Sunday, Sep 28, 2008
What happens when you distort a market?
Times Online: Savers flock to Northern Rock
NORTHERN ROCK is within days of being forced to stop taking savings from new customers after a rush of deposits into the nationalised bank.
More than £1 billion of savings has flooded into it in the past two weeks, following the continuing chaos that has engulfed the banking sector. The government guarantees underpinning Northern Rock have been encouraging savers to move their cash.
[Comment:] Ill thought-out knee-jerk reaction that attempts to control a market soon has its comeuppance when the government realises the market has more money than it does and it comes back to bite them. Should they: a) interfere further, causing further distortion, or b) back off and remove the distortion, so avoiding capital outflow from other banks, which endangers the rest of the system?
10 Comments
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1. alan said...
How about severely cutting the interest rates on offer by NR?
The nationalised NR could at least benefit from a "carry trade".
2. Cheekie Charlie said...
I see the AA which is part of HBOS is offering a 12 month bond at 7.21%! Just whats going on here?
3. jonb said...
or c) Use the money to repay the Bank of England loan. We will be needing it for all the other bank bail-outs that are on the way.
4. planning4acrash said...
This is why the Free Market is preferable. Government intervention is causing runs on smaller more prudent banks now. Can they contain this? Do they want to?
5. icarus said...
What happens when you distort a market? About the same as happens when Monsanto modifies genes - general ill health and increasing monopololisation.
6. icarus said...
er...monopolisation (haven't even started drinking yet).
7. Orwell said...
Cheekie Charlie. The fact is they predict higher rates of inflation (real or otherwise) than 7.7%!!!!
8. renting2 said...
C'mon icarus, you're hilf a buttle behined!
9. mark wadsworth said...
What Alan says, cut interest rates.
10. shipbuilder said...
It seems fairly obvious - cut the interest rates to make NR less competitive. Will this make a difference though when safety is the big concern? No doubt the most complicated method possible will be the solution - like tax credits on interest paid by banks other than NR or something equally ridiculous.