A run on the banks…

Posted by on Sep 14, 2007 in Uncategorized | 2 Comments

Itsawonderfullifeboardmeetng

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….

2 Comments

  1. Mark McGuinness
    September 16, 2007

    Interesting to listen to the newsreader last night, saying that the reassurances given by the PM and Governer of the Bank of England meant there was no rational reason for people to take their money out, but when they saw crowds of people at their local branch, they felt compelled to join in…

  2. kevin
    September 18, 2007

    isn’t it rational to take your money out, though? if you don’t trust the ‘reassurers’, if you were already stung by eg Equitable Life .. taps into deep stories about money, a bird in the hand … what’s mine is mine etc etc