The inevitable has happened. The British government has nationalised Northern Rock, the stricken British mortgage lender and bank that got itself into terminal trouble last year as a result of its ambitious, nay, reckless policy of relying on funding itself through the short-term money market. When inter-bank rates spiked, as they did as a result of the credit crunch caused by the US sub-prime mortgage meltdown, Northern Rock suddenly found it impossible to go on funding its mortgage products. It was ruined.
As I have said several times before, the most logical, if painful step, would have been to let the company go bust; depositors would be protected if necessary, but otherwise, the company would be wound up. It would have been a painful, even traumatic example of how unwise lending policies can go unstuck. It would have served, for years to come, as a harsh reminder about the dangers of trying to run a bank without sufficient savings to back it up its lending. Instead, the government’s move to pick up the tab for Northern Rock’s problems will act, however marginally, to weaken the necessary harsh message that should come out of the Northern Rock fiasco.
Now, I know that Samizdata readers will not give a brass farthing about the EU angle, but a thought does occur to me, as it has to others: how on earth can the company be allowed to offer highly attractive savings rates, which are more attractive than those of some of its competitors, when Northern Rock is able to enjoy the status of a tax-funded company, when other, rival banks, such as Alliance & Leicester, are not? How, exactly, is the British government going to be able to square its actions with the single market of the EU?