The path to hell is paved with good intentions
The current tumult over Northern Rock savings accounts is a perfect example of good intentions leading to bad ends. Working the chronology back from present to past, the Chancellor's recent decision to guarantee savings account 100% is driven by a good intention: to assure savers and end the panic run on the bank. The only reason Northern Rock would have difficulty after the Bank of England agreed to lend them money was if there was a run on the bank, and the only reason there has been a run is, well, because there has been a run. It's panic that's the problem, and reassurance such as the Chancellor offered sets out to eliminate the panic.
However, the panic started because Northern Rock borrowed from the Bank of England. The Bank of England lent to Northern Rock because it was necessary and lending to them would keep their cash flow flowing. That's a good intention: lend to an institution to prevent it keeling over. Lending by the way was at 1% point above base rate so it wasn't cheap.
But why specifically did the Bank of England lend to Northern Rock? Well, they, rightly some might say, decided that those affected by the US sub-prime led credit crunch should bear the weight of taking risks that exposed them to the sub-prime led credit crunch. You take the risk; you pay the price. That's right. In isolation. So the Bank of England were right to not lend generously on the general money markets if their decision was considered in isolation. But it was not taken in isolation; it was taken in comparison to the ECB and US Federal Reseve; both of whom released billions onto the money markets. UK institutions were at a disadvantage compared to their counterparts in the States or Euroland.
Had the Bank of England lent as generously and generally as the ECB or the US Federal Reserve the panic queues outside Northern Rock would never have existed. Had the Chancellor been a big enough thinker he would have seen that and made the BofE behave differently. As it is, as a result of a series of good intentions, we have a situation where banks can now try their luck at having their risks nationalised, people who lost on company pension schemes baying for the same sort of guarantee on their savings (and why not) and we're no better off for it than our European and American competitors who will have all dipped into the funds their central banks released onto the markets.
The path to hell is paved with good intentions.
However, the panic started because Northern Rock borrowed from the Bank of England. The Bank of England lent to Northern Rock because it was necessary and lending to them would keep their cash flow flowing. That's a good intention: lend to an institution to prevent it keeling over. Lending by the way was at 1% point above base rate so it wasn't cheap.
But why specifically did the Bank of England lend to Northern Rock? Well, they, rightly some might say, decided that those affected by the US sub-prime led credit crunch should bear the weight of taking risks that exposed them to the sub-prime led credit crunch. You take the risk; you pay the price. That's right. In isolation. So the Bank of England were right to not lend generously on the general money markets if their decision was considered in isolation. But it was not taken in isolation; it was taken in comparison to the ECB and US Federal Reseve; both of whom released billions onto the money markets. UK institutions were at a disadvantage compared to their counterparts in the States or Euroland.
Had the Bank of England lent as generously and generally as the ECB or the US Federal Reserve the panic queues outside Northern Rock would never have existed. Had the Chancellor been a big enough thinker he would have seen that and made the BofE behave differently. As it is, as a result of a series of good intentions, we have a situation where banks can now try their luck at having their risks nationalised, people who lost on company pension schemes baying for the same sort of guarantee on their savings (and why not) and we're no better off for it than our European and American competitors who will have all dipped into the funds their central banks released onto the markets.
The path to hell is paved with good intentions.
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