UK: Brown tries to prevent panic

Brown's statement that the UK economy is strong continues his basic line - but he does not explain that the reason it is strong is because of invisibles and the apparently unrestricted recycling of information within the UK.

But last week's announcement that the Bank of England was to prop up Northern Rock against a run by investors shook confidence. Brown - who it will be remembered was the architect of a supposedly totally independent Bank and Financial Services Authority (an independence which is in fact illusory) said "I can announce today that following discussions with the Governor and the Chairman of the FSA, should it be necessary, we, with the Bank of England, would put in place arrangements that would guarantee all the existing deposits in Northern Rock during the current instability in the financial markets."

This is the first run on a UK financial institution since the Hodge crisis in the 1970s. That brought down so called secondary lenders like a house of cards. The secondary lenders were what are now more trendily called "sub prime." There really is nothing new. Northern Rock has always been a lender prepared to offer loans in marginal cases - although that does not imply that they take on outright risky loans as so many US lenders have done. However, it has a small exposure to the US market and that has led to what Brown calls "short term liquidity difficulties."

Basically, the Bank of England has done nothing more than it is supposed to do - to act as a lender of last resort when a financial institution cannot raise capital in the markets, provided that its risk is acceptable. Northern Rock's loan book is, the Treasury says, in good order. The problem, to all intents and purposes, is that it ran out of cash.

For the rest of UK industry, that would mean insolvency. For a bank, it means that the credibility of the market is at stake. And as that credibility is the only thing keeping Brown's economy afloat, he can't afford to risk anyone seeing through the charade that is an economy based entirely on people not making things.