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Northern Rock has been nationalized
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.
Posted by Tyler Cowen on February 18, 2008 at 12:07 PM in Current Affairs | Permalink
Comments
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.
Posted by: Anonymous at Feb 18, 2008 1:01:22 PM
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.
Posted by: Anonymous at Feb 18, 2008 1:01:58 PM
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?
Posted by: BlogReader at Feb 18, 2008 2:47:10 PM
If the British government can nationalize a bank, why can't Venezuela or Bolivia do so with natural resources?
Posted by: javier at Feb 18, 2008 3:05:17 PM
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.
Posted by: Nick at Feb 18, 2008 3:09:18 PM
Javier,
Slight difference; NR went _to_ the British Government looking for support. The nationalization appears to be a move by said government to guarantee that it gets back what it put in.
That said, I believe arguments can be made that the initial support and/or the subsequent nationalizations might be errors. Moral hazard, etc. Then again, the last time we let moralists run the financial system we got the Depression.
Posted by: Bernard Guerrero at Feb 18, 2008 3:18:07 PM
Correction: Northern Rock has been nationalised.
Posted by: Patrick at Feb 18, 2008 8:46:07 PM
What kind of signal does this send to other banks? Screw up, and we'll bail you out?
Posted by: kurt at Feb 18, 2008 9:17:01 PM
shit.
Posted by: josh at Feb 18, 2008 10:00:58 PM
Patrick :"Correction: Northern Rock has been nationalised."
Nationalized is a valid spelling in British English. The recent trend towards English people using "ise" forms rather than "ize" forms is a reaction to the US preference of "ize" forms.
Nick :"Letting the bank fail would have been the best option."
No. Unfortunately British bankrupcy law determines that when a bank fails its account holders are amongst the last people to get a share of the capital. Shareholders come after them but most other creditors get a share of the pie before. Because of this is it inevitable that when a bank reaches a situation like this it will be nationalized.
Javier: "If the British government can nationalize a bank, why can't Venezuela or Bolivia do so with natural resources?"
No one is saying that they can't. However they should pay for the business. Venezuela have nationalized many businesses and have paid the market rate for what they have bought. In recent times though they have stopped doing that.
Blogreader: "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?"
That's an interesting question isn't it?
The manager they put in place says it could be years. But, why is this? Northern Rock's mortgage book is reasonably sound, why not sell it to the highest bidder straight away. Similarly its savings business would be sound in different hands, why not sell it to another bank. Its branches would be valuable to other banks too. If the UK government tried they could sell of the whole thing in less than a year. However they are not going to try, it seem the government wish to own a bank.
Posted by: Anonymous at Feb 19, 2008 5:47:25 AM
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.
Posted by: liberty at Feb 20, 2008 11:30:40 AM
"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."
I'm certainly not arguing that in general, they should give justification to their people for how this nationalization will help them. It is highly unlikely of course that this nationalization will help them, it is in reality and attempt by the Venezualan government to grab more power. It will impoverish them in the end as socialism always does.
However, it is not the place of external, foreign governments to judge the policies of the governments of Venezuela and Bolivia. Those are legitimate soverign governments. If they pay the market rate to the owners of the businesses and those owners agree then there is no justification for foreign governments to interfer.
But, if foreign owners have their legally obtained assets seized that *is* a case for a small amount of intervention by foreign governments - such as diplomacy.
Posted by: Anonymous at Feb 20, 2008 2:33:46 PM
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?)
Posted by: Jaguar at Jun 11, 2008 12:28:38 PM
