Northern Rock

As more information emerges from the Northern Rock debacle there seems to me to be a great deal to think about. A couple of days ago the government tried to stop publication of a leaked sales memorandum for the bank, which implied that the government’s funding (ie guaranteed by the Treasury and that means you and me) would continue beyond the agreed date of February and that it might be interest free. This funding amounts to something like £24 billion.

The stance taken by the Governor of the Bank of England, Mervyn King, (and I mentioned at the time that it was unfortunate that the bank he had to practise it on was New Labour’s in-house bank with branches in marginal constituencies) is that of the moral hazard. This says that if we indemnify depositors and investors against the risks they are taking, they will become risk happy: I could set up a bank tomorrow and it would have the same credit rating as Barclays because the government guaranteed the depositors. This is even more true of shareholders and professional lenders. Why should my taxes underwrite a South Korean bank lending to Northern Rock? Or a Canadian pension fund buying shares in it?

So everybody should stand to lose something? Not so easy. The people must have confidence in the banking system. After all, the reason I haven’t opened a bank is that the Bank of England would not have granted me a banking licence. And here we come to the nub of the problem and the largely unmentioned culprit. What used to happen, and the reason we haven’t had a run on a bank these few hundred years, is that the Bank of England knew what was going on in each bank, knew in advance of any problems and sorted them – even arranging for a takeover by a larger bank. And this has happened many times, to my knowledge. What changed was Gordon Brown’s new architecture for the financial system, a tripartite system with the Bank of England, the Financial Services Authority and the Treasury. Banking supervision was transferred from the Bank of England to the FSA so the Governor could no longer raise an eyebrow and call HSBC telling it to splash some cash. Gordon Brown, who drums himself up as an intellectual but didn’t seem to have the ability to think this through properly, is one of the main causes of this fiasco.

The answer now, apart from giving the Bank back its supervision of the banking system, and Gordon Brown apologising for introducing half thought through measures (Ha!) is that taxpayers’ money should not be used to bail out professionals. The loans should be at a proper rate of interest and should expire in February or within 6 months (there are some difficult maturities coming up so a short extension might be easier). To keep public confidence, particularly now that a large bank has been seen to go under, depositors should be given a 100% guarantee, but only up to £10,000. If you have that amount of savings you should have the nous to open an account at another bank.