Race to the bottom
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!