18th September 2007

The international money markets have been playing a game of 'pass the parcel'...

Northern Rock has played a huge role in the economy of Tyneside; it has been a clear regional success story. The Bank has developed from a small regional building society to one of the largest home lenders in the UK.  Local people felt that they could trust their bank.

Lines of savers desperately trying to extract their lifesavings from a bank is not something we should expect to see in an advanced economy like ours.

People will obviously be worried if they think that their savings are at risk. Confidence that our savings can be safely invested in banks and building societies is one of the fundamental assumptions one which our economy relies.  If that trust evaporates the whole underpinning of our economy is at risk.

This is why that restoring confidence in the bank is crucial.   We have supported the decision of the Bank of England to provide access to funds and totally endorsed Alistair Darling’s crucial decision to guarantee all savings invested in the bank. 

The fact that people continued to withdraw money even after the Chancellor’s announcement shows how what little trust the public have in this Government.  I would be better for people to accept this guarantee and continue to invest in Northern Rock with confidence.

The questions we now face are; how did a crisis in loans to Americans with weak credit histories end up with desperate savers queuing outside branches in Tyneside, and is Britain in a state to weather this international financial storm successfully.

Northern Rock has managed to become so successful by borrowing money from the money markets rather than simply relying on deposits from savers.  Whist these international debt markets were functioning normally, this was a perfectly sensible strategy which has allowed the bank to offer very competitive mortgages to those wanting to get on the housing ladder.

Unfortunately, the international money markets have been playing a game of ‘pass the parcel’ where debt has been sold on and lenders have thought that risk can be transferred.  The crisis hitting house prices and home loans in the US has meant that this game of ‘pass the parcel’ has come to a stop.  This has led to a crisis in confidence in international markets making it difficult for companies like Northern Rock to raise money.

The crisis which has engulfed Northern Rock just shows how vulnerable we all are to global economic forces.  The government has a responsibility to ensure that the UK’s economy is in a shape to withstand external shocks like this. 

As Chancellor, Gordon Brown has not done this.  Instead of using the past decade of economic success to introduce reforms and ensure that our economy was structurally sound he has squandered the opportunities he had.  

Under Gordon Brown, levels of both public and personal debt have increased enormously. This is a danger the Conservative Party has been warning the Government about for years and it is a shame that it has taken a shock like this to get the Government to focus on the problem.

 The tax burden on families has increased and ordinary families in the North East and across the country are feeling the pinch as disposable income is falling.  The economy has no slack in it to cope with a downturn.  We are ill equipped to cope with the problems posed by events in world financial markets and this has increased the chances of the credit crisis affecting the prosperity of ordinary people.

This is why promoting stability has to be central to our economic policy.   David Cameron has made it clear that stability is the prime focus to Conservative economic policy.  We have made it clear that we will not offer up front tax cuts, and any further tax cuts will be funded by sharing the proceeds of growth between cutting the burden of tax and reducing the levels of Government debt  and increasing funding for public services.