The Bank of England can cut rates as much as it wants: it won't be able to protect all the people who borrowed too much during the years of easy credit from some serious pain. All of the banks, including Northern Rock, have now sworn off lending more than 100% of the value of mortgaged properties. Some, including Nationwide, are imposing stricter conditions and higher rates on borrowers with less than 25% equity. As house prices edge lower, more and more people will find themselves in negative equity, even if they didn't start out that way. It's not at all clear who they will turn to, apart from the Bank of Mum and Dad, when the time comes to refinance.
Interestingly, this state of affairs disproves two completely contradictory assertions that have been made about Northern Rock: that removal of NR from the market would not affect the overall availability of mortgage credit (Kaletsky et al), and that nationalising it would go some way toward stabilising the credit crisis (Darling et al). The fact is that NR was never the problem: it was only the most obvious symptom of the severe problems created by the unbridled supply of cheap credit over the past half-dozen years.
It would be serious enough if the problems were confined to housing, but of course they're not. The hedge fund types have been meeting in the UK this week to bemoan the difficulties they are facing, now that banks are not throwing money at ropey deals; the airports operator BAA may have to flog of some of its assets because its debt burden has become unmanageable; the American owners of Liverpool FC may have to sell out because they can't finance their plans for a new stadium....the list is growing by the day. It's hard to feel sorry for any of the principals in these particular examples, but they all reflect the excesses of the recent past. Unfortunately, it's likely that a lot of less blameworthy people will suffer as this crisis continue to play itself out.
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