28 Oct 2009

Northern Rock – a money bucket that never ends

There’s £8bn more loans from the government to Northern Rock to let them lend it to all of you. On top of that there’s another £4bn of liquidity arrangements.

This takes the loan that had gone down to £15bn back up to £27bn, which will take “around a decade to pay off”, says the Rock’s chief executive.

My initial read on this is that the government is providing the funding for the Rock that it would otherwise raise from the dreaded wholesale markets that brought its downfall.

In fact Mr Hoffman told me that “in due course” the Rock would be returning to those same securitisation markets, “but in a simpler form”. So not quite Adam Applegarth Redux.

More concerned City voices will suggest that this massive loan is to deal with some horrible mortgage delinquencies amongst Northern Rock’s high loan-to-value borrowers. We will find out the figures next week.

All this raises a huge issue about the proper role of government. I had already pointed out that much of the bizarre mini-housing boom we appear to be enjoying in the middle of a record recession is the direct result of government sponsorship. Today’s extra loan is a more direct manifestation of that than even I had expected.

Northern Rock is now a tool of government pump priming. That may well be a good thing, and a fattened balance sheet might get a higher price from Tesco, or Virgin, or JC Flowers. But is it definitively the best use of scarce government resources?

And why on earth did the government spend the best part of last year pursuing precisely the opposite strategy with Northern Rock, destroying credit to cut the taxpayer loans to the Rock.

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