Britain lends lessons in credit crunch

You know you're in the grip of globalization when a spate of housing foreclosures in America results in hundreds of Britons lining up outside a bank, desperate to get their money out.

But as Britain takes stock after narrowly averting the collapse this week of its fifth-largest mortgage bank, Northern Rock, economists are pondering lessons learned from the country's gravest financial crisis for 15 years – and wondering where the global credit crunch will strike next.

Some point to Ireland and Spain, whose housing booms in recent years have stoked concern of a vulnerable property bubble. Others note that the credit crisis is buffeting the German banking sector, while Britain may also not be out of the woods yet. Thus far, the crunch appears to have spared Asia.

But since the extent of the fallout from the US subprime crisis is unknown, such predictions may be premature.

"The problem is that no one knows how deep the problem is," says Howard Archer, an economist at the Boston-based financial analysis firm Global Insight. "That is what makes it so hard to predict. One of the reasons that banks have been so reluctant to lend to each other is because no one knows where this bad debt is."

That led to a crisis for Northern Rock, a long-established lender that borrowed from other banks to fund its short-term commitments. When those funds dried up as a result of the chronic mistrust gripping a banking system unsure of who was sitting on bad debts, Northern Rock was forced to seek emergency funding. A "run on the bank" by account-holders ensued.

"We panicked," says Reg Harding, who tried and failed to take his £50,000 ($100,336) in savings out of Northern Rock's Kingston branch last Friday because the lines were so long. "They should have a deposit protection scheme like they do in America."

Risk ahead: more risky lending

The response from the authorities has proven controversial, but instructive for others who may face turmoil in coming months. For several days, the Bank of England argued that intervention would amount to "moral hazard," sparing risk-takers the full consequences of their losses. But when British TV showed lines of people, many of them elderly, queuing up in desperation, the authorities quickly said all deposits would be guaranteed.

This blank check has provoked criticism. Willem Buiter, a former member of the Bank of England's monetary policy committee, said the move was tantamount to "insuring free of charge all deposits in the UK banking system. It ... showed a loss of nerve."

Some argue that Britain should now install a bank deposit insurance program similar to America's. Others are calling for greater transparency so that parcels of questionable debt cannot be blithely parried around the global financial system.

Julian Jessop, a global economist with the London-based consultancy Capital Economics, says that the British move was justified. "The alternative of allowing people to lose money from a deposit account ... would have caused such problems in the wider economy that it was worth the moral hazard."

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