Northern Rock: Which party leader do you think has got a grip on the issue?

by Stephen Tall on December 11, 2007

Is it a) Vince Cable

The acting Lib Dem leader, Vince Cable, has written to the prime minister to urge him to introduce a bill in parliament before Christmas to permit “temporary” nationalisation of the bank. … Cable said efforts to sell to a private buyer had so far failed and temporary measures must be taken to secure taxpayers’ money.

“The consortiums involved are struggling to raise the vast amount of money needed. We are talking here about raising £30bn – roughly the size of the current defence budget – in order to repay the loan. … At the moment [the bank] is bleeding to death – approximately £3bn two weeks ago and £1.5bn last week had to be put in additionally.

“Once [it] is under temporary public ownership – I stress it’s temporary, not a permanent solution – it would reassure the banks who are lending that there’s an absolute sovereign guarantee. It would provide a period of stability.”

Or is it b) David Cameron?

“I don’t support nationalisation [of Northern Rock],” Cameron told the Today programme. “What we want is a private sale, but I suspect the government is running out of time and money and it may well be that it needs to go down the path of nationalisation. If it does it will be a monumental failure.”

(Translation: “I can’t support a Lib Dem idea, even if it’s right, and even though I may do in the future. But ’til then I want to keep my hands clean so I can attack the Government whatever. Responsible opposition? I’m not familiar with the phrase.”)

(Source: The Guardian, 11th Dec.)

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I’m not entirely sure any of the poltical interventions in this have been entirely helpful. With depositor’s money guaranteed to protect vulnerable individual savers, the key question now is financial. Which is going to cost UK plc the least?

i) nationalisation

ii) a deal with a private company or

iii) shutting it down

The viability of Northern Rock as a going concern is a commerical not political matter. The only good reason to keep this bank going if it cannot be sold to a private company is if nationalisation would be a cheaper option (long-term) than liquidation.

What evidence do we or David Cameron have that it is?

by Andy Mayer on December 11, 2007 at 5:38 pm. Reply #

The trouble with nationalisation is that:

a. It might well lead to a run on other banks as the global market comes to realise that the UK Government will bail out any ailing bank. It would make Black Wednesday look like a Champagne breakfast.

b. The Government has a history of incompetent running of public services, it will not run a bank very well.

c. These are not assets that can be easily liquidated as they are mortgaged properties.

d. To sell the business on will mean breaking the mortgages up into parcels of debt. Some will be good, secure, parcels. Others will, inevitably, be bad parcels, and in a market where sub-prime mortgages have become turkeys (seasonal pun) no one is going to buy them.

I think one of the only real options for the Government to get their money back is for them to pray for a private sale.

Whatever you do, I think Brown is going to have to get real about the length of time before he gets this rising loan repaid. I bet he wishes he had let it go to the bid over the Summer!

by Kevin Davis on December 11, 2007 at 6:54 pm. Reply #

It is important to put Vince’s support for nationalisation in the context of the general view (Cable, King, etc) that we need legislation to allow depositors money to be moved out of banks in trouble asap. That way we can get closer to eliminating the moral hazard.

There is also the q of at what price it is nationalised: if it is nationalised for a total of £1 (with the alternative being bankrupcy) then this would hardly encourage moral hazard – indeed, it would reduce it.

Praying for a private bidder does not sound too hopeful.

by Tim Leunig on December 11, 2007 at 7:26 pm. Reply #

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