Northern Rock shows up the market ideologues

I find it rather churlish and hypocritical to blame either Mervyn King or the Government for what has occurred at Northern Rock. The fault lies squarely with Northern Rock, and more broadly with a free and liberalised international money market: it is an instance of what economists call market failure.

As Chancellor, Gordon Brown spent ten years bending over backwards to please business leaders and the money markets with assurances of non-intervention in their affairs.

Business, banks and investors can't have it both ways: they can't on the one hand argue for markets that are as unfettered as possible in order (notionally) to maximise efficiency, profits and shareholder returns. And then on the other complain that government or central banks or regulators do not jump in to rescue them when that market (or those firms) are shown to be not up to the job.

The job, in this case, of making sure constituent firms lend and borrow sensibly and look after people’s savings.

I sauntered off on a rail tour of continental Europe for a couple of weeks on 13 September and the next day it all went off. Which I only realised a week or so later when I picked up an English paper in Vienna.

In it I read this piece by Martin Kettle, which broadly argues that the intervention by the Government to guarantee savers' deposits presents an opportunity to create a consensus for firmer social-democratic style regulation of and intervention in markets.

I agree only in part. 'Intervention' and 'regulation' must not be confused. Surely, intervention is what you do when regulation doesn't work?

So far the intervention on behalf of Northern Rock gives the message – as Mervyn King argued - that banks (and their shareholders) can go on taking irresponsible risks and will be baled out with taxpayers' cash when things go wrong.

I am all for the Government stepping in to guarantee savings deposits: but only if the lesson is learned that the market is far from perfect and requires regulation to prevent crises – rather than ad hoc interventions once the horse has bolted.

- Adrian Lowery, News editor, This is Money

>> NORTHERN ROCK: Latest news and advice

Comments

[Lance Concannon]

Hear, hear. The government is right to underwrite the savings of those prudent enough to be tucking money away (rare breed, it seems these days) and offer them some sort of protection if their bank/building society goes under, and I'm glad they're now talking about extending that protection.

As far as banks and their shareholders are concerned - let them hang. Mervyn should have stuck to his guns and left NR to its fate instead of bending to whatever pressure was applied and doing precisely what he said only a few days earlier that he would never do - bale out the short term money markets.

Free markets work, but only if they're made to learn from their mistakes.

[John]

I agree - but where was Brown to protect the pensioners? Surely he should have saved them from the likes of Equitable Life loosing the plot. Isnt that a bit double standard? Do you think he was gearing up for an election then - I wonder if Northern Rock had blown up now whether he would have done the same thing with no election on the horizon.