Nothern Rock- Should the state bail out capitalism?

[happy_Alex]

The bank of Engalnd has agreed to underwrite Nothern Rock after there's been a 'run on the bank'. People have and are queing to withdraw their savings after losing confidence in the bank, as Nothernern Rock have been trading on in 'sub prime' (capitalist euphemism for bad debt) . This is the first time since the 19th century there's been a run on a bank...

seems typically hypocritcal of capitalism that organisations can act irresponsibly if theres a profit to be made but force the state to intervene when economic stability is threatened. Clearly, as in the US, the state MUST intervene to prevent the situation from spiralling out of control.

 

[mrt144]

I'd say no in some cases, but not others. In this case, look at the net effect it will have on the economy, and also weight the future prospects for said company if you do bail them out. I'm sure northern rock isn't going to be sailing smooth for a few quarters on.

 

[CurtSibling]

The Northern Rock scam is just that, a game.

The econ-elite manipulate the finance levers, so they can buy up stocks, etc.

Here is something I noticed, for instance:
They wheeled out Greenspan to state that the UK housing market is going to implode.

Just so it will! And Brown and all his cronies with big money invested inproperty
buying can gain loads of real estate at knock down prices. Then the market will
'recover', and they can sell it all off at huge profits. People don't see it,
because they are too busy watching 'Scrubs' or 'Desperate Houswives'...

...

 

[angrybellsprout]

Wondering where you seem to think capitalism exists today, as opposed to corporate welfare.

 

[mrt144]

The Northern Rock scam is just that, a game.

The econ-elite manipulate the finance levers, so they can buy up stocks, etc.

Here is something I noticed, for instance:
They wheeled out Greenspan to state that the UK housing market is going to implode.

Just so it will! And Brown and all his cronies with big money invested inproperty
buying can gain loads of real estate at knock down prices. Then the market will
'recover', and they can sell it all off at huge profits. People don't see it,
because they are too busy watching 'Scrubs' or 'Desperate Houswives'...

...

you're a hoot. I'd love to see the finance levers and the economy machine they are connected to.

 

[CurtSibling]

you're a hoot. I'd love to see the finance levers and the economy machine they are connected to.

Hoho! Hehe! (pfft)

OK - All the financial 'disasters' all happen by magic...And santa is real too.

 

[Rambuchan]

Hoho! Hehe! (pfft)

OK - All the financial 'disasters' all happen by magic...And santa is real too.

Santa may not be real, but the drying up of the wholesale capital markets is.

These wholesale capital markets are exactly what fed the Northern Rock mortgage model. They financed their aggressive expansion to take one quarter to one fifth of the UK mortgage market this year from this source of cheap finance. When it dried up in the credit crunch that followed the US sub-prime turmoil, they simply couldn't finance the model anymore. Santa had nothing to do with it.

 

[mdwh]

The purpose of intervention is not to help the banks, but to help the savers.

The big problem without intervention is you risk a self-fulfilling prophecy. If a rumour started that their savings were not safe, then large numbers of people withdraw their money (as happened with Northern Rock). However, even if the rumour is false, the act of people withdrawing all this money can itself cause the bank to go bust. Thus, nothing more than a bad rumour could ultimately collapse the entire economy.

Alternatively, you'd have to have it so that banks didn't lend out so much money - but then you no longer have money available to be invested into business.

Is intervention of the central bank somehow against the spirit of capitalism? Well, I would argue that having a central bank full stop shows that the model of capitalism we use is not entirely laissez-faire. Given that we require a central bank, I don't see anything odd in making use of the central bank to keep things working. Whether capitalism could work without a central bank is another matter.

 

[George2816]

The big problem without intervention is you risk a self-fulfilling prophecy. If a rumour started that their savings were not safe, then large numbers of people withdraw their money (as happened with Northern Rock). However, even if the rumour is false, the act of people withdrawing all this money can itself cause the bank to go bust. Thus, nothing more than a bad rumour could ultimately collapse the entire economy.

That was from a hackers the movie!

 

[cthom]

it's hot air. they know there's no danger of the bank going bust, so they 'guarantee' it's safety. now, if they had done the same thing with Farepak... but that would have meant spending real money.

