Getting the Rock out of a hard place

So now we know what happens if you lend more money than you responsibly should.

The Government bails you out, offering to step in if you lose the confidence of your depositers.

Guaranteeing deposits at Northern Rock and offering to do the same for other institutions may prevent meltdown, but there is a large moral hazard cost. Banks now know that they don't pay the full penalty if they find themselves at risk of running out of cash.

It will be interesting to see how long the Government's extraordinary guarantee lasts for. Too short and it won't work. Too long and the moral hazard cost becomes almost unbearable.

Comments

[Letters From A Tory]

It's a painfully short-term solution aimed at preventing consumer confidence from divebombing and putting us into a recession.

There is no economic basis for guaranteeing these deposits, it's a purely political decision.