulatory alphabet soup, anyone knows what the Financial Services Authority actually is, they probably know it only as the bunch who make you produce your telephone bill and driving licence, even though you have banked at the same place for thirty years.

And despite their comforting talk, the politicians and regulators must know too that vast queues of people taking out their deposits is not good.

The financial system is highly interdependent.

It could just turn into a real crisis.

Their immediate reaction may be to make credit more plentiful, so that the banks do not run out of cash.

But that is a recipe for more inflation, which is already breaking through its target, thanks to high government spending.

Gordon Brown's chickens are coming home to roost.

WILL HUTTON, THE WORK FOUNDATION

We are in the middle of a bank run.

We've never seen it on this scale in Britain - of a major bank - since the 19th century.

They must say, that if they can't find a commercial buyer for Northern Rock, the Government will nationalise it.
Will Hutton
The markets are holding up quite well.

If it's nipped in the bud, I'm sure that we'll get through this in relatively good order.

The government has got to say that they're going to get the inter bank market moving in London at all costs, that they will stand behind the structured investment vehicles, that they will, in the jargon, discount them, lend against them if need be - and they must be prepared to re-regulate the markets.

And at the limit, they must say, that if they can't find a commercial buyer for Northern Rock, the Government will nationalise it.

They've got to, got to, got to give ordinary savers in Britain 100% reassurance and this has got to turn out to be a storm in a teacup.

If not there is a really serious risk that one could have a bank run that spreads beyond Northern Rock.

RAY BOULGER
JOHN CHARCOL MORTGAGE ADVISORS

The current situation in the money markets, with many prime banks refusing to lend to each other for longer than a day, is unprecedented, with Northern Rock being the first UK bank casualty.

But the quality of their loan book is better than average, with the number of mortgages 3 months or more in arrears only half the industry average.

For the foreseeable future there will be less funding available for mortgages.

This will impact particularly hard on borrowers with adverse credit, such as mortgage arrears or County Court Judgements.

People in this situation will have to pay a much higher interest rate, as much as 3% more, and need a bigger deposit.

Except in the very short term there is more good news than bad in this situation for house prices
Ray Boulger

Borrowers with a good credit status but little or no deposit, and those looking to remortgage with little equity in their property, will have less choice of lenders and the reduced competition means there will be a larger gap between the price for this type of mortgage and lower risk mortgages.

However, there is a silver lining for borrowers with a good credit record, which is the majority.

The credit crunch means that Bank Rate is no longer expected to increase to at least 6% and is likely to start falling sooner and further than would otherwise have happened.

This means that although reduced competition in the mortgage market, especially from specialist lenders, will result in lenders increasing the mark up they charge borrowers compared with their cost of funds, the actual rate borrowers pay will still be lower than would have been the case without the credit crunch.

This is already happening with fixed rate mortgages, where the best deals are now about 0.3% cheaper than a couple of months ago.

Except in the very short term there is more good news than bad in this situation for house prices. That is because interest rates are by far the biggest influence on prices and the credit crunch means that they will be lower than would otherwise have been the case.

This will more than offset the fact that a small percentage of potential buyers will no longer be able to get a mortgage.

The longer the credit crunch continues the more likely it is that Northern Rock won't be the only bank needing support.

The most important asset of any bank is confidence and if one bank folds savers will worry about which bank will be next.



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