The media here seem more shocked than I am. But imagine — a country dedicated to liberal economics (more or less) nationalizes one of the largest firms in its most vibrant economic sector. Martin Wolf has a good piece on the event. The real question is whether the UK (and other countries) will feel compelled to move to a system of regularized depositor liquidity rights and larger deposit insurance guarantees. Right now British depositors receive a lower guarantee, both de jure and de facto, and can wait for months for access to their funds from a failed bank; read more here. For all its drawbacks and screwy incentives, arguably the biggest advantage to deposit insurance is simply that it makes bank nationalizations unlikely. Simply letting the bank fail is not always a credible alternative, because of contagion effects, bank runs, and the simple workings of democracy. The bank did face an offer from Richard Branson but it seems that the numbers did not add up and the government would have been left holding the bag anyway. Felix Salmon adds commentary.
As a Brit I rather hope that the UK government do not extend deposit insurance.
Yes, Northern Rock has failed, but it is the first British bank to do so since the BCCI in 1991.
The lack of 100% deposit insurance on large sums causes savers to choose their bank carefully. Whereas in the US very many banks and cooperative savings organizations failed in the 80s.
Northern Rock would be sold back into private hands as soon as market conditions improve, Brown and Darling told today’s press conference.
Anywhere to place a bet on when this will happen?
Letting the bank fail would have been the best option. The problem for the Labour government was that Northern Rock has a great presence in a Labour Party heartland both in terms of employment and shareholders (the North East of England) and it would not have been politically advantageous to let the company fail (especially at a time when the government is having other problems related to losing millions of people’s personal data on computer discs, confusion over their Corporation Tax plans, taxes on non-doms etc etc) and their desire to maintain Gordon Brown’s supposed reputation for economic competence (which if it existed has now been lost). It was a purely political decision, not an economic one. Now all UK taxpayers sponsor one of the main English football teams – Newcastle United – who have Northern Rock written across their shirts. The fortunes of the team in recent years may suggest that rocky times are ahead.
Correction: Northern Rock has been nationalised.
shit.
Anonymous,
I don’t think everyone would agree that so long as government pays the market rate for a business, it should be able to nationalize it, henceforth running it with taxpayer funds.
BCCI was NOT a British bank. It was under foreign ownership. Barings on the other hand was a British bank that had to be sold on (for £1) as it was otherwise bankrupt. (It had been rescued once before in 1890?)
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