I may be reading this entirely the wrong way, but I look at the Northern Rock thing, and see the government basically saying “This is a high risk investment; we’ll take the risk away from the (relative) few who have invested and instead spread it across everyone else.”
Which is charming, I’m sure. And, in five years time, when a bigger bank with fewer government supporters on the board gets in trouble, will the same courtesy be extended towards them? Or, looking backwards, should the same guarantees have been offered to investors in BCCI or Barings?
In other words, I see a very, very dangerous precedent being set.
I’m not an economist or someone who plays the markets, although I’ve been involved in several detailed conversations along those lines in recent months. But my opinion of the entire set-up is that all the rules that people trade by, and all the systems they play, are pretty difficult to distinguish from confidence tricks. Now, there is no doubt that said tricks work, and I’m yet to be informed of a better way of making money for more people, but that doesn’t make them any less trickery. And the likelihood is that, this time at least, offering the guarantees that have been offered has changed the situation sufficiently that the guarantees will never be needed; people won’t go cashing in all their investments because there’s no risk of losing out.
But what about the next time; and the next time? What happens when those working the system come to rely on government bail outs? More and more risks will be taken, and eventually the risks will become so great that the government will need to step in and make good. And then we’ll all be worse off.
Or, of course, it could be the case that this is just a one off, and no guarantees will be offered to other banks. Which raises a whole separate set of questions along the lines of ‘So just who was Northern Rock blowing?’…