A guide for the bewildered

We may nervously watch the shares in our employer's firm plummet, or wonder what difference the freeze in the Oxfordshire housing market will make to our personal wellbeing.

Or more immediately, if we have money in a few banking shares, we will be watching our investment shrink alarmingly.

The day before the Government announced its part-nationalisation of Britain's largest banks, we asked Helen Merrington-Rust of the Abingdon branch of stockbrokers Redmayne Bentley a few questions, answers to which we hoped would act as a guide for the bewildered.

Q: Clearly millions rely on banks for mortgages and business loans. How will people needing such facilities be affected if banks are not recapitalised thanks to Government cash injections?

A: The simple answer is that people will find it well-nigh impossible to get loans. And even after a cash injection loans will probably still be difficult to get. The danger is that if the Government doesn't put in the money, people will panic and withdraw their savings as in the case of Northern Rock and as they were beginning to do with Bradford and Bingley.

Or they might go down the road to an Irish Bank, since the Irish government has guaranteed deposits. Its true that 98 per cent of British depositors are covered by the UK Government's £50,000 guarantee, but interestingly that 98 per cent hold only 50 per cent of the money deposited. The other two per cent own the other 50 per cent.

Q: How will people who have no need to borrow be affected? For example with pensions and endowments.

A: Pension funds are worth less than they were two weeks ago. If you are already in receipt of your pension, that should be fine. But endowments will be losing value — and in most cases that is what people are using to pay back their mortgages.

So if they are equity-based and this crisis continues, you will see returns diminish.

Q If the Government does pump money into the sector, what will be the consequences for the taxpayer?

At the moment the Government is fire-fighting. But there could be less money for public spending on schools and hospitals. On the other hand, confidence in banks is vital, and the banking industry itself contributes a great deal to the Government in the form of tax.

And also if the banking system starts to wind down, the whole economy will grind to a halt because the system is pivotal to the economy.

Q: Tell us a little about money markets and how banks lend to each other. Is the problem largely that the banks' cupboards are bare?

Banks won't lend to each other in the normal way because they are worried the borrower might go under. Instead the Bank of England lend them money and the banks put the money back each evening into the overnight money market.

Q: If you hold shares that are falling in value, you are obviously losing out. But would Government efforts to prop them up mean that the rest of us are in effect paying for our neighbours' shares?

A: Initially yes, in the very short term. However, if distressed banks are not supported this could lead to a domino effect — and the consequences for the economy don't bear thinking about.

For this reason, the Government's immediate aim is to stop banks going under. But once confidence is returned to the banking sector, the shares should go up again and the money will be repaid.

Q: Is there a danger that the economy will simply come to a halt?

A: Yes — I have heard that in the United States some employers have been unable to find short-term finance even to fund the payroll.

Q: Should employees of companies whose shares are falling worry?

Probably not unless there is a forced sale. It is a little like living in a house that is falling in value. You simply sit on your hands and do nothing — which of course leads us back to the previous question.

Q: What did demutualisation of the building societies have to do with it? Was deregulation a cause of the trouble and will the fact that healthy banks and building societies must now pay to help out their less healthy brethren mean that mortgages (where available) might remain expensive even with interest rates coming down?

A: Demutualisation meant there was more scope for taking higher levels of risk. And this certainly impacted on Northern Rock and Bradford and Bingley. Remaining building societies are being forced to help banks out, so yes, technically, the costs could be passed on.

Q: For those of us with cash to invest where should we put it?

Gilts, if you just want to park your money, because they are backed by the Government.

Or if you have a slightly higher appetite for risk there are a number of opportunities in the FTSE 100 — though perhaps not in banking, property or related sectors!

Q: To what extent is it justified that envy of City bonuses has changed to anger? A: Only one to two per cent of those working in the financial industry get "silly bonuses". Many of the rest have mortgages to pay like the rest of us.

Q: Will things ever be the same again now that we have reached bust at the end of the bull run?

A: I would like to think they will. The markets recovered after 1929, 1973, 1987, and 1998 when the Russians defaulted on their debts. And in March 2003 the market was down to 3,287 having hit 6,930 on the last day of the last millennium.

Within hours of this conversation the Government pumped billions into the banking sector, costing the taxpayer, at least in the short term, between £1,400 - £2,000. So, for frightened rabbits sitting tight, stay in your hutch unless you are forced to sell. And if you have money to deposit, make sure you have less than £50,000 in any one bank.