Stupid people

When I listened to the news this morning that Northern Rock had been guaranteed funds by the bank of England to cover its liabilities, my first thought was that they had gone through the threshold set by the Financial Authorities which means they no longer had sufficient finances to cover their debt. But no, it was clear this was not the case. Northern Rock is in a strong financial state.

To my mind, the very fact that the Bank of England were prepared to lend the Northern Rock money was a clear sign that they were completely satisfied that the Northern Rock was not going to go bust. If it were, the bank of England and the financial authorities would have a responsibility to close the bank down and preserve as many of its assets as possible.

So I am at a complete loss as to why so many stupid people today queued up outside branches of Northern Rock to withdraw all their cash in something like a scene from the Wall Street Crash in 1929. Even as a child watching the film "it's a wonderful life", I was amazed and the dumb short sightedness of the people in the "bank run" scene early on in the film. It appears as a nine year old I learnt more watching that film that those Northern Rock customers have done in a lifetime.

Yes, we can all sympathise for people worried about their savings, but the facts are that with Bank of England guarantees, The Northern Rock is not going bust.


Anonymous said...

Sounds a good argument but nobody trusts politicians and officials anymore. When they say 'don't panic' people think they are being lied too.

Harry Haddock said...

Risk of loss if savings left in ~ small, but possible

Risk of loss if savings taken out ~ zero

small, but possible > zero, however small the 'small but possible' is.

Ergo, sensible course of action?

Norfolk Blogger said...

Risk of loss if savings left in ANY BANK = small, but possible

Risk of loss if savings taken out of ANY BANK = zero

Let us not forget that the risk of being run over by a bus if anyone goes out today is small, but possible. I suggest that all Northern Rock customers sit at him, in a sleeping bag with a bottle of cool water in order to reduce the risk of them getting scolded by boiled water, so they aboid buses and so they don't stand a small but possible chance of falling down the stairs when going to bed.

Ergo, sensible course of action?

Harry Haddock said...

You've hit the nail on the head. Financial investment is all about managing risk. The risks you outlined are small, and the cost of mitigating them is high. In the case of Northern Rock, the risk is also small, but the cost of mitigating the risk is virtually zero.

Northern Rock's customers are therefore sensible to remove their savings, provided;

a) They can transfer the money to a n account with similar or better interest rate
b) They won't pay any early withdrawal penalties for doing so.