Moral Hazard

[ewx]

[Poll #1057683]

(FTAOD I'm not saying that the two situations are identical apart from the scale - I'd hoped 'actually' and 'potentially' would indicate that, if a hint was actually needed.)

Comments

[keirf.livejournal.com]

Yeah, but Farepak was for lower class savers, whereas Northern Rock is for middle class savers...

[aardvark179.livejournal.com]

The two situations are a bit different. In NR's case you want to stop a run on the bank because you believe it can survive, so it won't actually cost you anything, and a bank collapsing could have serious knock on consequences.

[mooism.livejournal.com]

Although I would guarantee the Farepak money, if Farepak had been under greater regulation to start with.

[gerald_duck]

People who give money to some random company to look after get what they deserve; people who deposit money with a recognised bank have more right to expect not to lose it.

But more important is the pragmatic argument: if Northern Rock goes, the entire economy is at risk. Though it may yet be in a pickle anyway.

Plus what aardvark179 said.

[beingjdc.livejournal.com]

Something else. Farepak on the same terms as banks hitherto - £2,000 and 90% of the next £30,000. The distinction between 'some random company' and 'a recognised bank' is increasingly spurious, with Sainsbury's Bank somewhere in the middle. Frankly Farepak's business model was theoretically more solid than Northern Rock's.

If Northern Rock isn't solvent, we shouldn't be bailing it out with taxpayers' money. If it is solvent, someone would have bought it, and the savers would not have suffered, only the shareholders (which would be the right thing).

[jiggery-pokery.livejournal.com]

This is a corking post and I have passed links to it onto two other people already. There are differences, as you note and as commenters have noted, but you're the only person I've seen to point out the similarities as well.

I haven't voted. Put me down for "I've thought about it and am not sure."

[gareth-rees.livejournal.com]

By taking deposits Farepak was effectively operating as a bank and I think it should therefore have been regulated as one. If this had happened, it would of course have then fallen under the remit of the deposit guarantee scheme and its customers would have got back 100% of their deposits (since less than £2,000). However, the more likely result would have been that it wouldn't have been able to operate in the regulatory environment and its customers would have had to find other ways to save.

[kaet.livejournal.com]

I agree with Gareth on this one, really. Farepak shouldn't have existed, really, because as far as I can tell they were offering financial services in a way which was incompatible with FSA regulation.

My problem with the moral hazard argument is that there is no real information available to consumers to distinguish financial institutions. Northern Rock a few weeks ago, for example, issued a statement that they were not exposed to US sub-prime mortgages to any degree. At this time they were already looking for a buyer (had hired Morgan Stanley to find them one) because they knew that the increased cost of inter-bank lending was scuppering their business. I think that the various regulatory agencies have failed, essentially, to make this a decision which can made rationally by any savers or borrowers, so I'm not sure that not guarantee invested sums actually avoids moral hazard.

Despite what we see about gaining bounteous wealth from chasing a 0.1% interest rate difference, banking below say, an annual expenditure's worth, is actually a commodity exercise about keeping possessions safe and conveniently accessible, and I think should probably be regulated as such. I think it makes sense to guarantee savings up to, say, three times the median salary (I've no idea what that value is!), and then down at, say, 50% on the rest?