Good Lord!

Opening of a Guardian Leader:

Northern Rock\’s big blunder was to borrow short and lend long.

That\’s it? That\’s the secret?

Err, does anyone at The Guardian actually know how banks work? All of them, every single one of them, borrows short and lends long. It is, in fact, the essence of banking. When you stick your money into an account that is a deposit that you can withdraw on demand. The bank then lends it out as, say, a mortgage. That mortgage might last 25 years. From the bank\’s point of view this is borrowing short and lending long.

Northern Rock may well have made blunders. Perhaps relying upon wholesale markets rather than retail deposits, perhaps not having enough equity, perhaps too fine a pricing on their loans. All of those are possible reasons for the troubles, but borrowing short and lending long simply ain\’t the point.

Tell me, are Guardian leaders written by the sociology graduates or something?

4 comments on “Good Lord!

  1. “Tell me, are Guardian leaders written by the sociology graduates or something?”

    Are you sure that isn’t illegal under recent or pending legislation on hate speech? Surely, Sociology must be classed as a religion by now.

  2. I think it’s more the “lend long at fixed interest rates” and “borrow short at variable rates”. Why on earth would you lend out at low fixed rates just because right now that’s what you are able to pay your depositors?

  3. Try this on the extraordinary business model of Northern Rock:
    http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/11/26/ccrock126.xml

    “Northern Rock sales staff can sanction mortgage offers of more than five times earnings to customers with salaries of £100,000 or more. If the customer agrees to a five year fixed rate deal they can qualify for a loan worth six times their income, said mortgage broker London & Country.”
    http://business.guardian.co.uk/markets/story/0,,2179625,00.html

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