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« Gold Stocks Preparing For Next Leg Up | Main | Correction Fully Underway, Buying Opportunity Approaching »

Northern Rock: Let it fail!

The front page of the Financial Times caught our eye with a story about the troubled UK bank Northern Rock.

Northern Rock: Let it fail!

As many of you will know Northern Rock is basically going bankrupt as a result of its loses from the mortgage market. The bank was following lending policies that are in our opinion extremely risky, if not plain reckless. When a bank is lending up to seven times the salary, for 125% of the value of the property, all on self accreditation, trouble is bound to surface. The CEO of Northern Rock has announced that he will step down in January and although this may not be surprising news, it was the next part of the article that surprised us.

In order to solve its liquidity issues during the summer, Northern Rock had to borrow money from the Bank of England at a penal rate of about 7%. However the Financial Times claims that now Northern Rock is actually paying a commercial rate, lower than the penal rate, on the money it borrowed. The fact that the Bank of England is supporting Northern Rock is ridiculous. In a free market system, good businesses do well and profit whereas poorly run businesses (such as Northern Rock) fail.

Another annoying aspect of this saga for us personally is the fact that it is the UK taxpayer is going cough the cost for the failure of Northern Rock. Having lived in the UK for a number of years now, we have paid a substantial amount in taxes on money that we have worked hard to earn. However this is tax payers money that is being utterly wasted on a failing business that should be allowed to fail and go bankrupt. The government should not be interfering in the market as this is a capitalist system.

If we make losses on the market, is the Bank of England going to throw money at our operation to make sure we do not go bankrupt? No. So it should extend the same courtesy to Northern Rock and any other financial institutions that are undoubtedly get into trouble over the next few years and let them fail.

Then again, when we think about this all literally, in theory the Bank of England could simply print more money to help all the businesses that are going to get into trouble. This would be an even bigger mistake than bailing the banks out in the first place and printing more money leads to inflation getting out of hand. High inflation is bullish for gold prices and gold stocks, but would have devastating affects on the mainstream economy.

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Reader Comments (3)

So I take it you don't have any money in Northern Rock then? So all depositors should lose any money they have above £35000 per account then, is that what you think ?
Interesting - not to say, cruel.

Incidentally, we don't have a capitalist system, we have a rigged system where the Bank of England creates money out of credit that has to be financed by the taxpayer. If we had a capitalist system then the Bank of England could not create any money - the money stock would depend on the size of the central bank's gold reserves.

The result is that we have a system that creates endless inflation. So its funny that you as Gold Stock analysts bemoan inflation - if it weren't for inflation then gold would be useless as an investment.

If the BOE does not bail out the banks then the entire system will collapse through deflation. Northern Rock is just the tip of the iceberg. Remember that deflation was tried once before in 1929 ? Didn't turn out too good did it ? Inflation and lots of it is the only cure to this disaster caused by negligent regulation and sheer greed of the banks.

The governor of the Bank of England should be punished for his negligence in allowing the integrity of the financial system to be undermined. Also the senior directors of the banks should also be punished for their sheer greed in authorising such risky loans and selling them on to duped investors.

November 22, 2007 | Unregistered CommenterS. J. Illingworth

Thank you for that excellent comment S. J. Illingworth,

We do not have any money in Northern Rock. We used to own shares in the bank but sold these at £12.16 to raise cash for added investments in precious metals. Currently we only hold positions in gold, silver and uranium.

We were not attacking the protection of depositors, but to have the government protect shareholders in Northern Rock is a scandal.

We are in full agreement that this system is not 100% capitalist and that the BOE has too much power.

November 22, 2007 | Unregistered CommenterGold Prices

As S.J. Illingworth suggests punishment is very much in order here, if only the system would permit it. Politicians and high ranking government officials should be made accountable to the people, as it was in ancient Greece, when retiring politicians and high ranking military officers could be subjected to interrogation by an assembly of citizens, who might then, if the official was found wanting, be subjected to a vote through casting of the ostrakon and banished into exile.

Something of this nature might make a world of difference to the standard of government which has now reached such abysmal depths of corruption and degradation, where even the worst malfeasants can walk off into the sunset to write their memoirs, make millions son the speaker circuits, and enjoy huge fees in sinecure positions on the boards of many corporations.

November 25, 2007 | Unregistered CommenterPeter Dykes

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