The government (or rather, taxpayer) is underwriting deposits at Northern Rock. And implicitly at other banks that get into trouble.
Right, the first effect of that is that innocent depositors are safe. Can’t fault that.
But what else does this imply? At a stroke, bank deposits acquire the safety of government bonds, in addition to the security they already had. Professional investors in charge of billions can see that, and suddenly their market changes. Government bonds become less attractive. Public sector borrowing (ahem, the taxpayer again) will need to pay higher interest rates, for the benefit of professional city investors.
And in the general race to the bottom, banks get rewarded that little bit more for gambling with people’s money, and the prudent get to lose out. As usual.
Update: 9 a.m. and shares in Northern Rock and other dicey banks are indeed up!
MJR/blog: Business Matters said
[...] 2007-09-18 Update: the UK government has guaranteed all deposits in the dodgy bank. This is a bad thing, as explained on niq’s soapbox: Race to the bottom. [...]
John said
It’s a pity Alistair Darling didn’t show similar consideration to Railtrack’s shareholders when, as Transport Secretary, he forced their company into administration, on a Sunday if I recall correctly (who else of us could get the High Court to open up on the Sabbath to do our dirty work?). Still, they were nasty capitalists weren’t they, not poor innocent savers in a dodgy mortgage bank which most of them mistook for a building society.
Still, over here in quiet, civilised and prosperous Bergen, I can forget about the woes of the UK for a while and marvel at the effects of consensus politics and a well-balanced socially responsible capitalist economy (helped by a little oil, admittedly)!
Poor Prudence! « niq’s soapbox said
[...] a month of appearing sensible, the Bank of England appears to have caved in and bailed out not just one bank’s depositors, but the banking system as a whole. More proof – if it were ever needed – that the prudence years [...]
Dean said
John, you appear to be missing the point of the article, that government bailouts only encourages private recklessness.