Who is irrational? Reflections of a Northern Rock saver
I have two accounts with Northern Rock, which together contain most of my savings, so I have been spending much of the last few days thinking about what to do and consulting advisors, Marxist and non-Marxist, about it.
Until yesterday (Monday 18th) I had decided to sit tight in the belief that the government would be forced to do something because of a possible threat to the banking system as a whole, but was planning to join the queues today (Tuesday) to get at least enough of my money out that I wouldn’t face major losses if the bank did go under.
That hasn’t proved to be necessary but I still have been getting very angry about news reports painting those trying to get their money out as ‘irrational’ and showing ‘herd psychology’ by just joining a queue because it was there.
Firstly, it is obviously not irrational to want to prevent a bank swallowing your money because of decisions taken by its managers and the markets. Northern Rock went out of its way to attract older savers with ‘Silver Saver’ accounts. Under the compensation scheme set up by the banks, anyone who had more than £ 2,000 stood to lose with those with over £ 35,000 losing everything above that limit if the bank went under (not the poorest in society, but that’s still only 1/400 of the NR Chief Executive’s salary and many people’s life savings).
So in the face of repeated statements that the bank was ‘solvent’ and that the Bank of England’s offer to lend would cover any gaps in NR’s balance sheet, it really came down to whether you accepted that that meant that all of the savers’ cash was safe – or, in other words whether you trusted the Chancellor of the Exchequer, the Governor of the Bank of England, and the banking regulation system.
There were good reasons not to once you looked at things in detail. The Bank of England can only act as ‘lender of last resort’ against collateral and, in the case of Northern Rock, that consists of the mortgages it has lent money for. Given that NR was lending more than the value of the houses bought and up to six times annual income, it is unclear how many of these are ‘sub-prime’ and how they would be valued by the Bank.
As actual details of the agreement between the Bank of England and NR were kept secret, nobody could be sure that the Bank of England’s offer to lend would cover all the deposits by savers. BBC journalist Robert Peston calculated (based on the last balance sheet and various assumptions about the terms of the loan) that they just about would but it was a fine line. Plus the Governor of the Bank of England was at the same time talking about the need to punish banks that took unnecessary risks (quite right, but it wouldn’t be the bankers or shareholders who lost their savings).
Obviously Darling and all the others who spent time talking up NR’s solvency knew all this. So what was going on was an attempt to convince people it was all under control in the hope that this would restore confidence and enable everything to get back to normal. The people in the queues called his bluff. Does that make them irrational? Or were they acting according to the rational self-interest that is valued when shown by entrepreneurs and bankers?
It is irrational that people’s livelihoods, chances of a decent retirement and place to live should depend to on the invention of ‘new business models’ which largely serve to make the rich richer and on gambling on whether you can convince others to buy dud loans by bundling them with good ones. But New Labour Chancellors couldn’t admit that, could they? People would lose confidence in the system…
- Bruce's blog
- Login or register to post comments
- Printer-friendly version
Northern Rocked
See my blog here
I disagree, partly with the argument made by Bruce that if the B of E did not bail out NR then it would be the depositors, not the shareholders and Management that suffered. In fact, today after the Chancellor has said the Government will use taxpayers money to bail out the Bank, its shares, and the shares of the other banks likely to be next in line at the begging bowl - Alliance and Leicester and Bradford and Bingley - have soared. Clearly, the main beneficiaries have indeed been those shareholdres and the Management that undoubtedly also has many shares and share options. The whole basis of capitalist ideology is that owners of Capital make profits for taking risks, but if capitalists can make huge profits and Capital gains by making risky decisions such as those made by NR and the other banks, yet are guaranteed against going bust by the Government where is the risk. In fact that is the whole basis on which neo-Liberalism operates at a macro as opposed to micro economic level, and where it differs with classic Liberalism.
NR should have been allowed to go bust. Then with its true value demonstrated as worthless it should have been nationalised under the control of its workers, depositors and borrowers, and only then with the savings of those depositors guaranteed. It should then have been transferred into the ownership of the workers, savers and borrowers to be run as a financial co-operative. The lesson for all those savers in existing mutualised and co-operative financial institutions such as the Co-op Bank, Brittannia Building Society, especially these where the unions have a considerable involvement, is that they should demand an opening of their books to see what Management practices they have adopted, what their business model is. At least in these co-operative organisations you have the right to do that, you have some control.
Arthur Bough