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The Northern Rock fiasco, ctd

It has been a mad-cap few days; the FTSE 100 index of shares oscillated by 9% today, an incredibly volatile day and although it ended higher after the Fed tried to kick-start the US economy with a sharp rate cut, we are not out of the woods yet. Although Britain may not have some of the problems of the USA, we have the disaster of Northern Rock. It looks as if the British government has decided that it is so desperate to avoid being tarnished as a government that nationalised a failed bank that it will, instead, create an elaborate set of government guarantees to enable a consortium of investors, led by Richard Branson, to run Northern Rock and over a period of time and with luck, repay the loans. It is a no-win situation for the taxpayer, of course, who bears the risk of this venture. It also adds to moral hazard and undermines the necessary fear of going bust that should, in a healthy economy, act to deter unwise lending practices (that is harsh, I know, but consider the long-term problems of not letting this happen).

Anatole Kaletsky is far too much of an economic intervenionist for my liking, but his article today is pretty good. His comments on Brown are damning.

Some time ago I made vaguely praiseworthy comments about Richard Branson, in the context of the airline industry. Well, we are all entitled to revise our opinions; I am not really sure I like what the Bearded One is up to, or his rather undedifying association with a deal involving huge amounts of public funds.

Update: Tim Worstall has some further thoughts.

12 comments to The Northern Rock fiasco, ctd

  • The British taxpayer does seem to be getting it ‘in the shorts’ in a big way with this Northern Rock thing. What is amazing is how the British press seem to think this is a mere trifle. I would have thought that a financial catastrophe of this magnitude would reasonably lead to calls for resignations.

  • The Labour government of Gordon Brown can only do what our rulers in Brussels say it can do..
    Sorry folks we are between a “schmuck and a hard place”.
    Labour’s nifty trick of using taxpayer’s money to keep its MPs at the trough might yet backfire.

  • permanentexpat

    Our system allows us to invest. We all know that it’s possible to make a profit. We should also know that it’s possible to make a loss.
    I do hope that, if I have invested unwisely, the gummint will rob you blind to give me my money back.

  • WalterBoswell

    Wouldn’t this bail out be going against EU competition rules or something to that effect?

  • RAB

    I think you are right Walt.
    But just watch a masterclass in fudge!

  • Dale Amon

    I would not be too hard on Sir Richard. He is after all, doing just what a good business man and horse-trader should do: part a fool from their money in as quick and painless a way as possible. If it happens that the fool is the government, so what? One can claim it is ‘wrong’ but you cannot take that to your shareholders as an excuse for not maximizing shareholder value.

    The only question in my mind would be: is the deal sweet enough that I can make a profit off it, regardless of what happens to Gordon?

    Money has its own rules and they have nothing whatever to do with ideology other than getting more of it is easier in a free market than in a not so free market.

  • Brendan Halfweeg

    Adam Smith said:

    People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public

    Perhaps in our time it could be modified to include “When people of trade meet with representatitives of the state…”

    I distrust any businessman who cosies up to the government, it cannot end well.

  • MarkE

    There is a certain symmetry here; Branson’s first business venture was funded by the taxpayer, through the creative (ab)use of the then purchase tax regime. I believe Branson was able to settle with the Revenue when found out and never actually convicted of anything which means he is, of course, innocent of any crime.

    Tom Bower is quite good on the details, but apparently Branson didn’t think that little matter worth including in his autobiography.

  • Lee Kelly

    There was a piece on the news last night, the ITV News I think, where the presenter explained that there are two possible outcomes to the Northern Rock “fiasco”, a good outcome and a bad outcome. The good outcome involved the government loaning Northern Rock the money to pay off their debt, and eventually being paid back, whereas the bad outcome involved the government loaning Northern Rock the money to pay off their debt, and never paying it back.

    If ever I was confronted with a false dilemma this was it. There have been a few stories recently, pouring out of mainstream media sources, which frankly rival the output of The Onion for absurdity. I have even toyed with the idea of writing a “news article”, discussing The Onion and its difficulties in an ever more competitive environment, with the likes of the BBC or CNN.

  • Northern Rock-Gordon Brown-Labour Party-Public money-Private Enterprise-Taxpayers screwed.
    Why anyone thinks that this accident prone, incompetent government is going to get this one right when has broken everything it has touched is a mystery.

  • John K

    Richard Branson was convicted of his purchase tax fraud, and was lucky not to be imprisoned for it. Clearly a fit and proper person to be handed the keys to a bank, secured with a loan for £55 billion from his new best friend, Mr Bean.

  • Paul Marks

    Dale Amon – I trust you were being sarcastic.

    If the function of a businessman is to “part a fool from his money” then a businessman would be a rather disgusting thing to be. What you present is a Hollywood (really the entire literary establishment) view of what a businessman is.

    There is a difference between a conman and a businessman.

    A businessman is someone who tries to produce a good or service that will be of value to customers. Customers that will come back to him happy with the product or service that they have bought from him.

    As for a man who gets involved with government to try and rob the taxpayers.

    There are lots of names for such a person – but “businessman” is not one of them.