Readers Question from:Trevor Downer. Glasgow. From what little I know the theory of Economics appears to have very little scientific basis. Two “experts” will give two different answers, add a third “expert” and yet another answer is provided.
Can someone explain to me why there is no easy answer to the problem of the Northern Rock Bank?I presume that the 26 billion pounds loaned by the government is the amount that the bank owes, including interest, to lenders to the bank. I presume that this money has been loaned by the bank to borrowers that have the assets that are equal to that amount and will return a greater amount over the agreed loan period.
This suggests to me that the simple answer would have been to close the bank down, for the government to pay that sum directly to the lenders and have the borrowers make re-payments directly to the government, thus, no losers and, over a long period, large gains for the government, ie, us the taxpayers.
Have I gone wrong somewhere? Where have I gone wrong? An explanation would be appreciated.
Firstly, you are absolutely right about Economists. Put 10 in a different room and you will get 11 different answers (or so the joke goes)
It is an interesting question.But, I think that if the bank is closed down i.e. made bankrupt, it is hard for the government to get its money back. Because if you declare bankruptcy there is no requirement to pay back your debtors. If the bank closed down it would be difficult for the government to get its money directly from the borrowers.
I think this is why nationalisation is seen as the least worse option. By taking ownership of the bank, the Government has the best chance of making sure it gets its loan back. Shareholders will be the big loser here because they will lose everything. – They could even try suing the government, although this is likely to fail.
The fact is further complicated by the fact that Northern Rock’s finances are in worse shape than previously thought. A lot of its liabilities are actually owned by a separate Jersey based company. (massive hole in Northern Rock’s finances)
Furthermore, the credit crunch has come at a bad time and has made it less attractive for private buyers (e.g. Virgin) to buy the company because they will find it difficult to renew the mortgage loans.
Maybe our readers can shed more light on the issue?