So let’s go over the logic of a run on a bank again shall we.
To begin with, I guess it’s worth repeating, a run is never a good thing, neither for the bank nor for the wider economy. Runs rob institutions of the funds they need to operate. At best they freeze investment and lending; at worst they trash businesses, jobs and livelihoods.
The greater good requires that runs like this not happen, that customers just sit tight and make like nothing happened. But this is one of those situations where the greater good flatly contradicts the individual good. The people withdrawing their funds are not selfish, panicky chavs. They’re rational economic actors obeying a very simple imperative: reduce risk.
The collective good doesn’t get a look-in here because it offers no benefit to the saver beyond a warm feeling. The system, in fact, explicitly excludes such collective benefits. There’s no ‘collective good’ box to tick on the application form. Even the most altruistic saver would be foolish to do anything other than cut and run. Paying attention to the big picture is, for the individual saver, irrational.
The logic of the run is, frankly, unarguable: while funds in the bank are exposed to extra risk it makes perfect sense to move them elsewhere – even where the actual risk is slight or even illusory. The only possible counter to a run like this is an explicit incentive to leave your money put or an outright prohibition on removing it.
Once the run has begun, reassurance – no matter how authoritative – has no further use: only specific, concrete economic measures (compensation, guarantees or penalties) can stop a run. It’s only rational to stay at home and ignore the run if you’re provided with a balancing benefit for doing so. Ministers, central bankers, regulators and pundits can say what they want: the run has its own logic and will continue until that logic is reversed.
In the event, the Bank of England has stepped in and promised to guarantee savers’ funds but, had they felt like it, Northern Rock could have tried to stop the run directly. The bank could have increased interest rates for savers to a better-than-market rate or provided bonuses for loyal savers. The Government could even have used special powers to stop the run dead, freezing accounts until things calm down (history suggests this kind of action just defers the run, though).
Stop Press: the power of the run is considerable, though, and this morning die-hard Northern Rock paranoids are still queuing round the block. It remains to be seen what can actually stop this run: perhaps a personal visit from the Chancellor or a tour of the Bank of England.
The intense drama of the last few days will probably be repeated at other lenders over-dependent on the wholesale money markets and, presumably, the Bank will step in to support them too. The rational thing to do right now is probably to get your money into the Northern Rock.
(Picture by Dominic’s Pics)