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Northern Rock nationalisation – the least worst option

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You have to feel at least a twinge of sympathy for chancellor, Alastair Darling, because whatever course of action he chose to take with Northern Rock, he was going to have a hard time from the press. As it happens, here at Economonkey House we think he’s done the best he could, or at least, as Alex put it, he’s chosen the least worst option.The only way the government could arrange for a privately funded rescue package would have been to underwrite the deal with taxpayers’ money – meaning that the taxpayers took all of the risk on those dodgy sub-prime mortgages Northern Rock has been signing up for years, but if it all came good then the profits would all go to private investors.

By completely nationalising Northern Rock, Darling has ensured that savers’ money is completely safe and that it’s the taxpayer who benefits from government investment in the company, not private investors. As it should be.

Of course, the people who are most upset by this course of action are the existing Northern Rock shareholders, but their concerns should be considered least of all. They invested in a bad company. They should consider themselves lucky – the only reason their shares still have any value at all is that Northern Rock is considered too big too fail, and the government has been forced to bail it out in order to maintain some degree of confidence in the country’s banking system.

It’s in the national interest to ensure that savers get their deposits back, if people are scared to put their money in ‘safe’ savings accounts, there’s a real danger of the system going badly wrong. But it’s not the taxpayers’ responsibility to bale out risk-happy investors who took a punt on a badly managed company and lost their shirt – that’s the nature of the game, better luck next time.

Although Darling’s done the only thing he really can, this episode does force us to ask a few questions. Is it really worth trying to restore Northern Rock to full health, with a badly damaged brand? Wouldn’t it be a better idea to wind the company up completely after ensuring that savers got their deposits back and mortgage holders were transferred to an alternative provider?

Also, if a major bank was allowed to be run so badly that the government was forced to step in an nationalise it in this way, what does that say about the state of our nation’s economy, the way in which banks are regulated, and Britain’s position as a leading player in the financial services industry?

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