Poor Prudence!

After 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 are long gone. We’ll inflate our way out of letting the city bankers – and indeed multiple-home-owners – face the consequences of their gambling.

Whether or not this could be fixed using interest rates is now immaterial. They’re not even going to try. Expect some smoke-and-mirrors over the coming months, to pre-empt and limit the damage to headline rates.

Worst, pumping more money in will only prolong our housing bubble. The major cause of it was oversupply of mortgage money, aided by smaller amounts of public money.

Poor old prudence. And poor taxpayer.

Posted on September 19, 2007, in economics, inflation, uk. Bookmark the permalink. 10 Comments.

  1. The winners here seem to be the Northern Rock borrowers. They are all on low rate, often long term fixed interest mortgages, and the Bank of England (and ultimately the tax payer) is effectively subsidizing them.

    Clearly I don’t understand banking, as I’d assumed Northern Rock would have bought long term wholesale money to fund these, and have regular income of cash from borrowers repayments, rather than need short term loans continuously to stay liquid.

    So I assume what really happened is Northern Rock didn’t allow for rises in interest rates properly, when buying money, and just went bankrupt because it couldn’t borrow money for less than it was lending it at.

    90% of the deposits to 32,000 GBP or so was covered by current guarantees anyway, so I guess we are helping out the richer depositors.

    But then the government and bank of England are suppose to be regulating these businesses so they don’t go bankrupt, so they do have some responsibility in this matter. It may be cheaper to loan the bank money, than deal with the law suits and other fall out from losing Northern Rock.

  2. The Finnish state used to guarantee all bank deposits. Then (in the early 1990s) we had major bank trouble costing the state enormous sums and causing a reorganisation of the banking scene. Shortly thereafter, the law was changed and a cap was created. Nowadays the cap is 25000 euros per account.

    It seems that a similar system is required by EU directive.

  3. Simon – that’s not really the whole story.

    The real winners are property owners who’ve seen their prices rise at a ludicrous rate, as market sentiment coupled with a surplus of easy money pushed them up. Especially property speculators, including the “buy to let” crowd, and in recent times even “buy to leave empty and profit anyway”.

    Corollary: the real losers are non-property-owners, already the poorest Brits (and including some who may be eligible for higher-rate income tax). Insofar as the Northern Rock’s borrowers include some who bought a first home at highly inflated prices, they’re victims too.

    Antti-Juhani – we have (or had) a similar scheme here: the first £2000 is fully covered, and the next £33000 is covered up to 90%. That seems to me a sensible compromise between protecting the innocent and distorting the market. But the Brits would doubtless resist any EU attempt to tell us to stick to the rules – whether our own or theirs!

  4. Let me stick up for the Bank of England again. It seems the poor blighters are being put under extreme political pressure now. The grilling given to the Governor, Mervyn King, today by British MPs was completely unreasonable. It seems our MPs (who tend to know a little about everything, but not very much about anything) are blaming him for not doing enough, and not intervening quickly enough. At least the bank’s intervention, when it happened, was on commercial terms (or so it has to be assumed, as such transactions are, of course, “commercial in confidence”) and was an action in extreme emergency, which is, after all, part of a central bank’s role. I don’t envy the job of an “independent” central bank that’s subject to this sort of rubbish from the amateurs who pretend to run the country.

  5. Mervyn King sounds like a man who tried to do the right thing, but the MPs attacked him for things he did right! I wouldn’t like to speculate on who may have lent on him.

    As for a behind-the-scenes bailout of Northern Rock, that might’ve made sense in this instance (dunno … ). But the power to make such a bailout on the quiet sounds hugely open to corruption.

  6. Not sure that it’s wholly fair to talk about a bailout on the quiet and corruption. I’m not aware of any evidence whatsoever to point to impropriety. Commercial confidentiality is a tricky issue, especially where public money is involved, but full disclosure can itself lead to unintended and negative consequences. Effective and intelligent parliamentary scrutiny might be a better option, but that’s something of which our semi-literate and prejudiced MPs are quite incapable, to judge by yesterday’s circus.

  7. Oh, and as for who lent on King, my money’s on Alistair Darling with the full backing of Gordon Brown. The former is an opportunist who is always eager to please his political masters, and whose principles seem rather wobbly at times, and the latter is worried that a housing crash might scupper his forthcoming election plans.

  8. 1. I didn’t raise the subject of a bail-out on the quiet. Mervyn King said that’s what he wanted, but he was prevented by law. That’s what I commented on.
    2. I’m not alleging corruption, or even suspicion thereof. I only said the system would seem more open to corruption, if the bank had power to make such bail-outs on the quiet.

  1. Pingback: Prudence officially busted. « niq’s soapbox

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