Nationalizing Northern Rock

Martin Wolf:

Nationalising Northern Rock was the right decision. It should have happened months ago. As soon as it became evident that the stricken bank could only survive with generous public sector guarantees, any so-called “private sector solution” was a mirage. This has finally become evident to the government itself, albeit far too late.

Fortunately, many of the lessons of this debacle have already been learned. These are three: first, regulation of banks needs to pay far fuller attention to the management of liquidity; second, the deposit insurance system of the UK needs to be more generous; and, finally, the UK must have a special insolvency regime for troubled banks that guarantees insured depositors immediate access to their money.

My bold. That sentence strikes me as containing a lot of applicable wisdom, even though I have not properly followed all the in and outs of the Northern Rock disaster.

When businesses are bailed out by the government, big time, a moral hazard is created. The profits remain private while the downsides are assumed by the public. No wonder people take big risks.