Bailing out the Banks

The announcement today, just over a week before important elections, that the Bank of England will advance up to £50 billion on collateral of varying risk, raises a number of questions.

1) The timing cannot be ignored. If such a scheme had been advanced in the autumn Northern Rock could have been saved intact, and its shareholders would not have suffered . The delay was entirely due to the Government indecision, -the decision on collateral is not an internal decision of the Bank.

2) There is unfairness here. It is true that the Board and shareholders of Northern Rock did risk their company by their business strategy, but others also did and they are now being bailed out. Other banks recognising their mistakes have begun to make arrangements, for example the RBOS decision to urge shareholders to subscribe to a rights issue, thus diluting the capital.

The result is that some shareholders have lost, some will now gain. No saver has lost, taxpayers are now risking more.

3)In the autumn the Governor of the Bank of England was clearly concerned about the message that bailing out would give. There is the problem of moral hazard - if the penalty for failure is reduced because the Government "will bail you out" imprudent policies are encouraged in the future.

The saga rumbles on, with confusion and dithering. What happens if the £50 billion is not enough? Will taxpayers have to accept more risk (already £150 billion)? This has not happened in other countries so long after the initial crisis. What is different here, with our greatest chancellor since the office began?