 

[Rambuchan]

Should the state bail out capitalism?

The question somewhat over simplifies matters. In a mixed economy, such as ours in the UK, it is more beneficial that it does than it doesn't.

If taxpayers money was not used in this case, and the bank went under, then this would arguably have cost taxpayers even more through the resulting economic crisis that would have swept through the UK's banking industry and knocked on into many other areas of the UK economy.

House prices would have tumbled faster, as lenders tightened their belts and peoples' ability to purchase property got weakened. This would have affected consumer spending in many other areas; car purchases, appliance purchases, the construction industry (another major part of our economy), general consumer spending on the high street and so on, these would all have been hit.

When people's major asset, their house, is depreciating in value, and banks are raising their rates (which they are doing anyway and the interbank rate is rising faster than the base rate) it's generally not a good thing for the national economy. This is what the Bank of England was seeking to avoid in making the unprecedented move to step up and become 'lender of last resort' to Northern Rock.

edit: seems I was cross posting, oh well.

 

[CurtSibling]

Santa may not be real, but the drying up of the wholesale capital markets is.

These wholesale capital markets are exactly what fed the Northern Rock mortgage model. They financed their aggressive expansion to take one quarter to one fifth of the UK mortgage market this year from this source of cheap finance. When it dried up in the credit crunch that followed the US sub-prime turmoil, they simply couldn't finance the model anymore. Santa had nothing to do with it.

I doubt santa has much dealings in the futures markets.

And in any case, you more or less reinforce my point that these organisations cause any finance crisis.

Not some intangible force of nature, like most of the general public seem to think.

...

 

[Rambuchan]

That's a not so subtle shift of position there Curt.

 

[Bill3000]

Let the market decide.

 

[Godwynn]

Do not bail them out. I'm not for sure, but I assume the customers have some sort of insurance on their funds if a bank collapses.

Let them fall, let them all fall.

 

[GinandTonic]

Im not sure bailing out is the correct term. Underwriting the debt will stop the bank from collapsing, thus meaning that it will not cost anything to do so. Intervening exposes the BoE to a potential liability, but since the BoE is not overexposed the probablity of that liability being realised. The shareholders are still going to take the hit, as they should - they bet and lost, the gov should not refund their stake. The collapse of the bank would punish a lot of people who were not shareholders.

 

[happy_Alex]

The purpose of intervention is not to help the banks, but to help the savers.

The big problem without intervention is you risk a self-fulfilling prophecy. If a rumour started that their savings were not safe, then large numbers of people withdraw their money (as happened with Northern Rock). However, even if the rumour is false, the act of people withdrawing all this money can itself cause the bank to go bust. Thus, nothing more than a bad rumour could ultimately collapse the entire economy.

Alternatively, you'd have to have it so that banks didn't lend out so much money - but then you no longer have money available to be invested into business.

Is intervention of the central bank somehow against the spirit of capitalism? Well, I would argue that having a central bank full stop shows that the model of capitalism we use is not entirely laissez-faire. Given that we require a central bank, I don't see anything odd in making use of the central bank to keep things working. Whether capitalism could work without a central bank is another matter.

People did not start withdrawing their money based on rumour but objective fact: money markets stopped lending money to Northern Rock due to the crisis in the US sub-prime mortgage market. I wonder if any of us would do the same if we felt our money was at risk...

as for intervention, capitalist organisations and systems take any measures to keep the money flowing and protect their profits and power, while one out of five borrowers who borrow money do so to cover living costs. Meaning that such people have no escape from the dept trap. Debt becomes a latterday serfdom. While banks lecture people on 'responsible borrowing' they encourage reckless credit habits and indulge in risky activities themselves...

 

[JollyRoger]

To bail out an institution that ignored the moral hazards just encourages other institutions to ignore the moral hazards.

 

[Left]

I doubt santa has much dealings in the futures markets.

And in any case, you more or less reinforce my point that these organisations cause any finance crisis.

Not some intangible force of nature, like most of the general public seem to think.

...

Financial Conspiracy: Not Just for Jews anymore.

 

[Rambuchan]

To bail out an institution that ignored the moral hazards just encourages other institutions to ignore the moral hazards.

Not if you revamp the checks and regulations after doing so.