Who is irrational? Reflections of a Northern Rock saver

Posted in Bruce's blog on Tue, 18/09/2007 - 16:24,

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…

Marxist Theory and History

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