The Halifax has posted a report of 2.5% house price falls month on month, the sharpest drop since the early 90s. The year on year figure is still positive at 1.1%

Martin Ellis, chief economist for Halifax said:

Overall, we expect there to be a modest fall in UK house prices this year. Any declines, however, should
be viewed in the context of the significant price rises over recent years. The average UK price has risen
by £120,860 during the past decade from £70,696 to £191,556; an increase of 171%.

Predictably there were some calls for the Bank of England to reduce interest rates but obviously, it is not the BoE’s remit to look after asset prices, rather to target inflation. Furthermore, the Bank of England’s previous interest rate cuts have not been passed on to mortgage borrowers, the private banks have instead been increasing their rates to customers.

Any such downward move in interest rates in the face of massive inflation would destroy the pound’s value against the Euro just in time for British people’s summer holidays.

The Abbey National bank deleted it’s 100% mortgage product today, the last such 100% product available in the UK.

According to Bloomberg, Northern Rock is to pull out of the UK subprime mortgage market.

The recently nationalised bank has been reducing it’s mortgage offerings over recent weeks.

This will no doubt come as something of a shock to the UK government who have been adamant thus far that there is no subprime crisis in the UK and that it’s all an American problem

The UK just bought itself a bank.

For a cool estimated £55-£100 billion of the taxpayer’s money, the UK government is to nationalise failing UK bank Northern Rock.

Northern Rock got into severe trouble late last year and had to borrow colossal ammounts of money from an emergency facility at the Bank of England. This in turn caused a failure of confidence in the bank by it’s depositors and a bank run.

The UK Labour government has now apparently decided that the taxpayer’s exposure to Northern Rock is so massive that they have no choice but to nationalise the bank in order to attempt to get back some of the money they have taken.

There had been various private takeover offers for the bank including one lead by Richard Branson’s Virgin group but they failed to materialise. It appears that the already hired former boss of Lloyd’s of London will be installed at Northern Rock to take control.

Whether there is any salvage to be had and whether the taxpayer will lose their money remains to be seen.

One would imagine that the UK chancellor, Darling, will now be about as popular with the British taxpayers as flatus in an elevator.

Update: Full details of the assets and shares nationalisation is to follow tomorrow (18th Feb)

Photo Credit: Alex Gunningham cc-by-2.0

The Office of National Statistics has that the assets and liabilities (there seem to be more of the latter than the former) of Northern Rock must be added to the public balance sheet as of 9th October 2007. This is due to the amount of control the government/treasury has taken over the failing bank and the public-funded support that has been given.

This means that the taxpayer is now facing an official increase in their debt burden of about £100 billion (£100,000,000,000) whether Northern Rock is actually nationalised or not.

£100 billion is a frankly terrifying amount. That’s one-hundred-thousand-million pounds. If you had that much money in pound coins and you laid them flat, edge-to-edge, they’d stretch around the equator over 56 times and they’d weight 3/4 of a million tons. Of course, this little practical excercise would be impossible as it would require 67 times more pound coins than actually exist in circulation.

There won’t be any hard news on whether the bank will be privatised or nationalised until the end of march but even in privatisation, current plans would effectively leave the buyer with the business of Northern Rock while the public gets to continue holding the liability for the debt.

Photo Credit: Alex Gunningham cc-by-2.0

I was just reading this article one the BBC about the Treasury Committee blaming the FSA for Northern Rock’s unsustainable business model when I came across this statement:

Unlike the great majority of UK banks, Northern Rock relied upon borrowing funds from the wholesale money markets to fund its mortgage business, rather than the usual method of using savers’ deposits.

Surely the BBC’s Business editors can’t be so naive as to not understand that the greatest majority of mortgage lending in the Western World is funded by fractional reserve banking.

Fractional-reserve banking refers to a financial system where the bank uses a fraction of its deposits to finance borrowers ie: It does not have the money as deposits to give out as loans. It ‘creates’ the money for the loan by starting a line on a ledger or in a database. The money is ‘created’ on the promise of the loan’s repayment.

Now, I can understand “Joe Bloggs” on the street believing that mortgages are only lent from deposits. After all, the banks do seem to spend some time and effort supporting this myth. However, I’d imaging that a great many people in business and finance circles are fully aware that mortgages are almost entirely funded by fractional reserve banking these days.

This begs the queston; why are the BBC business editors propagating a myth about banking which plainly isn’t true? Are the business editors really this naive?

You couldn’t make it up.

Northern Rock, the [almost] failed UK bank which now potentially owes the British taxpayer £55,000,000,000 (£55 billion) has reportedly payed it’s top bosses bonuses up to £100,000 each.

In a letter to senior staff, chief executive Andy Kuipers said that the “enhanced renumeration package”, which pays 173 Rock employees up to £25,000/quarter, was “essential to our continuing excellent operational performance”

Well, if Northern Rock are currently experiencing ‘excellent operational performance’, I’d hate to see them have a bad year.

Quite frankly, Northern Rock’s attitude is making a mockery of the British taxpayer who is still bailing out a company which may soon have to be nationalised as it’s viability is brought into question.

On Tuesday, there will be an extraordinary meeting of shareholders as they attempt to block the sale of Northern Rock to HM Treasury. In the mean time, the taxpayer’s exposure to Northern Rock will continue to increase.

Photo Credit: Alex Gunningham cc-by-2.0