Problem Solver Bank of EnglandOn September the 14th a rather unusual scenario for our times took place - thousands of anxious customers in a queue waiting (mostly patiently) in front of the branches, to take money out of Northern Rock (The Economist, 2007 2).
Northern Rock is the fifth biggest mortgage bank in the UK and has been observed critically these days. The credit institution has blundered into a crisis due to turbulences in the US real estate market. Roughly 25 billion pounds have been paid to Northern Rock as emergency financing from the Bank of England. Alistair Darling, Chancellor of the Exchequer, has guaranteed all the savers that they "will not loose a penny " (Article: Brown Atacked over Northern Rock 3) and their savings will be secure. Why exactly this bank ran into trouble and whether the government intervention was appropriate will be discussed in the following paragraphs.
In June of 2003 the prime rate was lowered by Alan Greenspan to one percent. With the prime rate being so low many people started to take up mortgages, without considering that they would have to pay higher mortgage interest rates in case of a climbing prime rate. In the past 2 years banks have given out mortgages worth 3200 billion dollar US - 20% of these mortgages to people with little financial security. (Der Spiegel,2007 4)Climbing interest rates and falling prices for real estate have made it impossible for many house owners to pay their mortgages. Especially in the sector of sub prime mortgages many defaulted on their mortgage payments. Since many European banks have high stakes in the US real estate market, it is a problematic situation regarding these banks' liquidities.
The problem that Northern rock faces these days is a result of its "racy business...