Earthquake and Aftershocks

Lenders gave money to people who had no chance of repaying the debt. At the time, it didn't much matter to the lenders, who were confident that they could flip foreclosed properties and still turn a profit. After all, home prices were on a steady incline and the new value would surely be better than the cost of the original mortgage.

The tide has turned and home prices have declined a bit. The mortgage lenders are holding portfolios of foreclosed properties that are not selling at the necessary high price. Their investors would like their interest payments on their investments, please, and there's no money in the till. That, in brief, is the current credit crunch. Too many bad loans made, not enough capital being returned.

The people who invested their savings in Britain's Northern Rock bank are queuing up, determined to take their money out of the bank that is failing because it made too many mortgage loans to too many poor people who shouldn't have been given a loan in the first instance. The Bank of England has funneled money into Northern Rock to prop it up, and Northern Rock is telling its customers that their money is safe, but if they were foolish enough to make bad loans, who would believe that they have developed any wisdom now?

The aftershock of the credit earthquake is rattling the homes of unsuspecting savers, the little people who put their money into the bank, expected to earn a little interest, and have the nest egg at some point in the future. Northern Rock is sinking, and the last thing it needs is to lose deposits, but the depositors see the floundering and they run for cover....with their hard-earned savings in hand.

To date, about 8% of the bank's deposits have been withdrawn, largely by old folks who have a clear memory of previous bank runs in the 1920's and 1930's. The bank is concerned that their stock value will sink abysmally, and then someone could come in and buy up the stock at bargain prices. And then, God help us all, but the stockholders will suffer. How cruel are the depositors, to not consider the holdings of the bank's owners as they remove their money and send Northern Rock's value down to the cellar. Shares have lost 70% of their value this year, and that's money out of the shareholder's pocket.

Easy credit is not so easy after all. More have to pay than just the individual who did the borrowing.