Different rules for different savers
Good on the government for (temporarily at least) guaranteeing the savings of Northern Rock customers and stopping a run on the banks.
Just one question. As Tim pointed out, if they could do this in the case of Northern Rock, why couldn't they do it (at a fraction of the cost) when Farepak went bust?
posted by donpaskini @ 10:38 pm
7 Comments
7 Comments:
Not an original observation on my part, I should make clear - Tim.
Bloody Hurrah.
The Government have done the wrong thing, really, though definitely the right move politically.
"The Government have done the wrong thing, really, though definitely the right move politically."
I think it was totally right. Only the guarantee could have stopped the run, and it was essential for financial stability that it be stopped.
"Just one question. As Tim pointed out, if they could do this in the case of Northern Rock, why couldn't they do it (at a fraction of the cost) when Farepak went bust?"
I will answer this point, actually. Whether or not Farepak customers ought to have been compensated, there are some relevant differences.
Northern Rock, unlike Farepak, had not gone bust. The guarantee to Northern Rock depositors has been given in the hope it never has to be used. This was, as mentioned above, crucial to maintaining confidence in the banking system, which did not apply in the Farepak case.
The argument that giving deposit guarantees will make reckless lending behaviour more likely should not really be taken seriously. No guarantee was given to the shareholders or management-they have no incentive to pursue a course of action that results in nationalisation.
That is not to deny, as others have mentioned, that there needs to be serious attention devoted to the underlying structural causes of the banking crisis, and action taken there as well.
"I think it was totally right. Only the guarantee could have stopped the run, and it was essential for financial stability that it be stopped"
No. Precisely wrong. What's essential for financial stability is that badly-run businesses suffer the consequences of their management decisions.
If Northern Rock were solvent, the run wouldn't have mattered - they would have stripped down to low holdings and liquidated the relevant assets, and another bank would have bought up the leftovers.
"No. Precisely wrong. What's essential for financial stability is that badly-run businesses suffer the consequences of their management decisions.
If Northern Rock were solvent, the run wouldn't have mattered - they would have stripped down to low holdings and liquidated the relevant assets, and another bank would have bought up the leftovers."
I can't agree that bank runs are good for financial confidence. Just sitting back and allowing events to take their course was too economically risky an option.
Of course if Northern Rock is bankrupt, then its shareholders and management should face the consequences of that.
But I don't see why the doctrine of facing consequences has to extend to the run itself. It was an unexpected reaction to the publicity surrounding the loan. If the loan had been secret, it would not even have happened.
Since we do agree-if on nothing else about this-that for political reasons major deposit banks will in practice be rescued the solution to the moral hazard issue is surely greater regulation of their activities.
Totally agree with Angus...I like your blog and I feel we share sufficient common ground for a link to each others blogs to be mutually beneficial.If you agree to link then please contact me at 'An Unrepentant Communist'
http://unrepentantcommunist.blogspot.com/
on the commments page of the current post,and I will immediately link your blog to mine.Looking forward to hearing from you.
Gabriel in County Kerry Ireland
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