Northern Rock - return of the government
So Northern Rock is to be nationalised, briefly, before being handed back to the private sector. The newspapers seem to be divided on this issue with some calling it a bad idea, whilst others call it a really bad idea. In a double interview on both the BBC and ITV this morning Chancellor Darling defended the proposal by stating that it was in the best interests of the tax-payers and that independent advisers had come to the same conclusion. He stated that this would be a brief period of management as the government does not and should not run a bank; I'll discuss this further a little later.
But what of the other two proposals still on the table? One was from Northern Rock themselves, yeah let's have the people who got the bank into this crisis take it over again. The other was from Virgin and poor old Richard Branson always seems to get the dirty end of the stick when dealing with the government. On the face of it this would seem the offer to take, but we're not privy to the details so it's impossible to comment with any degree of certitude.
The only alternative, it seems, was to nationalise the bank and bring it under government control... well no another alternative was to have let it collapse; except this is why the 'should not run a bank' government stepped in to prevent in the first place. Okay here's a ponderable - prior to all this fuss I'd never even heard of Northern Rock, it's not a name I'd consider to be 'High Street' and yet according to the government its collapse could affect other banks in a chain reaction; how exactly? How did we build this house of cards up to the point where one jolt might send the entire edifice crumbling down around our ears?
The government is claiming that this is the best for the tax-payers and if such a collapse could spread then they're right; except as I've pointed out elsewhere what sort of example does this set? Northern Rock apparently collapsed because it took high risk/high return investments; it gambled and failed. As a penalty for its failure it's being propped up by the government, nationalised and having its shareholders compensated; as the majority stakeholders are likely to be the ones who caused this mess it's difficult to see this as the correct course of action.
The reason you don't have a government running a bank is because it's underwritten by the taxpayer, it becomes a safe long term investment and unbalances the competition with other banks; but that's exactly what we've got happening here even before talk of nationalisation. Much as I decry the Free Market System if you're going to have one it has to apply to everyone and if you can't do so because everything has become so interconnected then what we should all be really looking at is how to untangle this entire mess.
In an act of total synchronicity Channel 4 is showing a Dispatches tonight about banks - their greed and myopia, and how they risk your money.
2 comments:
The Northern Rock saga hasn't happened before, so whatever the government/Bank of England do or don't do, we are unsure whether it’s the right thing to do or not. There are as many advantages as disadvantages on the decisions made (or not made) with Northern Rock.
Northern Rock exercised their right to ask for help. This should have been a small article at the foot of the financial section of the broadsheets. The public got wind of it and queued up outside the branches withdrawing their accounts. People in the street and watching television saw the queues and consequently decided to withdraw their money. As this happened the financial institutions lost confidence and the share price fell, this fuelled the public to get their money out and form queues outside the branches, and so on... What is amusing about this is that if Northern Rock had invested money into their IT infrastructure and promoted Internet bank accounts, nobody would have seen the queues and the vicious spiral wouldn't have gained momentum!
The asking for help part was due to the high ratio (higher than other banks) between account holders and loans/mortgages to the public. They also had very little involvement in institutions and other financial portfolios which didn't help. However, it was not a sign that the bank was collapsing, it could have easily been a sign that the bank was acting prudently and cautiously (even responsibly). Now put yourself in the shoes of a bank CEO, would you ask for help to get you over a tight patch now after Northern Rock, or would you keep quiet and hope everything is going to be OK?
Here is an acid test to this theory: Get a load of people to queue outside a bank's branches just to ask for a leaflet for instance. When a person has finished they then go to the back of the queue and start again. Then when the public or the press ask anyone in the queue what's happening, just say you have heard rumours. Then see what happens. Don't do this by the way its probably illegal, even more so if you have a spread index account!
"we are unsure whether it’s the right thing to do or not." I completely agree the only item that can be pointed out is that neither the government nor the Bank of England have any experience in running that particular type of institution.
from "So Northern Rock have required some assistance from the Bank of England, investors shouldn't be concerned they say; gee that'll work." Everyone was already in a state over the sub-prime 'crash' then we get a bank here essentially saying 'We're in a bit of trouble' yoink there goes the money.
"What is amusing about this is that if Northern Rock had invested money into their IT infrastructure and promoted Internet bank accounts, nobody would have seen the queues"
Nah you'd have got some 'nameless' paper offering account holders £100 to queue at their local branch so as to get a photo.
Anyway I agree with your points it all got whipped up into a frenzy, but in the aftermath it still needs to be pointed out that this was one bank that might have dragged down a lot with it and what can we do to prevent this sort of thing being able to occur again?
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