In the news today: Northern Rock – one of the UK’s biggest homeloan players – had to go cap in hand to the Old Lady of Threadneedle Street for short term money as a result of the general squeeze on bank-bank lending (following on from the US subprime market).
What happened next we haven’t seen in Britain in mylifetime: a rush by savers to take their money out of Northern Rock. Asked on R4 if this was panic, one saver (who’d just lifted £150k) readily agreed.
It;s worth bearing in mind that this kind of phenomenon is just another side of the coin which makes markets work in the first place…
And just as the rational agent wouldn’t dream of paying above the odds because something is scarce (ok, they would, we all do), so the same (ir)rational agent can’t help but follow other people’s excitement and behaviour….