Northern Rock. Economics and sheep herding.


I've dedicated this evening to continuing my loft conversion, however, I've now broken my last drill bit and work has stopped. Hence, t'internet time.

I've just read a good blog by The Appalling Strangeness , written in response to some cockwaffle by George Monbiot. It regards the collapse of Northern Rock, the free market and government regulation of business.

In all articles relating to Northern Rock, the collapse is always put down to the ineptitude of the company directors following a risky market strategy that went wrong. Certainly their risk taking did contribute to the collapse and the resultant bail out, but personally I don't blame the bank for the end result. My knowledge of economics (admittedly limited) leads me to conclude that the fault lies firstly with the media and secondly with the banks customers.

Economic success is all down to confidence. If confidence is high, people invest. If it is not they don't. Simples.

When Northern Rock realised that they were getting into serious financial trouble they turned to the Bank of England and asked if they could have a loan should they need it. At that point they were still in a position to correct the problems and pull themselves back from the brink. This may have involved borrowing money and that's why they asked. Lets make that point very clear at this moment. They didn't actually borrow money, just made provision in case they needed to. Its like me saying to my mum, I may be skint at the end of the month. If I am, can I borrow some cash. If she says yes then I know I don't have to avoid paying the gas bill.

The trouble is that the media got hold of this and splashed it across every outlet possible. They made sure that everyone in the country knew that Northern Rock was in trouble and had asked for help. Until this happened there was no real problem. The bank was sorting itself out and knew it could rely on the BofE to help if necessary. The moment the media stuck its nose in and made the proverbial mountain, confidence in the bank was lost.

Everyone who had savings in the bank suddenly believed they were going to lose them. They weren't at this point. They all rushed out to their local branch with the intention of withdrawing their couple of hundred quid in savings before the bank went bust. That is when the real problems started. Most average Joe's don't know how a bank works. They think that when they deposit a tenner, this goes into the vault until they want it back. It doesn't. Money deposited gets invested in the market or lent out. Banks only keep a small surplus to deal with day to day transactions. So of course, when everyone queued up outside the banks, there wasn't enough money to give them. And that is what caused the collapse. Bad publicity and sheep.

So what would I have done if I had money in Norther Rock at that time. Well to be honest I rarely have any money anyway, but assuming I did, I would also have been queueing up to get it back because I know everyone else would. If I didn't at least try, I would surely have lost my cash when the inevitable collapse happened.

What would have happened if the banks had shut their doors as soon as the queues started forming? For sure there would have been a lot of angry customers but they would have gone home eventually. Northern Rock could have closed its branches for a week and used that time to get out in the media themselves. They could have assured all their customers that the bank was not about to go bust and they were not about to loose their money. Would it have worked? I don't know but it would have been a much better option than just capitulating and allowing the collapse to go ahead.

And now the taxpayer owns the bank, apparently. Will we ever see a profit for ourselves from it? Will we F£££

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