DESPITE having seen Northern Rock share prices crash by 60 per cent, queues of depositors outside branches taking out £2bn of their savings and borrowing £13bn from the Bank of England, Chairman Matt Ridley told MPs yesterday that ‘the Northern Rock business model was a good one’.
However, he told the Treasury Select Committee that the model ‘proved unable to cope with an unexpected seizure of the money markets in August. We were subject to a completely unprecedented and unpredictable closure of the world credit markets.’
Northern Rock’s Chief Executive Adam Applegarth said that they had planned to cope with a 40 per cent drop in housing prices, but had not considered a freezing up of financial markets. He said: ‘What wasn’t stress-tested was the event deemed implausible – of the global markets freezing up overnight.’
They never dreamed they would not be able to borrow more money!
What is clear from this testimony is that the activities at Northern Rock, that is borrowing money at one rate to provide mortgage loans at another rate, are normal business practices in the banking world.
The losses sustained by Northern Rock are small change compared with those of the big boys of the banking world, like America’s Citigroup and J P Morgan, or HSBC.
Citigroup announced on Monday that its third quarter profits had dropped by 57 per cent because it had written off $5.9bn. $2.4bn of this was on mortgage defaults and unrepayed personal loans. The largest US bank said that credit losses would plague the financial sector for the rest of the year, which sent share prices in New York plunging.
This financial crisis has forced the US Treasury Department to sponsor moves by America’s three largest banks, Citigroup, Bank of America and J P Morgan to set up a special $75-$100bn fund. It is a desperate move to bail out banks, forced to sell their SIV (structured investment vehicle) debt packages.
Ben Bernanke, the Chairman of the Federal Reserve Board, the US central bank, also expressed fears about financial stability on Monday. He said that the ‘ultimate implications of financial developments for the cost and availability of credit, and thus for the broader economy, remain uncertain’.
The problem for Bernanke, the Treasury and the major American banks is that US capitalism is sinking under the weight of its debts – the country has a trade deficit with the rest of the world of $825bn, the Federal government budget deficit is more than $500bn, and mortgage and consumer debt runs into trillions of dollars.
As a result of this, states and financial institutions are dumping the dollar, the exchange rate of which is dropping dramatically and is still ‘overvalued’, according to Rodrigo Rato, the Managing Director of the International Monetary Fund (IMF).
With a flight from commercial paper and the dollar, the world’s main trading currency, the prices of strategic commodities and gold (the value reserve and hedge against the dubious worth of paper credit notes and currencies), are soaring.
Overnight yesterday US light oil hit $86.8 a barrel. Gold has gone up from $742 to $756 an ounce since the beginning of this month.
The financial chaos and anarchy of the capitalist crisis is already having a direct impact on the working class in advanced capitalist countries, like the US and Britain.
In America, a quarter of a million families are losing their homes every month as a result of mortgage defaults and repossessions, job losses are mounting and inflation is fuelled by the falling dollar.
In Britain, where London is the world leader in speculation, the number of mortgage refusals from banks and building societies have rocketed, according to figures published yesterday. More than 738,000 applications have been turned down since March, a rise of 60 per cent. Around 382,000 of these refusals were to first-time buyers under the age of 35.
The deepening capitalist crisis, with its banking anarchy and chaos of job losses and inflation, is threatening catastrophe for millions of working-class families in the US, Europe and Japan.
Their only answer to this crisis must be the struggle of the working class to carry through a social revolution to overthrow capitalism, establish workers’ power and go forward to a socialist society.
This means building sections of the International Committee of the Fourth International, the World Party of Socialist Revolution, in every country.