Money Madness

With the news that Northern Rock has obtained a loan from the Bank of England, people are pulling their savings out faster than you can say "next round's on you"!
This is proof that the majority of people in this country have absolutely no idea about how financial institutions are run and the effect that taking all their money out will have...

Firstly, the Bank of England is not in the habit of lending money - have you ever heard of them issuing a mortgage? They are the lynchpin of all financial institutions in this country and they would not lend money unless it was almost guaranteed to be paid back. If people bothered listening to what they were being told they would understand that Northen Rock is not actually in financial distress. If you look at the business model of Northern Rock, it will show that they actually borrow a lot more money to fund their mortgages and loans than most other banks and building societies. Most banks/building societies fund their lending through their savers and this is why Northern Rock have requested help.
The fact they have asked for help and received it is almost proof positive that they will not go down the toilet...
That was until yesterday when mass hysteria took over and people started pulling all their money out of Northern Rock...this action in itself COULD be the downfall of the company. If there are no savers, then all their money needs to come from the money markets.

So why does the fact that Northern Rock borrows a lot of money a problem?
It is to do with the US Mortgage saga - it has become apparent that mortgages have been given to high risk customers in the US and that there is a risk to a lot of non-UK companies losing a lot of money. This has an effect on the Global money markets as there is less inclination to lend and borrow, and lenders will probably put their interest rates up.
However, as constantly stated, this is a temporary glitch - the money market will sort itself out and when it does, Northern Rock will be back on an even keel!
Therefore, it actually appears that Northern Rock are acting in a completely up-front and responsible way as they are trying to safeguard their current savers and borrowers.
The Bank of England obviously agree as they have agreed the loan.

The Northern Rock customers now withdrawing their money could actually trigger financial instability within the whole UK financial market as people WILL lose faith in the banks and building societies.

There is always the possibility that another institution will take over Northern Rock, but they will have to agree to pay back the Bank of England so there are complications there.