For YesBut’s Image on 21st September 2007 Chewy posted the caption -
"Solid as a rock?"
The image and caption suggested the thought and story to me:
Perhaps it’s the mood I’m in - or the fact the World is viewed through the window of our psyche with its blemishes and reflections - but I felt a sense of the inevitable when I heard about the run on the Northern Rock Bank. It just had to happen. For too long the USA and British economies have been based on foundations of sand.
Banks went out of their way to entice people to take loans. “You want to buy a house? Here have a loan. You want to buy a car? No problem, dip your hand in the bucket and take a handful of cash. Repayments? Don’t worry about repayments, we can consolidate all your loans into one big loan, which you can repay over the next seventy years.”
With free access to loans there was an inevitable increase in the price of houses, 10% ~ 15% ~ 20% increases per year. And people rubbed their hands in glee, “look at the increase in value of my house, if things carry on like this I’ll be a millionaire” - but it was all “Mickey Mouse money”.
In Northern Rocks case, they broke the Golden Rule of Banking, when they obtained short-term loans to finance long-term mortgages. When borrowers in the US started to default on their loan repayments, shock waves were soon felt on this side of the pond and Northern Rock was unable to obtain loans to finance its business.
Jim and Mary were quite contented living in their apartment. They had no children. Jim worked in an office while Mary did charity work three afternoons per week. The highlight of their year was their two week holiday to Spain.
At first they ignored the junk mail they received enticing them to have a Platinum Credit Card. But after a time they thought “why not?”. It would allow them to buy the little luxuries they so justly deserved. Mary wanted new furniture and change the kitchen in the apartment. While Jim thought it would be nice to have a new car. With the lease of their apartment as security, the bank was delighted to give them a loan. In fact they offered to give them an additional £5,000 to cover other expenditure.
The loan certainly made a big difference, Mary and Jim were delighted with their new standard of living. Instead of their normal package holiday to Spain, they went on a cruise.
It took nearly a year, before they noticed the monthly loan repayments was accounting for a big slice of Jim’s salary. By the last week of every month, Mary had to count the pennies before going shopping for groceries. Then when the deep freeze unit broke down and had to be replaced, together with some other unexpected expenditure, it became impossible to pay the monthly repayments.
The Bank Manger while being courteous, wasn’t as friendly as when they had seen him to obtain the loan. But he agreed to reschedule the loan.
Changes had to be made. The car was sold, and it was agreed Mary would have to look for paid employment. But the hardest pill to swallow was the realization that Jim wouldn’t be able to take early retirement at 60 but probably would have to continue working well past his 65th birthday. There would also be no annual holidays - not even a cheap package holidays to Spain.
