Thursday, 02.21.08
Retro chic
Carl de souza/AFP Getty Images
Britain's "New" Labor is looking elderly these days. The word "nationalization" has brought back echoes of the "old," quasi-socialist Labor movement, supposedly vanquished thoroughly and finally by Thatcher.
But this is hardly a second red revolution. A bank run forced the government's hand. The government guaranteed Northern Rock's deposits to keep panicky depositors from pulling out and tipping the bank into insolvency. Unable to find a buyer willing to assume the considerable downside risk, the government had little alternative to outright nationalization. The government plans to operate the bank at arm's length.
This sticky situation may offer the best argument for American style deposit insurance. Complaints that deposit insurance encourages both banks and depositors to behave irresponsibly are common. But though these guarantees are expensive and economically distorting, they may be comparatively cheap if they insure against boondoggles like the Northern Rock fiasco.
No choice leftThe FT's Martin Wolf says nationalization was the right move, and that it holds lessons for the UK's regulation and deposit insurance system. |
An upsideFelix Salmon points out that the UK taxpayers were going to get hit with the Northern Rock's losses anyway -- at least they'll now also receive their returns. |
What's next"The real question," writes an unshocked Tyler Cowen, "is whether the UK (and other countries) will feel compelled to move to a system of regularized depositor liquidity rights and larger deposit insurance guarantees." |
