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)
You know, I was wondering about this. Why would you bother to take your money out when the government is guaranteeing that you won’t lose any of it. But then I thought, well, it’s one thing to have a verbal guarantee, quite another to think through the process that might lead to you actually getting the money back if the bank melts down.
We’ve all seen how government schemes to distribute money can go awry (farmers anyone?). So if you have your own money stashed away, and you like the idea of being in control of your money, the last thing in the world you want is for the government to suddenly get its mitts on it. Even if you are convinced that they will give it back to you, the thought of the process, of how this might work, of what you might have to tell them, of hte forms. What about delays? Might it take a week, a month, six months? After the media storm has passed and there is no political imperative to sort it out? Might it turn into a debacle of its own? Remember all those pensioners who lost their pensions when firms went bust? Is the government leaping to reimburse there?
I’m not saying anything like that will happen, but you have to think through how people relate to their money (like to keep complete control over it), how they relate to the government (know a bit about how they operate, have read the horror stories).
Think about the simple equation – what’s the downside to getting my money out now? Possibly a day of queuing outside the bank. What’s the potential downside if I don’t? Form filling, proving it’s mine, waiting for the machinery to be sorted out.
Never forget that the scariest phrase in the english language is: “We’re from the government and we’re here to help.”
and don’t forget you can get better rates in plenty of places as well. I would be taking mine out – but not urgently enough to queue through the night.
I’ve got all my investments tied-up in race horses and lotto tickets.